When an Auditor Overlooks Major Items
Nonprofit Executive Directors and board members rely on auditors to ensure the accuracy of financial statements and the proper reflection of the organization's financial health. However, a recent experience has underscored the importance of not blindly trusting an auditor's work.
Despite paying auditors substantial fees for thorough reviews, a concerning oversight emerged. For over six years, a previous auditor failed to call out, question, or test a $140k asset on my client’s balance sheet. The prolonged oversight of a significant asset raises serious doubts about the quality of audit work. Other red flags with the previous auditor prompted the organization to seek new auditors who questioned the asset for the first time in years. The documentation of the asset’s value was no longer available.
Audits are primarily intended to provide donors with assurance regarding the appropriate use of donations. But sometimes they fall short of fulfilling even this basic function. It's worth noting that audits are often mandated by regulations, making them obligatory rather than genuinely beneficial.
Despite the substantial fees nonprofits pay auditors for financial scrutiny, the ultimate responsibility for oversight rests with nonprofit leadership. Inexperienced volunteer treasurers may mistakenly believe that by compensating auditors for their services, they have relinquished their responsibility to them. I have seen this play out by putting auditors in the position to call the shots. Lacking proficiency in accounting, audits, or their own duties, treasurers may inadvertently empower auditors, who may exploit this dynamic to their advantage, resulting in wasted time and resources. It's easy to think "these people are the professionals, and we’re paying them a bunch to do this one task they are supposed to be experts at. Who am I to question them?" But auditors are still human, conducting many engagements each year. And unfortunately some cut corners.
Auditors also often struggle to communicate discrepancies effectively. In this case, the reliance on the auditor's expertise led to a passive acceptance of the asset's valuation without further inquiry. To mitigate such oversights, proactive steps are necessary. Thoroughly reviewing draft financials, asking specific questions, and considering changing auditors after communication lapses are essential for maintaining professional skepticism and fostering open communication. Shockingly, the high fees do not guarantee good project management or advice on how to handle or resolve issues that may arise.
This oversight serves as a wake-up call against complacency. Vigilance is crucial, even with paid professionals. By seeking alternate opinions and questioning discrepancies, organizations can uphold financial integrity and stakeholder trust.
In conclusion, the experience underscores the critical importance of balanced oversight in financial governance. Nonprofit leaders must actively engage in the audit process, while auditors must diligently scrutinize and communicate potential risks. As a third party liaison between the client and auditor, I too must reflect on how my role may introduce drawbacks or limitations. I had assumed my involvement ensured an added layer of protection, yet this oversight occurred regardless. As the auditor had worked with the client longer than I had, I took their assurances at face value rather than questioning further. A further complication is that auditors often assume clients and intermediaries like myself know little, responding to inquiries with vague reassurances of "let us handle this." They help create a situation where minimal scrutiny is expected, then do only as little work as possible while deflecting any questions back to the client. It resembles working with a black box that doesn’t actually do much. They provide no real transparency or accountability.
Let this be a lesson in diligence and proactive measures for all involved parties, ensuring the integrity and trust upon which our missions depend. Nonprofit leaders, auditors, and third parties alike must challenge assumptions, maintain skepticism, and foster truly collaborative oversight. Complacency benefits no one.
