Nonprofit Board Crisis

Nonprofit Board Intelligence #NonprofitBoards

Nonprofit board knowledge about facts and figures is essential to a board's fulfilling its fiduciary duty of care.  When it comes to understanding the finances, boards are very dependent on what their execs tell them.  So it's probably not surprising that boards don't always know whether the financial statements are accurate, until at least when the annual audit occurs, presuming they understand what is reported.  

The following Philadelphia Inquirer story tells of a woman who managed to steal $50k a year for 12 years.  The nonprofit in question has annual revenues of about $12 million so the question: how responsible is a board when it "misses" the redirection of $50k a year and what should it have done different.  I don't have all the answers especially given the approach the manager used in redirecting funds.  

Ex-manager accused of bilking $600K from Philly nonprofit for troubled children

Updated: SEPTEMBER 29, 2016 — 1:08 AM EDT

by Jeremy Roebuck, Staff Writer

A former manager at a Northwest Philadelphia mental-health treatment facility was accused Tuesday of embezzling more than a half-million dollars in public funds meant to help children suffering from trauma and behavioral disorders.
Police seek Suburban Station flasher
Federal prosecutors say Sonja McQuillar, the former director of health and information management at Northern Children's Services, issued checks through her job to family, friends, and agency contractors for work they did not perform.

She allegedly forged signatures to cash the checks and pocket the money herself. Authorities estimate she bilked more than $600,000 from the agency between 2002 and 2014 as a result of her purported scheme.

McQuillar, 50, of New Castle, Del., could not be reached for comment Wednesday. It was not clear from court records whether she had retained an lawyer.

She first came to the attention of federal authorities through a tip to the Philadelphia Office of the Inspector General.

From its Ridge Avenue campus in Wissahickon, Northern Children's Services offers residential and outpatient programs that serve thousands of low-income children and families. The agency, founded in 1853 as the Northern Home for Friendless Children, is a regular recipient of federal grant funds awarded by the city and the Philadelphia School District.

"Every nonprofit that receives taxpayer funding accepts a responsibility to give charitably with integrity," Inspector General Amy L. Kurland said in a statement. "These funds were designated to help some of Philadelphia's children who are most in need."

McQuillar has not entered a plea to charges of theft and making false statements to authorities.

[email protected]

215-854-2608 @jeremyrroebuck

 

Nonprofit Board Cybersecurity #NonprofitBoards

Cybersecurity is not a topic traditionally on my radar when thinking of nonprofit boards.  But the following blog makes a good case for why I should think otherwise.  From Lexology and FisherBroyles please read further.  

 

Privacy and Data Security: Responsibilities of the Board of Directors and Senior Management of for-Profits and non-Profits related to Privacy and Security

FisherBroyles

 

USA September 26 2016

Directors and officers have fiduciary obligations to ensure the proper operation of the organization. Specifically, in addition to traditional requirements for financial and strategic transaction oversight, there should be oversight to ensure that the organization takes appropriate steps related to the privacy and security of personal information. The obligations of an organization can extend to personally identifiable health information (PHI), consumer financial information such as credit card and account numbers, the electronic and physical records and information maintained by the organization, business continuity and disaster recovery, and the protection of the ability of the organization to conduct business. These are some of the obligations specifically related to cybersecurity:

• Directors need to understand the importance of cybersecurity and its relationship to organizational risk assessment;

• Public company directors need to address their unique disclosure and control requirements, which are becoming increasingly prominent and were very recently the subject of a Wall Street Journal article entitled “Corporate Judgement Call: When to disclose You’ve Been Hacked;

• Cybersecurity cannot be looked as just an information technology issue, but rather needs to be seen as a component of compliance in general;

• Boards should ensure that they engage and are regularly briefed by those with adequate experience;

• Boards should ensure that management has a risk management assessment process including ongoing monitoring of new legal developments, and should regularly discuss with management the changing level and  types of risks faced by the organization, appropriate efforts to mitigate risks including procurement of dedicated insurance coverage, technical measures, plans to address potential incidents, and the plans, staffing and budgets related to each of these areas;

• The risks associated with cyber and related physical threats should be factored into the organization’s business continuity and disaster recovery plans, which should be tested and updated regularly;

• Appropriate, specific benchmarks such as ISO 27001-2 or PCI compliance, should be used to assess the efforts of management;

• The issue of cyber risk allocation must be thoughtfully addressed in the covenant/warranty, indemnity and liability limitation sections of contracts with customers and vendors, particularly cloud vendors.

