Update: FBI Now Involved in Fiscal Sponsor Scam

The FBI and the state attorney general’s office have gotten involved in the investigation of the International Humanities Center, which closed its doors after  three years of IRS scrutiny. IHC was a California-based 501(c)(3) organization that functioned as an umbrella structure and fiscal sponsor for over 200 nonprofits but it now appears it may have all been a Ponzi scam.  IHC closed its doors suddenly in January, with little explanation and almost $1 million unaccounted for. That figure is with only 49 groups reporting and may go higher as other groups come forward. Many of the groups have been completely crippled by the loss of their donations and donors’ reluctance to give once the news hit about the missing funds.

Source: LA Times

CEO Expenses and the Board

An Op-ed piece by Michael Peregrine at the Chronicle of Philanthropy provides a good reminder about why it is so important to pay attention to CEO expense account spending. The head of the foundation of the University of Texas Southwestern Medical Center, Dr. Wildenthal, is stepping down after an internal investigation concluded inappropriate spending including mingled business and personal purchases.

Dr. Wildenthal led the foundation for 22 years before tips reporting lavish international travel, fine wines and other extravagances spurred an internal investigation. Peregrine states “the entirety of the report leaves an impression – fairly or unfairly – of a respected executive who developed a sense of ‘entitlement‘ based on a record of extraordinary accomplishment.” He notes this created an atmosphere of excessive deferential attitudes to Dr. Wildenthal’s judgment in spending.

There’s only so much an auditor can do if we take issue with the exact nature of spending, in terms of whether this is really best way to meet your program or fundraising objective. We can bring it to the board’s attention but if the board isn’t willing to question it themselves or has bought into an executive’s reasoning for spending, all we can really do is repeatedly point at it. An audit opinion speaks to whether the numbers are free from material misstatement. This does include whether program spending was actually spent on the program (as opposed to personal spa days), but we don’t and can’t actually opine on whether the spending was particularly wise or frugal.

The board bears fiduciary responsibility to monitor spending and make sure there is sound judgment involved. When it comes to nonprofit organizational structures, the board is the highest authority and should not defer to an executive when it comes to questionable expenditures.

Read more of Peregrine’s piece here.

Exchange Transaction or Contribution (avoiding management letter comments, part 5)

Organizations receive many different types of revenue including contributions, grants, contracts, and dues.  Some of these revenue types are recorded in a similar manner while others are very different.  It can also be hard to tell the difference between of the types.  For example, grants and contracts usually have a written agreement, but they are recorded differently.

One of the most important questions to consider is who is receiving the benefit.  If the benefit is going to be received by the public or a group not related to the donor, then money is probably a contribution.  If there is some product or service that is going back to the organization that is providing the money, then it is probably an exchange transaction.

The first step is to determine if the revenue is an exchange transaction or a contribution.  Exchange transactions are recorded based on when the revenue is earned and affect revenue, receivables, and deferred revenue.  Contributions are recorded when received or pledged and affect revenue, receivables, and temporarily restricted net assets.

Below are some things to consider when deciding if there is an exchange transaction or a contribution: Continue reading »

Congressional Hearing of IRS Monitoring of Nonprofits

Representative Charles Boustany Jr. (R – LA) has called a hearing of the House Ways and Means Committee scheduled for next week to discuss tax-exempt organizations and concern that the IRS has not been aggressive enough in monitoring charity abuses.

Up for discussion are items outlined in Boustany’s letter to the IRS sent October 6, 2011 as follows:

• How many tax-exempt organizations have been audited since 2008 and what issues were identified?
• How has the redesigned Form 990 increased transparency and accountability?
• Analysis of unrelated business income, revenues and the value of assets held by nonprofits for the years 2008 – 2010.
• What is the process for following up on allegations of excessive political campaign activity?
• Discussion of the level of charity care provided by all hospitals.

Click here to see the entire letter.

