When the Numbers Become Evidence: Forensic Accounting in Nonprofit Fraud Investigations
By Steven DiVirgilio, CPA
Nonprofit fraud cases involve more than missing money. They involve donor trust, board oversight, grant compliance, restricted funds, public reporting, and sometimes the survival of the organization itself.
When suspected fraud is discovered, the first questions are practical: How much is missing? Who had access? How did it happen? Were restricted funds or grant funds affected? Do the financial statements or Form 990 need to be corrected? What should the board do next?
Those questions are financial, but they can become legal questions quickly. That is where forensic accounting can be useful. The role of the financial expert is to analyze the records, follow the money, explain the accounting, and help turn financial information into understandable evidence.
A forensic accountant does not replace the attorney, the board, law enforcement, or the court. The attorney guides the legal strategy. The board protects the organization. The forensic accountant helps determine what the records show.
The Role of the Financial Expert
In litigation or dispute-related matters, a financial expert may be asked to analyze accounting records, internal controls, damages, diverted funds, tax filings, financial statements, restricted funds, or the reasonableness of certain transactions.
The expert should stay in the financial lane. A forensic accountant should not testify that someone is “guilty” of fraud or offer legal conclusions that belong to the court or jury. But the expert may explain what the records show: transfers to personal accounts, unauthorized credit card charges, fictitious vendors, altered bank statements, unsupported reimbursements, payroll irregularities, missing documentation, or accounting entries that concealed personal expenditures.
For the work to be useful, it must be organized, documented, explainable, and tied directly to the records reviewed. The expert should be able to explain what records were reviewed, what procedures were performed, what assumptions were made, what limitations existed, and how the findings were reached.
Expert testimony also needs to be reliable. Federal Rule of Evidence 702 and the Massachusetts Guide to Evidence both focus on whether expert testimony is helpful, supported by sufficient facts or data, and based on reliable methods. For a forensic accountant, the work needs to be more than accurate. It needs to be defensible.
Nonprofit Fraud Often Starts With Weak Controls
Many nonprofits are mission-driven, leanly staffed, and dependent on trust. That is admirable, but it also creates risk.
Small and mid-sized nonprofits may have one person receiving checks, making deposits, recording transactions, paying bills, reconciling the bank account, managing the credit card, and communicating with the outside accountant. That is too much control in one place.
Trust is not an internal control!
A forensic accounting review can help identify where controls failed, including weak segregation of duties, poor credit card oversight, lack of bank reconciliation review, inadequate grant tracking, weak restricted-fund accounting, unclear board reporting, or failure to review Form 990 before filing. Weak controls do not automatically prove fraud, but they can create the opportunity for fraud to occur and remain undetected.
The Board Needs Answers, Not Blame
When fraud or suspected fraud is discovered, board members often ask how the problem went undetected. That question should be answered carefully.
The purpose of a forensic accounting review is not to embarrass the board or second-guess every decision with hindsight. The purpose is to reconstruct what happened, identify what information was available, determine where the process broke down, and help the organization understand what should change going forward.
A board may have received monthly financial statements and still not have seen the problem if the reports were incomplete, too summarized, delayed, or prepared by the same person controlling the transactions. A treasurer may have reviewed bank reconciliations but not received cancelled check images, credit card support, payroll change reports, or vendor details. An outside accountant may have prepared tax filings or financial statements based on records provided by management, without being engaged to test for fraud.
Those distinctions matter. A forensic accountant can help the board distinguish poor controls, poor reporting, poor bookkeeping, intentional concealment, and actual financial loss. A good report can answer these questions without turning the analysis into a blame exercise. That is valuable to board members who want to protect the organization, correct weaknesses, and show that the matter was handled seriously.
What a Forensic Accountant Looks For
A nonprofit fraud investigation should begin with scope. The attorney, board, audit committee, insurer, or other specified party should define the issue clearly.
Is the concern theft of cash? Misuse of credit cards? Payroll fraud? Unauthorized compensation? False grant reporting? Donor-restricted funds spent for the wrong purpose? Related-party transactions? Altered bank statements? Missing accounting records?