What about nonprofit boards? These obligations exist for nonprofit organizations as well. While legal responsibility of the board members of a nonprofit organization may vary from state to state, members should understand that there has been litigation on exactly the issue of a nonprofit director’s liability. Some states allow the nonprofit to provide potential enhanced protection for director and officers through charter and bylaw provisions, while others impose by statute different specific obligations on these persons. Irrespective of legal liability, however, the better practices are for each director to understand and ensure that the organization’s plans and actions are appropriate to address these risks in the same manner as for-profit companies.

The federal HIPAA law governing those in the health care field and their vendors imposes specific obligations on covered entities. There are special privacy and security rules associated with PHI. HIPAA rules require covered entities and business associates to implement and maintain security policies and measures to address cybersecurity to some extent in a manner which differs from requirements applicable to other businesses. There is also recent published HHS guidance addressing minimum standards, how to prevent and address breaches and on ransomware. 

It is important to understand that many organizations will be business associates under HIPAA even if they are not directly involved in the delivery of health care, and the legal requirements will apply to them. A fundamental element of a compliance strategy in this area is for covered entities to properly determine when business associate agreements are required and ensure that they are obtained.

FisherBroyles - Martin B. Robins, Geoffrey M. Goodale, Joseph Manak, Michael S. Khoury and Kimberly Dempsey Booher

Nonprofit Board Culpability #NonprofitBoards

When something goes really wrong, just how culpable should a nonprofit be?  This is pretty much the question being raised in a trial that is trying to determine just how wrong the Salvation Army was in continuing it's Philadelphia's store operations while next door a building wall was being removed.  The wall fell and killed and injured shoppers and staff who were in the store at the time.  Now we certainly know that the board likely did not weigh-in on whether the store should be closed during demolition.  At the same time, the board might have had in place a policy that would have provided management with parameters for when exactly they should consider closing the store.  And, the board might have also had policy that guided management in terms of risk of harm to shoppers and employees.  

It is not clear to me what policies of this nature were indeed in place, but if they weren't, should we not expect the board to be held responsible?  The trail will certainly reveal all the facts and you can imagine the consequence if the board is found as culpable as their managers.  This whole event though should serve as a warning to nonprofit boards to be asking the questions about employee and customer safety; to be clear what they as policy makers would say are the appropriate elements to consider; and provide oversight to ensure management practices what the board commits.

Here's the Philadelphia Inquirer story.

Expert: Salvation Army had duty to close store destroyed in deadly collapse

by Joseph A. Slobodzian, STAFF WRITER

Lawyers for the Salvation Army have portrayed the charity as a victim of the 2013 demolition collapse that destroyed its flagship Center City thrift store and killed two of its workers and four customers, and injured 13 others.

But an expert on retail business operations told a Philadelphia jury Tuesday that top officials of the nonprofit should be held liable for damages in the collapse because they ignored danger warnings from owners of the demolished building.

The result, testified Robert Bartlett, was that the store at 22nd and Market Streets was open and busy on June 5, 2013, when an unsupported three- to four-story brick wall on the demolition site next door toppled and crushed the one-story store.

Bartlett heads Bartlett Joseph Associates in San Rafael, Calif., an independent retail industry management consulting firm. Bartlett also testifies as an expert in business-related litigation and was called to testify by lawyer Andrew J. Stern, who represents Mariya Plekan, the most seriously injured of the survivors.

The 54-year-old Ukrainian immigrant had both legs amputated at the hip after being trapped for almost 13 hours in a pile of debris. Plekan was in court Tuesday in her motorized wheelchair, a friend by her side.

In his opening statement to the Common Pleas Court jury of six women and six men last week, Stern said the evidence would show that Salvation Army officials in West Nyack, N.Y., had traded emails for months with Thomas Simmonds, property manager for New York real estate speculator Richard Basciano and his STB Investments Corp.

STB owned the vacant Hoagie City building being demolished, and Simmonds' emails expressed anger and frustration at the Salvation Army's decision not to allow access to the thrift store's roof so demolition workers could more easily take down the wall.

In several emails, Simmonds warned that "people are going to be killed" and that there would be "headlines no one wants to see."

Salvation Army officials, however, never relayed any danger warnings to the supervisor and workers at the Center City store.

Bartlett said that failure to report violated the Salvation Army's own 2012 employee policy manual requiring employees to report any hazards to supervisors.

In deposition testimony cited by Bartlett, Maj. Charles Deitrick, the charity's general secretary for its adult rehabilitation centers, acknowledged that there was "no policy and no downward communication to the stores."

