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Friday Accounting Ethics Case - Proper Use of Grant Funding

Nov 20th 2009
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Release 10, day -7 and counting

This weeks ethics case is focused on evaluating the proper use of grant funding and expenditures during the course of an audit engagement. Evaluating the appropriateness of an expenditure under a government or private grant can be subjective in nature and professional skepticism can create a situation where the auditor and the client may not agree on the propriety of a grant expenditure. Who is ultimately right? Who are the stakeholders that must be considered? What is the auditor's responsibility?


You have been working on an audit engagement for a not-for-profit organization that is primarily supported by various governmental grants for specific program activities. Up until now the audit has gone very smoothly. The client has maintained excellent records which has facilitated the audit process. You have been working through testing compliance with the various governmental grants. Once again the client has provided excellent record keeping which is more than sufficient for supporting the various expenditures under the grants. However, you have come across two expenditures for which you have some uncertainty as to whether they are appropriate.

One of the grant funded programs of the organization is an awareness and outreach campaign. In connection with that campaign the grant budget included $25,000 for printing of various flyers and promotional materials. Throughout the year the organization spent $10,000 on printing costs for these flyers. In the last month of the fiscal year the organization made two orders for additional flyers at a cost of $15,000 which are the two invoices you are now questioning. It is not uncommon for not-for-profit organizations to spend out grant funds at the end of the grant period to avoid having to return the unexpended grant funds and also to avoid a reduction in funding in the next fiscal period. What has raised your concern, is that when you inquired about the expenditures the Executive Director indicated that as of today all of the flyers are still sitting in the boxes they were shipped in from the printers in a storage closet in the back of the office. Upon further investigation you find approximately $13,000 of flyers for the same program that were order in the prior fiscal period that have not yet been distributed.

Aside from the possible accounting error and adjustment to treat these as supplies inventory if material, what is the auditor's responsibility regarding these expenditures? You delicately discuss the concern with the client and their stance is that they will eventually use the flyers and that they are allowed under the grant therefore the expenditures are appropriate. Are they appropriate or is this a case of waste and abuse of government funding? 

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