Once the scope is defined, the financial record can be built. The work often includes reviewing bank statements, cancelled check images, credit card statements, general ledgers, accounting system audit logs, payroll records, vendor files, grant agreements, donor restrictions, board minutes, Form 990 filings, and financial statements.
The expert may reconcile bank activity to the accounting records, identify unsupported transactions, isolate payments to employees or related parties, review credit card charges, trace transfers, and document altered or missing records. The goal is not to make accusations. The goal is to establish what the records show.
Common Patterns in Financial Misconduct
Fraud is often hidden in routine transactions. A vendor payment, payroll change, reimbursement request, credit card charge, or transfer between accounts may look ordinary until it is compared to approvals, source documents, historical patterns, or the organization’s stated purpose.
In nonprofit matters, the accounting description may not match the economic reality. A personal expense may be coded as program supplies. A related-party payment may be recorded as a normal vendor cost. A transfer may be described as operational when it moved funds away from their intended purpose.
That is why a forensic review generally works backward from the records. The question is not “Who do we think did this?” The better question is “What does the document trail show?”
Agreed-Upon Procedures Can Be a Practical Framework
In some nonprofit fraud matters, the work may be structured as an agreed-upon procedures engagement, or as a litigation-support engagement that uses a procedures-based approach. The exact form depends on the assignment, intended users, and whether the matter involves investigation, insurance, board oversight, regulatory response, or litigation.
An agreed-upon procedures engagement is not an audit. The accountant is not expressing an audit opinion or providing an overall conclusion that fraud did or did not occur. Instead, specific procedures are performed, and the results of those procedures are reported.
That distinction is important. In a fraud-related matter, the report should avoid overstatement and legal conclusions. The focus should be on what was tested, why it was tested, what documents were reviewed, what exceptions were found, and how the results were calculated.
In practice, this type of work should be organized with the discipline of an audit program. The procedures should be clear, sequential, documented, and capable of being followed by someone who is not a financial professional. Attorneys and boards are not only hiring technical knowledge. They are hiring the ability to produce a clear, organized, evidence-ready work product.
The Report Should Be Built for Court !
A forensic accounting report in a nonprofit fraud matter should be clear enough for a judge, jury, mediator, board member, attorney, insurer, or regulator to understand. The strongest reports are not dramatic. They are organized, factual, and tied to documents.
The report should generally explain the assignment, scope, period covered, records reviewed, procedures performed, results, questioned transactions, assumptions, limitations, and exhibits. It should also identify whether the analysis was limited by missing or incomplete information.
For litigation purposes, formatting matters. Page numbers, schedules, exhibit tabs, footnotes, transaction references, and clear headings allow the report to be used effectively during depositions, mediation, board meetings, insurance claims, or trial. A non-financial reader should be able to follow the report without needing to understand accounting jargon.
A well-written report should allow the reader to move back and forth between the narrative, the procedures performed, the findings, the schedules, and the supporting documents.
This is an area where forensic accounting work differs from ordinary accounting work. The expert is not only analyzing numbers. The expert is preparing a record that may be challenged, cited, relied upon, and explained in a legal setting.
The forensic accountant’s job is not merely to “find the number.” The job is to present the work in a way that can be tested, understood, and relied upon.
Real Cases Show the Pattern
Recent nonprofit fraud cases show why this work matters.
In Massachusetts, the founder and former CEO of the Boston-based nonprofit Violence in Boston was sentenced in federal court after pleading guilty to charges involving diverted donations, COVID-19 relief funds, rental assistance, grant funds, false tax returns, and failures to file tax returns. According to the Department of Justice, she was ordered to pay restitution of $106,003, with forfeiture to be decided later.
The Detroit Riverfront Conservancy case is another example. The former CFO was sentenced to 19 years in prison for embezzling more than $40 million over an eleven-year period and was ordered to pay approximately $48 million in restitution. That case highlights warning signs a forensic accountant would focus on: related-party vendors, altered bank records, unauthorized debt, personal credit card payments, and lack of independent verification of bank activity.
