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Trouble Brewing: Are Nonprofits the Next Roslyn?

Joanne S. Barry

When the Roslyn School District financial scandal broke in 2005, the wrongdoing revealed was shocking in its audacity—$11.2 million in school funds stolen from the taxpayers of this Long Island village to fund the personal expenditures of former school district employees, including the superintendent, and a coterie of their friends, relatives, and associates.

Beyond shaking the public trust, the malfeasance cast an unfortunate light on the accounting profession. A 2005 report from New York's Office of the State Comptroller (OSC), “Anatomy of a Scandal,” deconstructed the events leading up to the convictions, calling the audit conducted by the district's disgraced independent external auditor “so flawed and so far below professional standards that it failed to identify the millions that were apparently misappropriated.”

The revelation led to statewide audits of school districts by the OSC as well as the adoption of reform legislation in the form of a five-point plan for school district accountability, drafted as a collaborative effort between the NYSSCPA, the OSC, the New York State School Boards Association, New York State United Teachers, the New York State Council of School Superintendents, and local Nassau County authorities.

While laudable, these actions were reactive rather than proactive. The audit quality issues identified by the Roslyn scandal provide a teaching moment for CPAs. The CPA profession has an opportunity to be in front of instead of behind the eight ball on this issue. Consider the billions disbursed annually to state and local governments and tax-exempt 501(c) groups—$500 billion was budgeted for the fiscal year 2009, according to the Government Accountability Office (GAO), not including the $300 billion earmarked through the 2009 stimulus bill (American Recovery and Reinvestment Act). Transparency and financial accountability in this area is essential.

The high-profile Roslyn scandal produced unpleasant aftershocks that harmed the public's view of the profession. A controversy of the same caliber in the nonprofit arena could have a similar result, but beyond a natural mindfulness of how CPAs are perceived lies the deeper issue of audit quality and an assurance that nonprofits are using qualified, trained CPA professionals to meet compliance requirements.

According to the National Center for Charitable Statistics, as of November 2010 there were approximately 104,000 registered nonprofits in New York State. Only California and Texas, with roughly 166,000, and 107,000, respectively, have greater numbers. With such a large number of nonprofits in New York, it is vital for these organizations to have audits on which the public can depend. Without them, is not difficult to imagine the potential impact on the public's confidence in nonprofit organizations and charitable donations, as well as in the audit profession itself.

Many nonprofit organizations are small and understaffed, and, in this economy, they are fighting to keep their doors open. A May 2010 GAO report found that nonprofits often struggle to cover the costs of doing business, which can lead to “compromised quality of important administrative functions, including information technology, human resources, legal, and accounting operations.” Therefore, nonprofits, with an eye understandably on the bottom line, may often take the lowest bidder when looking for an auditor.

The CPA's Responsibility

It is within the power of the CPA profession to assume responsibility and ensure that due professional care is taken in audits of nonprofit organizations. Government agencies like the Office of Management and Budget (OMB) and the GAO depend on CPAs to help guarantee that the billions of federal award dollars distributed to nonprofits each year are spent in the manner intended. And so does the public.

While it is true there could be more Roslyns brewing that we are not yet aware of, what it really comes down to is quality. Regardless of how much auditors charge for their services, or why they choose to provide these services at lower rates (building a practice or going through a slow season), quality is not a commodity. Auditors may charge lower fees for an acceptable reason, but that does not mean that they should lower their standards along with those fees. It's a simple business decision: Are the hours that have been dedicated to complete an engagement enough to perform a quality audit?

While CPAs are responsible for performing quality audits, the organization purchasing these services is obligated to be an informed consumer. The NYSSCPA has been a standard bearer and bridge builder between the CPA profession and New York nonprofits by matching nonprofit boards with CPA volunteer members for years. Our members have also dedicated hours of time speaking to nonprofit and governmental groups across the state in an effort to educate them on the right qualifications to look for and what to avoid in an auditor. But it's not enough. Society members have helped various state agencies with audit compliance issues in the past; perhaps it's time for a more permanent partnership with the state. We don't want to be comparing a future scandal to Roslyn—we want to be on the front lines in helping to prevent it.

Joanne S. Barry. Publisher. The CPA Journal, Executive Director, NYSSCPA, jbarry@nysscpa.org.

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