One of the most interesting aspects of accounting is that financial statements often reveal questionable patterns long before anyone notices a problem with the organization. A single unusual transaction can go unnoticed. However, when several unusual transactions begin appearing together, they may trigger additional questions.

Experienced financial professionals often become skilled at recognizing these patterns. Like a physician reviewing laboratory results, an EA or CPA generally does not jump to conclusions based on a couple of unusual transactions alone. Instead, they’ll look for trends, inconsistencies, and relationships between different accounts.

Many times these questions uncover nothing more than bookkeeping errors, and they identify an opportunity to improve internal controls. Then again, in rare cases they may reveal something requiring further investigation.

One of the first areas many financial professionals should review is the organization's cash activity.

Yes, cash remains one of the highest risk assets because it is easily transferred and often difficult to trace.

Some possible observations might include:

Make no mistake, none of these items automatically indicate fraud. They simply raise questions, such as why was the cash needed? Or why wasn’t proper documentation maintained? Did someone review and approve the expenditure?

Often there is a perfectly reasonable explanation. Good accounting begins by asking questions, but not by making unfounded accusations.

Vendor payments can also reveal useful information.

Here are some red flags that Financial Crimes Enforcement Network (FinCen) says financial professionals should look out for:

These transactions may suggest that vendor files deserve more review. Simple verification procedures, confirming addresses, reviewing invoices, and validating vendor existence can significantly reduce risk.

Payroll is another area where strong internal controls become extremely valuable.

Experienced practitioners may notice:

Payroll errors are many times often just mistakes. Nonetheless, because payroll typically represents one of an organization's largest expenses, periodic review is simply good financial management.

Many nonprofit organizations operate using grants that contain very specific restrictions.

Financial professionals should pay close attention to:

Most grant agreements clearly define how funds may be used. Maintaining separate accounting for restricted funds helps ensure compliance while giving grant providers confidence that resources are being used as intended.

One lesson repeated throughout both the financial profession and fraud research is that governance matters.

Healthy organizations generally demonstrate:

A sign of weak governance sometimes appear when:

None of these circumstances prove misconduct alone. Unfortunately the organization may be just sloppy, simply reducing transparency. When these start to add up to a pattern, something may be causing your warring bells to go off. Taking a closer look is really your job. Good governance protects the honest public, just as much as it protects the organization’s assets.

One concept frequently discussed by fraud examiners is known as the Fraud Triangle. It suggests three conditions often exist when occupational fraud occurs:

Pressure

Financial hardship, unrealistic performance expectations, or personal circumstances.

Opportunity

Weak internal controls or insufficient oversight.

Rationalization

An individual's ability to justify inappropriate behavior. 

Organizations usually have much greater influence over opportunity than over the other two elements. Strong governing systems, approval procedures, reconciliations, and board oversight can reduce the opportunity for fraud while simultaneously protecting the organization and its employees.

Fortunately, effective controls cost very little.

Whenever practical, different individuals should:

Even small organizations can often divide responsibilities among volunteers or board members.

Reconciling every bank account monthly remains one of the most effective internal controls available. Independent review of reconciliations provides additional assurance that unusual items receive timely attention.

Board members do not need accounting degrees, but they do need to be curious.

They need to ask questions like:

Questions like these will encourage healthy discussions.

Organizations benefit from documented policies covering:

Consistency becomes an organization's greatest strengths.

First, don’t rely exclusively on trust. Yes trust is essential, but internal controls protect that trust. Second, postponing reconciliations until year end is a big mistake, because errors become much easier to resolve when discovered quickly. Third, allowing one individual to control every accounting function is not the wisest thing to do. Checks and balances are a good thing.

Even the appearance of independence will strengthen an organization’s credibility. Finally, and it goes without saying, but I’ll say it anyway, having an internal and external audit is a great thing to do.

If a financial professional notices several unusual patterns. What do they do then? Rather than assuming wrongdoing, a practitioner should begin by gathering additional information, by requesting supporting documentation.

They can ask management to explain the unusual transactions. They can recommend strengthening internal controls or improving documentation. If concerns remain unresolved, practitioners should follow the ethical standards of their profession, which are to document your observations in detail, and consider whether additional consultation, legal advice, or reporting obligations apply after referring to the applicable laws, and professional standards.

The objective is not to prove guilt. The objective is to ensure accurate financial reporting while protecting the organization and everyone involved.

Before approving financial statements, board members might consider asking:

These questions rarely require accounting expertise. They simply encourage thoughtful oversight.

Most nonprofit organizations exist because people genuinely want to improve the lives of others.

That mission deserves strong financial stewardship. Good bookkeeping cannot eliminate every risk. Neither can annual audits, but it helps.

However, thoughtful governance, accurate accounting, regular reconciliations, transparent reporting, and healthy curiosity can significantly reduce opportunities for mistakes while strengthening public confidence. Maybe that’s one of the greatest benefits accounting professionals provide.

They do not simply prepare tax returns or financial statements. They help organizations build systems that allow charitable missions to continue serving communities for years to come. I know this was a lot of information, so thanks for hanging in there.

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Keeping your books organized throughout the year makes tax season less stressful and helps management make better decisions. If you'd like another set of experienced eyes to review your bookkeeping processes, The Smith Advisory LLC, [email protected] can help you build tax ready books that support both compliance and confident decision-making.

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This article is provided solely for informational and educational purposes and is intended to encourage discussion about nonprofit governance, accounting, and taxation. It is not legal, tax, accounting, or investment advice and is not directed toward any specific individual, organization, or factual situation. Every nonprofit organization operates under its own unique circumstances. Readers should consult a qualified CPA, Enrolled Agent, attorney, or other professional advisor before making financial, tax, governance, or compliance decisions.