A Washington case involving a finance director at two nonprofits shows a more familiar pattern for smaller organizations. According to the Department of Justice, the finance director was sentenced to 41 months in prison for embezzling more than $3 million over an eleven-year period, including funds used for a mortgage, vacations, and gambling losses.
The Form 990 Issue: Significant Diversion of Assets
For nonprofits, a fraud investigation may also affect tax reporting.
Form 990 asks whether the organization became aware during the tax year of a significant diversion of assets. The IRS instructions state that a diversion includes unauthorized conversion or use of the organization’s assets other than for authorized purposes, including embezzlement or theft. The instructions also explain that a diversion is significant if the gross value of all diversions discovered during the year exceeds the lesser of 5% of gross receipts, 5% of total assets, or $250,000.
That means the forensic accounting work may matter not only for litigation, insurance recovery, and board oversight, but also for public tax reporting.
The financial expert can help determine the dollar amount, the period affected, whether restitution or insurance recoveries occurred, whether prior financial statements may need correction, whether grant reports were affected, and whether the Form 990 needs additional disclosure. The organization also needs legal guidance on disclosure, privilege, communications with regulators, employment actions, insurance claims, and potential criminal referrals.
Testifying Is Different From Investigating
A good investigation does not automatically make a good witness.
A financial expert who testifies must be able to explain accounting issues in plain English. The attorney, judge, and jury may not understand debits, credits, restricted net assets, grant compliance, or Form 990 reporting. The expert’s job is to make the financial evidence understandable without overstating it.
The expert should be prepared to explain the assignment, documents reviewed, missing records, procedures performed, loss calculation, assumptions, limitations, and whether management explanations were considered and verified.
The expert should also be prepared for cross-examination. Opposing counsel may challenge scope, assumptions, missing documents, reliance on management, accounting judgment, methodology, or whether the expert is offering a legal conclusion. That is why workpapers matter. The testimony is only as strong as the work behind it.
Common Nonprofit Fraud Red Flags
Attorneys and board members should watch for practical red flags: one employee controls too many financial functions, bank reconciliations are not reviewed, credit card charges lack receipts, vendor names look unfamiliar, payroll changes are not independently approved, restricted donations are not tracked, grant reports do not agree to the general ledger, Form 990 is not reviewed by the board, or cash flow problems exist despite strong reported revenue.
None of these facts alone proves fraud. But each may justify a closer look. A forensic accounting review can help separate weak accounting from suspicious activity. Not every messy set of books is fraud. Sometimes the issue is poor bookkeeping or lack of oversight. Other times the accounting records reveal a pattern that requires legal action.
Conclusion
Nonprofit fraud investigations require both financial discipline and legal judgment. The attorney guides the legal strategy. The board protects the organization and its mission. The forensic accountant helps determine what the records show.
When a financial expert serves as a witness, the work must be reliable, documented, and understandable. The expert should identify the records reviewed, explain the procedures performed, quantify the amounts at issue, and avoid legal conclusions.
In many matters, the quality of the written report can be just as important as the analysis itself. A clear report with organized procedures, page numbers, schedules, exhibit references, and factual findings can help attorneys, boards, insurers, regulators, and courts understand the financial evidence.
In nonprofit cases, the stakes are not limited to dollars. Fraud can damage donors, employees, beneficiaries, grantors, regulators, and the public’s trust in the organization.
A forensic accountant cannot undo that damage. But the work can bring clarity to the financial record. And when the numbers become evidence, clarity matters.
About the Author
Steven DiVirgilio, CPA, is a Massachusetts Certified Public Accountant based in the Greater Boston area. He advises individuals and closely held businesses on tax, accounting, financial reporting, and business matters. His litigation support practice includes analysis of tax returns, financial statements, business records, and closely held business issues that may arise in divorce and other legal matters. Steven is also an adjunct professor at Babson College.
This article is for general informational purposes only and does not constitute legal, tax, accounting, or valuation advice. Each matter depends on its specific facts and circumstances.