Another official, Maj. John Cranford, administrator of adult rehabilitation centers in Philadelphia, testified in a deposition, that he believed that for the Center City store workers "there was no need to be informed."

Bartlett testified that, at the very least, the Salvation Army should have had a structural engineer or other "competent professional" on site monitoring demolition beginning on June 2, three days before the collapse.

By refusing to close the store, Bartlett testified, Salvation Army officials undermined the reputation that brought customers into their thrifts.

"This was a trusted brand that has been around forever," Bartlett added.

In addition to the Salvation Army, those being sued included Basciano and STB; Plato A. Marinakos Jr., the Center City architect whom Basciano and STB hired to monitor demolition; demolition contractor Griffin Campbell, and Sean Benschop, an excavator operator hired by Campbell to help knock down the remains of the Hoagie City building.

[email protected]

215-854-2985 @joeslobo

www.philly.com/crimeandpunishment

 

 

"The store should have been closed on or before June 4," Bartlett added.

Nonprofit Board versus PA Auditor General #NonprofitBoards

 Not guilty!  That's essentially the response by the board of the Pennsylvania Cyber Charter School and two affiliated schools to the accusation by the Pennsylvania Auditor General who has assessed that the "leaders involved with all three of these schools had intermingled relationships that put individual self-interest above student needs while controlling hundreds of millions of dollars in taxpayer education funds from nearly every district in the state".  

In particular, according to the Philadelphia Inquirer, "One of the central issues at PA Cyber was that its board provided little oversight of business transactions involving Nick Trombetta, the cyber charter's founding CEO; board members; family members; and related entities.  Because of the inordinate number of related-party transactions, the board and the administration had an even greater duty to govern all aspects of the cyber charter school's management, but it failed to do so," the 91-page report said."

But the school board takes no responsibility for a number of financial irregularities identified by the Auditor General and simply states: "the school's board had "instituted a robust conflict-of-interest policy. The school also said that it had been reviewing existing contracts with the management company and that any renewals would be "achieved via an open and public process."

And, not to appear totally dismissive, the CEO stated: "While we adamantly disagree with Auditor General DePasquale's two findings regarding Lincoln Park Performing Arts Charter School, we wholeheartedly agree with his desire to make schools more accountable to taxpayers." 

It is certainly appropriate that a board should indeed deny false accusations and incorrect findings, but why am I led to believe that the Auditor General may not be off-base with his findings?

Might there not also be a different public response or even no public response in an effort to address what has been identified as areas of concerns?  What's your thinking?

Nonprofit Board Treasurer for 20 Years #NonprofitBoards

Nonprofit board treasurer for twenty years and for two nonprofits!  So much for officer term limits and board term limits. And talk about unlimited trust.  And finally, reps from both organizations reported not being aware that "there was an ATM card linked to the organizations' bank accounts".

The story from nwi.com tells of "a 79-year old man, accused of taking more than $50,000".  It's not clear how or why "officials" got involved by their findings revealed the facts that money was going out-the-door and not being spent for the intended purposes. 

A quick internet search revealed that the past-treasurer in question remains on references for the Hunky Hollow Athletic Club as the registered agent and contact person.  On the Cerebral Palsy site, under the listing of officers, the Treasurer position is blank.

 

Lessons anyone?

 

Nonprofit Board and CEO Pay #NonprofitBoards

I don't fully understand the "why" but the Times-Picayune decided to conduct an examination of New Orleans' nonprofit executive salaries.  The not-so-surprising finding is that some execs, those who run really large nonprofits, are paid more than execs that don't.  Stories about exec pay often focus on whether the execs are being payed too much for doing "charity" work.  The long-standing attitude is that folks who do "charity" work shouldn't be paid as much as those who do work for-profit.  Another often discussed focus on exec pay is the percentage or proportion of donor money used to pay execs versus provide direct service.  The use of donor money is a serious matter but simply linking exec pay and direct service does not provide enough of an explanation as to whether donor money is being used appropriately, effectively and/or efficiently (partially because a huge chunk of many nonprofit exec's time is directly associated with service delivery).

All that said, the Times did its analysis and did a fine job talking about the full range of considerations in a nonprofit board's setting its exec salaries.  And oh yes, the real story is about what goes into a nonprofit board's considerations for setting their only employee's salary and benefits (remember: boards only have 1 employee).  So sit back and read - there is much to consider.

