Doing the Right Thing

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The recent occurrences within the Long Island school system have been sad to watch. In the wake of reports of improper spending, and possibly corruption, two large, wealthy school districts will undergo in-depth audits, and New York State Comptroller Alan Hevesi plans audits of 21 other local school districts.

Most of the recent accounting scandals have focused on public companies, but accountability in the government and nonprofit sectors is even more important, because they touch everyone, not only investors. Governments and nonprofits are funded by taxes and charitable giving, respectively, and the trust of those taxpayers and donors is paramount. School districts, for example, are entrusted with spending public money for the educational welfare of children.

Financial and Performance Audits

The CPA profession should take the lead in making sure that a nonprofit or government entity’s finances are tied to activities that accomplish its mission. Audits must be more than just technically sound. We should strive for audits that focus not only on whether the organization is Doing Things Right—accounting properly for its income and expenses—but also on whether it is Doing the Right Thing—accomplishing its stated mission, and not misusing its funding.

There is a fundamental difference between the auditing standards needed in the for-profit sector and in the government and nonprofit sectors. The for-profit sector exists to create profits, while the government and nonprofit sectors exist to serve the public. Most nonprofits and all government agencies that accept federal government money are required to have their audits performed in accordance with Government Auditing Standards, the “Yellow Book,” which apply to both mandatory financial audits and to voluntary audit services that are subject to standards for performance audits. The Yellow Book standards could be adopted for all New York State nonprofits and government entities regardless of whether they receive federal funding. The Yellow Book standards are overseen by the GAO; the New York State Comptroller would oversee their application to state government agencies.

Mixed Messages

Unfortunately, one obstacle on this road will be acknowledging that a current public perception about audits of nonprofits and government entities—that financial statement audits already determine whether expenditures are in line with budgets and missions—is incorrect. The perception that auditors ensure that nonprofits and governments are Doing the Right Thing is similar to the mistaken public perception that auditors of public companies look for fraud.

Although requiring both financial and compliance audits in the nonprofit and government sectors would raise costs, the long-term benefits to the public would more than justify the expense. We must also think of what message we’re sending to our public school students. This is worth remembering whenever people talk about whether children should be taught about morals and ethics at school or in the home. Doing the right thing is more important than maintaining an appearance of doing things right.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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