By Steven DiVirgilio, CPA
Nonprofit fraud cases involve more than missing money. They involve donor trust, board oversight, grant compliance, restricted funds, public reporting, and sometimes the survival of the organization itself.
When suspected fraud is discovered, the first questions are practical: How much is missing? Who had access? How did it happen? Were restricted funds or grant funds affected? Do the financial statements or Form 990 need to be corrected? What should the board do next?
Those questions are financial, but they can become legal questions quickly. That is where forensic accounting can be useful. The role of the financial expert is to analyze the records, follow the money, explain the accounting, and help turn financial information into understandable evidence.
A forensic accountant does not replace the attorney, the board, law enforcement, or the court. The attorney guides the legal strategy. The board protects the organization. The forensic accountant helps determine what the records show.
The Role of the Financial Expert
In litigation or dispute-related matters, a financial expert may be asked to analyze accounting records, internal controls, damages, diverted funds, tax filings, financial statements, restricted funds, or the reasonableness of certain transactions.
The expert should stay in the financial lane. A forensic accountant should not testify that someone is “guilty” of fraud or offer legal conclusions that belong to the court or jury. But the expert may explain what the records show: transfers to personal accounts, unauthorized credit card charges, fictitious vendors, altered bank statements, unsupported reimbursements, payroll irregularities, missing documentation, or accounting entries that concealed personal expenditures.
For the work to be useful, it must be organized, documented, explainable, and tied directly to the records reviewed. The expert should be able to explain what records were reviewed, what procedures were performed, what assumptions were made, what limitations existed, and how the findings were reached.
Expert testimony also needs to be reliable. Federal Rule of Evidence 702 and the Massachusetts Guide to Evidence both focus on whether expert testimony is helpful, supported by sufficient facts or data, and based on reliable methods. For a forensic accountant, the work needs to be more than accurate. It needs to be defensible.
Nonprofit Fraud Often Starts With Weak Controls
Many nonprofits are mission-driven, leanly staffed, and dependent on trust. That is admirable, but it also creates risk.
Small and mid-sized nonprofits may have one person receiving checks, making deposits, recording transactions, paying bills, reconciling the bank account, managing the credit card, and communicating with the outside accountant. That is too much control in one place.
Trust is not an internal control!
A forensic accounting review can help identify where controls failed, including weak segregation of duties, poor credit card oversight, lack of bank reconciliation review, inadequate grant tracking, weak restricted-fund accounting, unclear board reporting, or failure to review Form 990 before filing. Weak controls do not automatically prove fraud, but they can create the opportunity for fraud to occur and remain undetected.
The Board Needs Answers, Not Blame
When fraud or suspected fraud is discovered, board members often ask how the problem went undetected. That question should be answered carefully.
The purpose of a forensic accounting review is not to embarrass the board or second-guess every decision with hindsight. The purpose is to reconstruct what happened, identify what information was available, determine where the process broke down, and help the organization understand what should change going forward.
A board may have received monthly financial statements and still not have seen the problem if the reports were incomplete, too summarized, delayed, or prepared by the same person controlling the transactions. A treasurer may have reviewed bank reconciliations but not received cancelled check images, credit card support, payroll change reports, or vendor details. An outside accountant may have prepared tax filings or financial statements based on records provided by management, without being engaged to test for fraud.
Those distinctions matter. A forensic accountant can help the board distinguish poor controls, poor reporting, poor bookkeeping, intentional concealment, and actual financial loss. A good report can answer these questions without turning the analysis into a blame exercise. That is valuable to board members who want to protect the organization, correct weaknesses, and show that the matter was handled seriously.
What a Forensic Accountant Looks For
A nonprofit fraud investigation should begin with scope. The attorney, board, audit committee, insurer, or other specified party should define the issue clearly.
Is the concern theft of cash? Misuse of credit cards? Payroll fraud? Unauthorized compensation? False grant reporting? Donor-restricted funds spent for the wrong purpose? Related-party transactions? Altered bank statements? Missing accounting records?