The 10 highest-paid nonprofit executives in New Orleans: How much they make and why

 

By Jennifer Larino, NOLA.com | The Times-Picayune
Email the author | Follow on Twitter
on September 22, 2016 at 9:43 AM, updated September 22, 2016 at 10:39 PM

 

 How much should a CEO be paid? For-profit and nonprofit entities alike spend millions of dollars each year on consultants and reports in search of the right answer.

Deciding how to compensate top leadership can be an even tougher balancing act for nonprofits, said Rick Cohen, spokesman for the National Council of Nonprofits. Organizations need to make sure the bulk of the money they get in donations and grants funds their social mission, he said.

Though nonprofits are not automatically exempt from paying federal or state taxes, many do not -- a factor that invites closer scrutiny to salaries."We're also competing for the same talent the for-profit sector is, the same people who need to feed their families and pay off their student loans," Cohen said. 

A look at tax records for more than 230 nonprofits in New Orleans shows compensation for CEOs and other top-paid employees varies widely depending on the sector and size of the organization. In general, the larger the organization is and the more national in scope its peer group, the bigger its paychecks are.

At least 17 nonprofit executives in New Orleans make more than $300,000 a year, including three who were paid more than $500,000 for the year, according to a NOLA.com | The Times-Picayune analysis of the latest IRS filings available and Guidestar.org reports.

Top 10 highest-paid New Orleans nonprofit executives
Rank	Name	Title	Nonprofit	Most recent salary
1	Paul Hoolahan	CEO	Allstate Sugar Bowl	$639,932
2	Michael Hecht	CEO	Greater New Orleans Inc.	$559,000
3	Ron Forman	CEO	Audubon Nature Institute	$528,226
4	Nick Mueller	President and CEO	National World War II Museum	$490,834
5	Karl Benson	Commissioner	Sun Belt Conference	$440,001
6	Stephen Perry	CEO	New Orleans Convention and Visitors Bureau	$439,840
7	Robert Crifasi	General Manager	New Orleans Country Club	$424,714
8	Jeff Hundley	COO	Allstate Sugar Bowl	$405,152
9	Arnold Lupin	President	Lupin Foundation	$352,812
10	Byron Harrell	President and CEO (former)	Baptist Community Ministries	$349,848
Internal Revenue Service

The analysis looked at nonprofits headquartered in New Orleans that reported more than $500,000 in income. Guidestar defines income as money an organization gets from contributions, grants and the performance of services before certain costs -- rental expenses, sales expenses, direct expenses, costs of goods sold -- are subtracted.

This top 10 ranking does not include executives at higher education and health care nonprofits, sectors that typically pay much higher salaries. Executives in nonprofit health care were ranked separately for this project.

Search for New Orleans nonprofit executive salaries

Use our database to search salaries for hundreds of nonprofit officials.

Local leaders

In interviews and statements, the city's largest -- and highest paying -- nonprofits pointed to peer-to-peer comparisons as a driving factor behind pay decisions. NOLA.com | The Times-Picayune sought comment from all the nonprofits found in the top 10 list.

Audubon Nature Institute, which runs 10 local museums and parks and is among the city's largest nonprofit employers, did not make a representative available for an interview, instead sending email statements with a list of national institutions it compares itself with for pay purposes. The list included the Chicago Zoological Society, the National Aquarium in Baltimore and the Georgia Aquarium as well as local institutions such as the Sugar Bowl and the New Orleans Country Club.

Audubon CEO Ron Forman is the third highest-paid nonprofit executive in the city, making $528,226 in 2014. Forman was among six Audubon executives who earned six-figure salaries that year, including chief of staff Bill Kurtz and vice president of food and beverage Richard Buchsbaum.

Comparing New Orleans nonprofit pay to other cities

See how the city's top-paid nonprofit executives compare to national peers.

In an emailed statement, Audubon spokesman Frank Donze said Audubon employs more than 1,000 people and oversees multiple parks and museums, factors that make it unique. The board's compensation committee uses a wide range of market data to review and recommend pay packages for Forman and Kurtz, he said. The entire board then reviews and approves the pay packages. 

The statement said pay for Forman, chief executive for 40 years, and the executive team reflects successful efforts to turn Audubon from "a struggling zoo to an array of world-class attractions, parks and facilities." 

Ray Jeandron, who chairs the compensation committee for the Sugar Bowl board, said salaries for its top leadership are competitive with other college football bowl organizations.

"We really are in a national business. We're competing against the largest bowls in the country," Jeandron said, adding executives sit at the negotiating table with major TV networks and national sponsors.

