What is Financial Statement Fraud?

The financial statements of an organisation explain what the organisation has done during the last 12 months so when financial statement fraud occurs, the financial statements do not tell the true or actual picture.

Both the Profit and Loss Statement and the Balance Sheet can be manipulated.

The Profit and Loss Statement can be misstated in the following ways:

Overstated revenue

By overstating revenue, the profit is improved or loss is reduced.

Understated expenses

By understating expenses, the same effect as overstating revenue is achieved.

However, the opposite may also be possible in a nonprofit. For example, if an organisation is required to expend all of a grant and has not done so, increasing expenses would enable the grant to be acquitted as required by the grant provider.

The Balance Sheet can be misstated in the following ways:

Overstated assets

Generally an organisation will want to overstate assets to show the organisation in a better position than it is actually in (for example to ensure the bank is happy with lending criteria). However, again the opposite may occur in a nonprofit organisation as the organisation may want to be seen to have fewer assets to ensure the continued receipt of grants.

Understated liabilities

It is normal in financial statement fraud that liabilities are understated.

Ultimately someone in the organisation has to undertake the falsified transactions and the accounts are then approved with or without knowledge of the fraud. However, if the accounts are then used, significant problems could arise, from fraud charges against an employee, management or a member of the board, reputation risk or loss of funding.

Changing Treasurers = Loss of Accounting Records?

One of the questions I am regularly asked about is how smaller nonprofits keep control of their accounting records when treasurers change so regularly – usually every year.


Issues I have been asked about include:

• The Treasurer uses his/her own accounting software on his/her home computer. In this case how does the board control the security of the information (eg. viruses on the computer), loss of the information (eg. damage to the computer hard drive) or the computer being stolen if the house was broken into? There is also the issue of the organisation potentially not using licensed software.
• The Treasurer does not hand back the accounting records when ceasing in the position. If the only records available are those held by the accountant / auditor it can be difficult to budget for the next year.
• The Treasurer does not give the rest of the board access to the accounting records. This can mean a number of problems from the Treasurer wanting absolute control, to fraud.

How do you resolve a situation like this? The organisation should consider and investigate online accounting software. Some accounting software (some of which is well known and widely used) is now available online. This means that as one Treasurer leaves and a new Treasurer takes over, the data is available. It also mean that it can be accessed (even if it is read only) by other members of the board, the external accountant / auditor and is backed up properly by the software provider.