Once the scope is defined, the financial record can be built. The work often includes reviewing bank statements, cancelled check images, credit card statements, general ledgers, accounting system audit logs, payroll records, vendor files, grant agreements, donor restrictions, board minutes, Form 990 filings, and financial statements.
The expert may reconcile bank activity to the accounting records, identify unsupported transactions, isolate payments to employees or related parties, review credit card charges, trace transfers, and document altered or missing records. The goal is not to make accusations. The goal is to establish what the records show.
Common Patterns in Financial Misconduct
Fraud is often hidden in routine transactions. A vendor payment, payroll change, reimbursement request, credit card charge, or transfer between accounts may look ordinary until it is compared to approvals, source documents, historical patterns, or the organization’s stated purpose.
In nonprofit matters, the accounting description may not match the economic reality. A personal expense may be coded as program supplies. A related-party payment may be recorded as a normal vendor cost. A transfer may be described as operational when it moved funds away from their intended purpose.
That is why a forensic review generally works backward from the records. The question is not “Who do we think did this?” The better question is “What does the document trail show?”
Agreed-Upon Procedures Can Be a Practical Framework
In some nonprofit fraud matters, the work may be structured as an agreed-upon procedures engagement, or as a litigation-support engagement that uses a procedures-based approach. The exact form depends on the assignment, intended users, and whether the matter involves investigation, insurance, board oversight, regulatory response, or litigation.
An agreed-upon procedures engagement is not an audit. The accountant is not expressing an audit opinion or providing an overall conclusion that fraud did or did not occur. Instead, specific procedures are performed, and the results of those procedures are reported.
That distinction is important. In a fraud-related matter, the report should avoid overstatement and legal conclusions. The focus should be on what was tested, why it was tested, what documents were reviewed, what exceptions were found, and how the results were calculated.
In practice, this type of work should be organized with the discipline of an audit program. The procedures should be clear, sequential, documented, and capable of being followed by someone who is not a financial professional. Attorneys and boards are not only hiring technical knowledge. They are hiring the ability to produce a clear, organized, evidence-ready work product.
The Report Should Be Built for Court !
A forensic accounting report in a nonprofit fraud matter should be clear enough for a judge, jury, mediator, board member, attorney, insurer, or regulator to understand. The strongest reports are not dramatic. They are organized, factual, and tied to documents.
The report should generally explain the assignment, scope, period covered, records reviewed, procedures performed, results, questioned transactions, assumptions, limitations, and exhibits. It should also identify whether the analysis was limited by missing or incomplete information.
For litigation purposes, formatting matters. Page numbers, schedules, exhibit tabs, footnotes, transaction references, and clear headings allow the report to be used effectively during depositions, mediation, board meetings, insurance claims, or trial. A non-financial reader should be able to follow the report without needing to understand accounting jargon.
A well-written report should allow the reader to move back and forth between the narrative, the procedures performed, the findings, the schedules, and the supporting documents.
This is an area where forensic accounting work differs from ordinary accounting work. The expert is not only analyzing numbers. The expert is preparing a record that may be challenged, cited, relied upon, and explained in a legal setting.
The forensic accountant’s job is not merely to “find the number.” The job is to present the work in a way that can be tested, understood, and relied upon.
Real Cases Show the Pattern
Recent nonprofit fraud cases show why this work matters.
In Massachusetts, the founder and former CEO of the Boston-based nonprofit Violence in Boston was sentenced in federal court after pleading guilty to charges involving diverted donations, COVID-19 relief funds, rental assistance, grant funds, false tax returns, and failures to file tax returns. According to the Department of Justice, she was ordered to pay restitution of $106,003, with forfeiture to be decided later.
The Detroit Riverfront Conservancy case is another example. The former CFO was sentenced to 19 years in prison for embezzling more than $40 million over an eleven-year period and was ordered to pay approximately $48 million in restitution. That case highlights warning signs a forensic accountant would focus on: related-party vendors, altered bank records, unauthorized debt, personal credit card payments, and lack of independent verification of bank activity.