Mississippi Rebels wide receiver Derrick Jones (19) celebrates after the 82nd annual Allstate Sugar Bowl at the Superdome on Friday, January 1, 2016. (Photo by Michael DeMocker, NOLA.com | The Times-Picayune)Michael DeMocker 

The Sugar Bowl's two highest-paid executives -- CEO Paul J. Hoolahan and chief operations officer Jeff Hundley -- are also among the highest paid in the city. Hoolahan topped the list, making $639,932 in 2014. Hundley ranked eighth at $405,152.

Jeandron said the board hires an outside compensation consultant for about $10,000 a year to complete performance reviews and provide pay ranges to guide in compensation decisions. Performance factors include tickets sales, new sponsorships and major event deals.

Jeandron said Hoolahan and Hundley have led efforts to develop the Sugar Bowl and roughly 50 other amateur athletic events. In January 2015, the Sugar Bowl joined a three-year rotation with the Rose, Orange, Cotton, Peach and Fiesta bowls to host a semifinal game as well as a Southeastern Conference and Big 12 conference championship game.

Sugar Bowl leadership "deserves to be paid at or near the top levels of all the bowl executives in the country," Jeandron said. "We're not embarrassed by the level of pay we have."

Louisiana's highest-paid public university leaders

The top public university leaders and system presidents according to their base pay in 2014-15.

To be sure, looking at compensation figures for a single year provides a snapshot of pay for that moment. For example, roughly $200,000 of Lupin Foundation President Arnold Lupin's 2014 pay was compensation deferred over 20 years, said Louis Lupin, the organization's treasurer.

Greater New Orleans Inc. CEO Michael Hecht, the second highest paid nonprofit executive in the city, earned $559,000 in 2014. That included $50,000 in deferred pay from a previous contract.

Leslie Jacobs, a Greater New Orleans Inc. board member, said measurable factors such as the number of companies attracted to the area, jobs created, public policy achievements and brand awareness factor into Hecht's pay.

Jacobs noted Hecht, a graduate of Yale University and Stanford Graduate School of Business, is a central figure in the region's economic development efforts. Making sure his pay is comparable to peers in cities such as Philadelphia, Atlanta and Houston is a priority for the board, she said.

"High performers do not come cheap and they're wooed all the time," Jacobs said.

In emailed statements, board members for the Convention and Visitors Bureau, said CEO Stephen Perry and his team manage a giant economic engine that markets the city through three domestic travel offices and five overseas, amounting to, as businessman and board member Greg Rusovich put it, "what is virtually Louisiana's third Fortune 500 company."

The board reached Perry's $439,840 compensation in 2014 by looking at what his peers were paid in 10 competing U.S. cities. The board then took the average of the five lowest paid executives.

Where the money comes from is also a concern. New Orleans' hotel tax is a key source of funding for the board. Steve Pettus, board treasurer and managing partner at Dickie Brennan & Co., said board rules specifically stipulate CEO pay must be funded by private sector dollars.

The National World War II Museum uses benchmark data from 17 local and national organizations to set pay, including the Audubon Nature Institute, the Colonial Williamsburg Foundation, the Field Museum of Natural History in Chicago, the U.S. Holocaust Memorial Museum in Washington, D.C., and the Intrepid Sea, Air & Space Museum in New York City. 

The museum board also relies on data from the American Alliance of Museums and Southeastern Museums Conference.

Gordon H. "Nick" Mueller, president and CEO of the museum since it was founded, made $490,834 in 2015, ranking fourth among nonprofit executives in the city. Five top museum officials ranked within the top 30 highest-paid local executives.

Chief operating officer Stephen Watson said the National World War II Museum has gone through "dramatic growth" in recent years, morphing into an institution that is one-of-a-kind in the region. The museum is expected to welcome 700,000 visitors through June 2017, up from 100,000 in 2009. Its staff has increased from 75 to 300 employees.

Watson, who made $232,344 in 2014, said salaries have to remain competitive with major national institutions if that growth is to continue.

"We're building a world class museum in New Orleans," Watson said. "We're telling a big story and we're doing it with the best talent and at the highest level."

How is nonprofit pay set?

The IRS requires a committee of independent nonprofit board members to review compensation for top-paid executives. But what exactly goes into determining pay?

In recent years, executive paychecks in the for-profit world have hinged increasingly on performance measures, including how much profit a company makes and sales goals. Such metrics can be harder to pin down for nonprofits.

