To Audit or Not to Audit

Dear Kim,

Is an audit really important? We are a 20 year old performing arts organization, with a budget of about $500,000 in a good year and $350,000 in the not so good years. We have three full time staff and a lot of volunteers, and we work in a small community. Basically, our organization provides all the theater, drama and public speaking training for the public schools in our area, and provides a place for adults to also do amateur theater. About 2/3rds of our budget is ticket sales. We have a small grant from the state arts council and we get some fees some years from the schools or from the PTA for our work. We have a performing space and sometimes people rent it for weddings or for dances and other musical events. We have never had an audit and we have some new board members who think we need one to show that we are above board and are using our money wisely. But an audit will cost upwards of $10,000! Is that a wise use of money?

~We are honest, take my word for it!

Dear Take My Word,

First off, I do take your word for it! From the description of what you do and how much it costs, it is clear that this is largely a labor of love. However you do need an audit every so often, and once in 20 years seems prudent. Audits are expensive, but small nonprofits are particularly susceptible to fraud because we trust each other, there is rarely a whole lot of money that could be stolen so we imagine thieves will go to more lucrative grounds, and our work is done by unpaid volunteers or low paid staff.   But we forget that there are two types of fraud: that which is committed by your organization, and that which is committed on your organization. It is the latter that often goes unnoticed.

I doubt you are committing any fraud but an audit reassures the public that this is so and happy donors are the best kind. Nonprofits commit fraud by lying about where their money goes, misrepresenting how much they spend on fundraising, and engaging in illegal self-dealing. I doubt you are doing that.

I worry that you are leaving yourself open to fraud committed by someone on you. For example, skimming cash before it is deposited is a common way that organizations with a lot of sales are ripped off. Using a company credit card or donor credit card numbers for personal purchases is not uncommon. Stealing office supplies or postage is very common. Then there are the more sophisticated forms of fraud—bookkeepers continuing to pay terminated employees or setting up fictitious vendors and invoices.   Sometimes this is so petty that it would not be caught by an audit, and sometimes it is so clever that it would take more than one audit to ferret it out, but in general an audit discourages bad behavior.

The most important thing to remember about money is that it brings out the best and the worst in all of us. I have seen dozens of good people commit fraud because they were feeding a gambling habit, they were being blackmailed, or they were under tremendous stress from medical debts or student loans. They rationalized that they would pay the money back, or that they deserved it, or that it wasn’t that much. Having seen this in an enormous variety of small organizations, I have become a fan of an audit.

Audits are expensive, but in my experience, not having one is far more expensive.

~Kim Klein

Click here to read how another group survived an embezzlement.