A Washington case involving a finance director at two nonprofits shows a more familiar pattern for smaller organizations. According to the Department of Justice, the finance director was sentenced to 41 months in prison for embezzling more than $3 million over an eleven-year period, including funds used for a mortgage, vacations, and gambling losses.
The Form 990 Issue: Significant Diversion of Assets
For nonprofits, a fraud investigation may also affect tax reporting.
Form 990 asks whether the organization became aware during the tax year of a significant diversion of assets. The IRS instructions state that a diversion includes unauthorized conversion or use of the organization’s assets other than for authorized purposes, including embezzlement or theft. The instructions also explain that a diversion is significant if the gross value of all diversions discovered during the year exceeds the lesser of 5% of gross receipts, 5% of total assets, or $250,000.
That means the forensic accounting work may matter not only for litigation, insurance recovery, and board oversight, but also for public tax reporting.
The financial expert can help determine the dollar amount, the period affected, whether restitution or insurance recoveries occurred, whether prior financial statements may need correction, whether grant reports were affected, and whether the Form 990 needs additional disclosure. The organization also needs legal guidance on disclosure, privilege, communications with regulators, employment actions, insurance claims, and potential criminal referrals.
Testifying Is Different From Investigating
A good investigation does not automatically make a good witness.
A financial expert who testifies must be able to explain accounting issues in plain English. The attorney, judge, and jury may not understand debits, credits, restricted net assets, grant compliance, or Form 990 reporting. The expert’s job is to make the financial evidence understandable without overstating it.
The expert should be prepared to explain the assignment, documents reviewed, missing records, procedures performed, loss calculation, assumptions, limitations, and whether management explanations were considered and verified.
The expert should also be prepared for cross-examination. Opposing counsel may challenge scope, assumptions, missing documents, reliance on management, accounting judgment, methodology, or whether the expert is offering a legal conclusion. That is why workpapers matter. The testimony is only as strong as the work behind it.
Common Nonprofit Fraud Red Flags
Attorneys and board members should watch for practical red flags: one employee controls too many financial functions, bank reconciliations are not reviewed, credit card charges lack receipts, vendor names look unfamiliar, payroll changes are not independently approved, restricted donations are not tracked, grant reports do not agree to the general ledger, Form 990 is not reviewed by the board, or cash flow problems exist despite strong reported revenue.
None of these facts alone proves fraud. But each may justify a closer look. A forensic accounting review can help separate weak accounting from suspicious activity. Not every messy set of books is fraud. Sometimes the issue is poor bookkeeping or lack of oversight. Other times the accounting records reveal a pattern that requires legal action.
Conclusion
Nonprofit fraud investigations require both financial discipline and legal judgment. The attorney guides the legal strategy. The board protects the organization and its mission. The forensic accountant helps determine what the records show.
When a financial expert serves as a witness, the work must be reliable, documented, and understandable. The expert should identify the records reviewed, explain the procedures performed, quantify the amounts at issue, and avoid legal conclusions.
In many matters, the quality of the written report can be just as important as the analysis itself. A clear report with organized procedures, page numbers, schedules, exhibit references, and factual findings can help attorneys, boards, insurers, regulators, and courts understand the financial evidence.
In nonprofit cases, the stakes are not limited to dollars. Fraud can damage donors, employees, beneficiaries, grantors, regulators, and the public’s trust in the organization.
A forensic accountant cannot undo that damage. But the work can bring clarity to the financial record. And when the numbers become evidence, clarity matters.
About the Author
Steven DiVirgilio, CPA, is a Massachusetts Certified Public Accountant based in the Greater Boston area. He advises individuals and closely held businesses on tax, accounting, financial reporting, and business matters. His litigation support practice includes analysis of tax returns, financial statements, business records, and closely held business issues that may arise in divorce and other legal matters. Steven is also an adjunct professor at Babson College.
This article is for general informational purposes only and does not constitute legal, tax, accounting, or valuation advice. Each matter depends on its specific facts and circumstances.