Take a food bank, for example. If the goal is to end hunger, should an executive director be judged on the number of meals the organization serves? Or is it better for business when demand is low?

"It's really about seeing that inch-by-inch progress, which is very difficult to write into a contract" for many nonprofits, said Cohen, with the National Council of Nonprofits.

See the top 10 New Orleans charter school salaries

Which education leaders made the most money in the 2013-14 academic year?

Kelly Pepper, executive director of the Louisiana Association of Nonprofit Organizations, said more nonprofit boards are using performance measures -- such as fundraising goals, programs launched and services offered -- to determine what they pay executives.

For the most part, however, boards still rely heavily on comparison -- looking at what similar organizations pay and making sure they are competitive, Pepper said. 

IRS rules already require nonprofit boards to obtain market data for comparable positions in for-profit and tax-exempt organizations when setting pay for top brass. Pepper noted the largest nonprofits hire consultants and buy compensation reports to scope out the market.

Boards also have to consider the type of person they want leading their organization, Pepper said.

"Executive directors are the face and voice of our organization. Our personalities, our character, our honorability, our worth is a reflection of our organization," Pepper said. "What is the value of that?"

Looking at the highest-paid individuals only provides a slice of the overall picture. More than half of the roughly 500 executives and top-paid employees included in the analysis made less than $100,000 a year in 2013, the year with the most complete data available. Again, professionals in the nonprofit health care sector were examined separately.

The Louisiana Association of Nonprofit Organizations surveys Louisiana nonprofits every three years to see what they are paying, reporting median pay for more than 100 jobs by nonprofit budget and total employees. The most recent survey released in August shows CEO pay ranged from $60,331 a year for the smallest nonprofits (with budgets less than $250,000) to $137,200 a year for the largest (budgets exceeding $10 million). A total of 835 nonprofits responded to the survey.

Nonprofit Board Financial Matters #NonprofitBoards

 

 Everytime I read about a nonprofit executive taking funds from that nonprofit's coffers my first question is: where was the board?  Below is a good list of steps a nonprofit board can take to reduce the risk of having me ask: where were you.  Here's a link to the article.

Keep Honest People Honest. Internal Control Practices for Nonprofit Boards.

September 21, 2016

A recent study found that the average fraudulent event lasted about 18 months before it was detected, and 77% of all frauds were committed by individuals working in accounting, operations, sales, executive/upper management, customer service and purchasing. Nearly half of victim organizations never recover any losses that they suffer due to fraud.

So what is your board of directors doing to protect your nonprofit organization?

The answer should be internal controls – systems and processes that reduce exposure to risk and protect your organization’s assets. Internal controls are the first step in combatting fraud, and a board of directors plays an important part in identifying and mitigating risk. Here is a list of internal controls your board should consider and potentially execute.

Identify and discuss the risk areas within your organization. Look at the strategic, financial and operational activities of your organization. Look at any compliance and reputational concerns that exist. What controls are in place to weaken any identified risks? Are they successful? Look closely at your special events, fundraisers, volunteers, finances, staff, restricted grants and reputations. These are all areas where your exposure to risk is highest.

Maintain honest and ethical behavior throughout your organization. The importance of ethical behavior should be communicated from the top down, by management and the board. Compliance with your organization’s code of ethics, and/or conflict of interest policy should be expected and verified. Whistleblower policies should be in place and encouraged so suspicious activity can be comfortably reported. When fraud is discovered, do you have a “no tolerance” attitude?

Establish independence from management. Relatives or friends of management should not be serving on the board. Independence is essential in limiting management’s ability to override decisions or controls that are in place. Check for independence and any current affiliations when you are interviewing prospective board members.

Analyze internal controls for efficiency. If you implement internal controls and never evaluate them, how do you know that you are effectively minimizing risk? Test your controls. Set up criteria to rate your exposure to risk and evaluate the effectiveness of your controls. Review reporting relationships, responsibilities and authority in relation to effective internal controls. Follow best practices to utilize talents of your members, and provide them with a segregation of duties – as much as your budget allows.

Monitor the budget and review financial statements. Look for budget variances and a corresponding explanation. Are any unusual or unexpected transactions of financial results investigated in a timely manner? Consider reviewing payroll detail, credit or debit card charges, and daily activity frequently. Increase the frequency of your bank reconciliations.

React to recommendations from the auditor. Read the internal control or management letters presented by the auditor and encourage management to implement the suggestions. Follow up to see that changes in procedures have been made and are effective at reducing risk. Does your board meet with external auditors in an executive session? It should.