Per the Ways and Means Committee website, nonprofits are invited to submit their opinions on the topics by written statement. In order to submit your thoughts, go to the Committee homepage, http://waysandmeans.house.gov, select “Hearings.” Select the hearing for which you would like to submit, and click on the link entitled, “Click here to provide a submission for the record.” Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close of business on Wednesday, May 30, 2012.The hearing will take place on Wednesday, May 16, 2012, in Room 1100 of the Longworth House Office Building, beginning at 10:00 A.M.

See specific formatting requirements for submissions and more details on the hearings here.

Additional Source: Chronicle of Philanthropy

Aronson Online Resources: Access Previously Recorded Webinars

Did that webinar we did that you wanted to catch happen at an inconvenient time for you? No worries! We are looking out for you. Just check out the Aronson LLC webpage which catalogs resources, including previously recorded webinars in downloadable format.

Just go here: http://www.aronsonllc.com/news/resources.html

for access to webinars, newsletters and other items of interest that have been archived for as a resource available to you at no cost.

Webinars you may have missed include:

4/25/12 Hot Topics and Trends Affecting Nonprofits

12/14/11 Cyber Security Threats to Nonprofits

9/20/11 Practical Advice for Planned Giving

and many others that may be of interest! You too could be a very happy computer user in a field somewhere!

Update: DC Ex-Councilman Sentenced to 38 Months for Stealing from Nonprofits

D.C. Ex-Councilman, Harry Thomas Jr. got a smackdown in district court last Thursday in the sentencing hearing, after pleading guilty in January to embezzlement of over $350,000  and filing false tax returns. The funds were originally intended for use by the D.C. Children and Youth Investment Trust. Thomas is now looking at 38 months in federal prison.

Assistant U.S. Attorney Jonathan Haray called it, “the most egregious actions of public corruption ever proved against a member of the D.C. Council.” Let’s remember that this is a council that includes Marion Barry.

Prosecutors pointed to the luxury vehicles and expensive wardrobe, some of which were directly traceable to the embezzled funds, when asking for a four year sentence. The Defense pushed for 18 months. Both sides are in agreement that Thomas will have to pay restitution of $353,500 and forfeit the Victory motorcycle and Chevy Tahoe. In consideration is an additional $92,500 related to funds diverted from a city drug program used instead for the 2009 presidential inaugural ball.

Source: The Washington Post

#dccouncil #harrythomasjr #fraud #nonprofit

Wells Fargo Served a Major Legal Defeat Against Minnesota Nonprofits

U.S. District Court Judge Donovan Frank has shot down Wells Fargo’s request for dismissal of the civil trial following the 2010 verdict of fraud and breach of fiduciary duty by the bank. Blue Cross and Blue Shield of Minnesota, along with two other health care organizations, several pension funds, a college endowment fund, and a charitable foundation, sued Wells Fargo for misrepresenting the level of risk of their investment. The nonprofits stand to win $41 million at the civil trial in January 2013, not including punitive damages which could skyrocket into the hundreds of millions range.

The bank presented an investment program claiming it was safely conservative and could earn extra returns by lending the securities to brokers for short sale transactions. The lawsuit claims that the bank concealed the reality of the complex, long/short, structured investment which tanked along with the rest of the market in 2008.

The bank, now owned by Citigroup Inc., defends its investment vehicle, saying that the program was in accordance with investment guidelines and the investments were suitable at the time of purchase.

A word of caution: Investment brokers are ultimately selling a product. Unless they have certification as a financial planner (CFP), they owe professional due care, but not fiduciary responsibility, meaning, protecting your financial interest isn’t the top item on their list. Many brokers are also CFPs and it makes good financial sense to make sure your broker is one.

News Source: Star Tribune

#wellsfargo #lawsuit #nonprofit

Your Dog Wants to Walk With the Nonprofit Ninjas This Saturday

WALK FOR THE ANIMALS – THIS SATURDAY, May 12^th

in Bluemont Park (329 N. Manchester Street, Arlington, VA 22203). Registration opens at 8:30am and the walk begins at 9:30am.

