There are a number of questions auditors need to consider when trying to determine whether an organization fraudulently used federal funds, experts said during a panel discussion at an accounting industry conference last week.
Audit fraud is defined as intentional acts that cause material noncompliance or are done with the intention of misappropriating federal funds, according to Jacqueline Matthew, CEO at accounting firm, Houldsworth, Russo & Co.
In other words, it typically relates to lying about how federal dollars have been used, she said, speaking during the panel discussion at the American Institute of Certified Public Accountants’ Governmental and Not-for-Profit Industry Conference in Dallas.
There have been a number of high-profile fraud cases in recent years. Notably, in May, the leader of a Minnesota nonprofit group, Feeding Our Future, was sentenced to 41 years in prison after coordinating a scheme that defrauded a federally-funded child nutrition program of $250 million.
There were a number of red flags in that case, said Troy Rector, a shareholder and CPA accounting firm Clark Nuber who specializes in non-profit work. For example, he said the organization’s revenue surged from $1.4 million in 2019 to $140 million in 2021.
One of the more than 70 individuals charged under the scheme falsely claimed to have served over 40,000 meals to children each week at one site — a figure that was more than double the population of the town it was located, according to a 2025 release from the U.S. Attorney’s Office in the District of Minnesota.
“Just looking at this organization and significant expansion of program activities, you can see where risk was certainly heightened,” Rector said during the panel.
Auditors need to guard against fraud in single audits of government entities as it relates to each major program, said Matthew.
They do this by assessing the fraud risk to determine the extent of the compliance testing they need to conduct in order to form an opinion on the program, said Rector. Throughout the process, there could be points where the team reassess that risk, he said.
Questions to ask during assessments
It’s important for auditors to understand the direct material compliance requirements and the program activities for the major federal programs they are testing, said Rector. Sometimes organizations commit fraud by misrepresenting whether they met programmatic objectives that come along with the money they received, he said.
Each major program has different applicable compliance requirements, activities, and designs, said Rector. During assessments, auditing teams should focus their discussions on each program individually, he said.
“Each should really be looked at and considered as its own separate mini audit,” added Matthew.
When brainstorming whether fraud may have occurred, teams should discuss whether the federal program has shown to have fraud risk in other entities, said Rector.
That involves staying on top of news stories about fraud being perpetrated and learning what federal program it targeted, how the fraud was perpetrated, how it was concealed, and how it was identified, he said.
They should also ask if an organization has a motivation to misreport the use of funds, Rector said.
An organization may have an award that runs through the end of the year, for example, but the auditor may have learned that it's facing budget pressures and the money will not likely be renewed, he said. The organization may not have the ability to carry over those funds and could feel pressure to spend it, he said.
“With organizations, if they just don't know what they're getting into when they sign on that award, there could be pressure or incentive to try to conceal compliance, fabricate documentation,” said Rector.
Auditors should determine whether the funder provided any oversight, said Rector.
During audit planning meetings with the funding agencies, Rector’s team always asks about oversight and monitoring visits, he said. They try to determine when monitoring was completed and its result, he said.
“If the agency did perform monitoring to issue the report, and there are findings, well, let's get a copy of that report,” said Rector.
Turnover within the program, such as staff layoffs, could also create chaos within an organization and opportunities for fraud, said Rector.
Rector also suggested it’s important to understand whether the entities involved have going concern risks that could lead to major financial changes such as insolvency. A number of organizations downsize after seeing a reduction in federal assistance, putting more pressure on cost allocation and assignment, he said.
An organization that is not getting its overhead costs covered may look to find ways to charge it to the federal award, Rector said.
And there can also be compliance risks when a particular program rapidly expands, said Rector.
When that happens, auditors should ask whether there’s been actual growth, added Matthew. It’s important to know whether the growth is reasonable or expected given the funding they’re receiving, the number of individuals a given program serves, and what is known about the area or the population, she said.