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To learn more download our Guide to Financial Governance for Nonprofit Board Members or contact your Beene Garter professional at 616.235.5200.

Nonprofit Absentee Board #NonprofitBoards

Here's a story about a not-so-small and high-profile nonprofit where everything from the outside looked "right" but as evidence is indicating, this organization was merely a tool for its executive who appears to not have thought her $150K salary was enough.  The big question: where was the board and what were they doing given that, in my opinion, only if the board members were sleeping, would they have missed some key indicators that all was not right.  Here's the Wall Street Journal story.

Armed Forces Foundation ex-director charged with fraud, tax evasion, lying to IRS

By Spencer S. Hsu September 20 at 5:01 PM
Federal prosecutors announced an eight-count indictment Tuesday against Patricia P. Driscoll, charging her with a fraud and tax-evasion scheme as president of the Armed Forces Foundation, a Washington-based charity that assists veterans.

Driscoll resigned July 12 after 12 years at the military charity following an ESPN “Outside the Lines” report on her alleged mishandling of funds. In a December tax filing, the foundation reported it had “become aware of suspected misappropriations” by Driscoll totaling about $600,000 from 2006 to 2014.

During that time, the foundation, which has ties to several sports entities, regularly claimed that 94 to 96 percent of donations went directly to military members and their families, according to court files. The charity reported $2.3 million in donations in 2014.

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[Kurt Busch says ex-girlfriend Patricia Driscoll was a trained assassin]

Instead, prosecutors said, Driscoll allegedly reported sham donors and donations, failed to disclose fundraising commissions she received in addition to her $154,440 salary, and spent foundation money on personal expenses that included payroll and legal fees, business rent, and covering charges on a credit card she used for the private security business she operated in a rowhouse that also served as the foundation office and that she came to co-own with the foundation.

Prosecutors alleged that Driscoll lied to the Internal Revenue Service by failing to include fundraising commissions and other benefits when helping the charity prepare Form 990s, annual IRS disclosures that tax-exempt groups must file.

Driscoll, 38, of Ellicott City, Md., was charged with two counts each of wire fraud, mail fraud and tax evasion and one count of attempts to interfere with administration of internal-revenue laws. In addition to federal charges, she was charged with first-degree fraud under District law. The charges span from 2010 to 2015.

Driscoll’s attorney, Barry J. Pollack of Miller & Chevalier, could not immediately be reached for comment.

The foundation and an attorney, Ralph J. Caccia of Wiley Rein, also did not immediately respond to an email and phone requests for comment.

ESPN reported at the time of Driscoll’s resignation this summer that the foundation thanked Driscoll for her work and issued a statement in her behalf , stating: “I am proud of what we achieved during my time at the Armed Forces Foundation. Especially as it pertains to PTSD [post-traumatic stress disorder] and TBI [traumatic brain injury], the foundation is saving lives by creating awareness and helping veterans find the services they need before taking tragic and drastic steps such as suicide.”

Driscoll was in the news in 2014 after Driscoll accused NASCAR driver Kurt Busch, her then-boyfriend, of grabbing her by the throat and slamming her head against a wall during an argument in his motor home at Dover International Speedway.

At a hearing over her request for a protective order against the 2004 Sprint Cup champion, Busch stated that Driscoll was a trained assassin who once returned from an assignment in a blood-spattered evening gown. Driscoll did not deny the claim under oath but said Busch lifted it from a movie script she had been writing.

A judge granted a protective order in early 2015.

[Kurt Busch ordered to stay away from ex-girlfriend but can still race]

The indictment in the alleged charity fraud was announced by U.S. Attorney Channing D. Phillips; Paul M. Abbate, assistant director in charge of the FBI’s Washington field office; and Thomas Jankowski, special agent in charge of the Washington field office of IRS-Criminal Investigation.

Nonprofit Board Guidelines #NonprofitBoards

It sometimes feels that the "rules" for being a nonprofit board are fairly simple: do what the IRS describes in terms of fiduciary duties (care, loyalty and obedience).  But as anyone who has served on a nonprofit board will state, it's not so simple.  So we have others like me who offer prescriptive advice usually based on experience and this can be helpful.  And of course there are also some nonprofits who publish materials about being a board.

Well, maybe I missed it but there's a National Association that considers itself the standard setter for responsible board leadership and it just released a report described below.  Of particular interest to me: the infographic that describes the key areas requiring ongoing board attention.  The big story: boards must evolve to match their environments and evolution includes not only composition and recruitment but content.