To raise funds for the Animal Welfare League of Arlington.

Proceeds from this year’s event benefit all of the homeless pets in our shelter and all of the animals in our community. Every dollar counts.
What does my money go towards?
-> $25 will cover the cost of 1 heartworm test for a shelter dog
-> $50 for 4 shelter cats or dogs to be microchipped
-> $100 will cover the cost of 2 cat spays/neuters or 1 dog spay/neuter

PLEASE CLICK HERE to register to walk with the Aronson Nonprofit Ninjas or donate!

Accounting Policy Manuals (avoiding management letter comments, part 4)

Not having a written accounting policy manual can be detrimental to your controls, so it shows up often as a management letter comment.   This is usually considered a control deficiency. Below are some suggestions on what to include in an accounting manual and what should be included in each area so you can avoid the management letter comment.

• Maintenance of the chart of accounts –which number sequences are used for assets, liabilities, net assets, revenues, and expenses. Don’t over-complicate it, but make it work for your needs.
• Capitalization and depreciation policy – what is the cutoff for a purchase to be capitalized or expensed, what is the expected useful life that will be used to depreciate the item.
• Petty cash policy – how much is kept on hand, how regularly is it refilled, what can it be used for, and who has access to it.
• Credit card usage and receipt retention policy – who in the organization is allowed to have a credit card, what are the credit cards to be used for, and what purchases require advance approval.
• Equipment lease policy – what is the basis to determine if the lease will be considered a capital or operating lease.
• Processing of cash receipts – who will do what, and when processes should occur.  See Part 1 of this series for help on planning the process.
• Processing of cash disbursements and payables – who will do what, and when processes should occur.  See Part 1 of this series for help on planning the process.
• Processing of payroll– who will do what and when processes should occur.
• Bank reconciliation procedures – who will do what and when processes should occur.  See Part 1 of this series for help on planning the process. Continue reading »

Fall-out Over Foundation Impropriety

There’s a lot of finger-pointing and passing the fiduciary buck going on at the Los Angeles Trade Technical College these days and heads are rolling. The executive director of the Trade Tech foundation, Rhea Chung, is being investigated on claims of lavish spending, excessive bonuses, and allegations of forged signatures on checks. The improper spending came to light during a state audit.

File this under Do Not Do This: Included in the questionable spending are items such as: $1,500 monthly car allowance, $22,000 performance bonus, $2,000 monthly pay for running the youth orchestra, tens of thousands of dollars on golf outings and daily restaurant meals averaging $150 a day.

Here goes the finger pointing: Ms. Chung claims all her expenses were approved by the President of Trade Tech, Chip Chapdelaine. Chapdelaine claims no knowledge. Faculty claim they brought the questionable spending to Chapdelaine’s attention and that he ignored it. Chapdelaine stated he never had fiduciary responsibility over Chung, that it was the chair of the board, Darryl Holter’s responsibility. Holter claims Chung reported to Chapdelaine, not to the board. Holter is also under fire for potential conflict of interest and claims personal vendettas are causing all these problems. Faculty of the college and the state education code agree that as President, Chapdelaine bore responsibility to ensure the foundation’s finances were appropriate.

Here goes the head-rolling: Chung is on administrative leave pending further investigation. Chapdelaine removed Holter as chair of the board and Holter, along with another board member resigned. The faculty governing body at the College issued a no-confidence vote yesterday, calling on Chapdelaine to resign. Chapdelaine is declining to comment.

What to learn from this: Don’t make assumptions someone else is responsible or looking. When it comes to public funding, everyone involved owes some fiduciary responsibility but absolutely no one at the top can shirk that responsibility. Review current financial reports regularly. Ask questions about odd spending and follow up – especially if someone else seems to be ignoring it. If you aren’t sure of the chain of command – it needs to be in the by-laws.

Source: L.A. Times

#LATradeTech #fraud #fiduciary #Chapdelaine