By the way, there is one piece of bad news about this report.  It's a members-only item.  So....find an NACD member or ask if your Community Foundation would buy a membership. It's not inexpensive.

 

NACD Issues Guidance for Corporate Directors on Building the Strategic-Asset Board

 

 

GlobeNewswire•September 20, 2016

 WASHINGTON, Sept. 20, 2016 (GLOBE NEWSWIRE) -- The National Association of Corporate Directors (NACD), the standard setter for responsible board leadership, today released the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board.

An infographic accompanying this announcement is available athttp://www.globenewswire.com/NewsRoom/AttachmentNg/16013200-1a82-4bcc-88c9-c0cf4b7fa642

The world in which boards operate has been transformed in fundamental ways in recent years, including increased operational complexity, rapidly changing technology, global political instability, the proliferation of cyber threats, more vocal demands from shareholders and stakeholders, new regulatory requirements, and greater levels of media and public scrutiny.

Directors must ask themselves if their boards’ composition, director skill sets, and core governance processes remain fit-for-purpose in a dynamic environment where the board’s mandate is dramatically evolving.

“If a board’s leadership appears passive or unprepared in the face of this new mandate, directors should prepare for the possibility of shock treatments imposed from the outside,” said Richard Koppes, commission co-chair, director of the IRRC Institute and NACD, and former deputy executive officer and general counsel, CalPERS. “Without sufficient evolution, boards could face revolution.”

The 2016 NACD Blue Ribbon Commission report describes the ways in which the board’s mandate has shifted in response to external factors and strategic imperatives. The commission believes boards must move beyond traditional approaches to board refreshment and establish a system for continuous improvement in the boardroom.

“This new environment has placed significantly different demands on directors,” said Bonnie Hill, commission co-chair, director of California Water Service Group, and former lead director, Home Depot. “Boards need to ask themselves, ‘Are we ready?’ True continuous improvement is not a check-the-box exercise.” 

This timely report contains information that will be useful to every board:

Eleven recommendations identifying what a board needs to do to establish a set of continuous-improvement processes that will enable it to adapt over time as the organization’s competitive environment evolves.

Action steps directors can take regarding board leadership and oversight responsibilities, board composition and succession planning, recruiting and onboarding new directors, board-evaluation processes, continuing education for directors, tenure-limiting mechanisms, and communication with shareholders and stakeholders.

Twelve appendices with detailed guidance and tools all boards can use to benchmark current practices and implement improvements, including

Tools to assist with long-range board succession planning.

Guidelines for onboarding new directors and for ongoing director education.

Templates for board and committee-level evaluations.

Real-world examples of corporate governance principles, tenure policy language, and disclosures related to director skills, board composition, and board-evaluation processes.

Tools to assist with long-range board succession planning.

Guidelines for onboarding new directors and for ongoing director education.

Templates for board and committee-level evaluations.

Real-world examples of corporate governance principles, tenure policy language, and disclosures related to director skills, board composition, and board-evaluation processes.

“As we noted in last year’s Blue Ribbon Commission Report on the Board and Long-Term Value Creation, NACD believes that the mission of the board is to serve as a strategic asset of the company,” said Ken Daly, NACD’s CEO. “This new report provides the tools and action steps to help boards of public and private companies, as well as those serving nonprofits, develop a continuous-improvement plan that keeps their skill sets and processes in tune with their organization’s strategic needs.”

The Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board is available exclusively to NACD members and can be found at www.NACDonline.org/2016BRC.

The Report of the NACD Blue Ribbon Commission on the Board and Long-Term Value Creation can be found atwww.NACDonline.org/Value.

The report’s commissioners are distinguished corporate directors and governance experts. In aggregate, they serve on a total of 20 publicly traded, 14 privately held, and 31 nonprofit company boards.

 

About NACD
The National Association of Corporate Directors (NACD) empowers more than 17,000 directors to lead with confidence in the boardroom. As the recognized authority on leading boardroom practices, NACD helps boards strengthen investor trust and public confidence by ensuring that today’s directors are well-prepared for tomorrow’s challenges. World-class boards join NACD to elevate performance, gain foresight, and instill confidence. Fostering collaboration among directors, investors, and governance stakeholders, NACD has been setting the standard for responsible board leadership for 40 years. To learn more about NACD, visit www.nacdonline.org. To become an NACD member, please contact Steve Kalan at [email protected] or 202-572-2089. If you are already a member, contact your NACD Membership Advisor at[email protected] to ensure that you are receiving the best value from your membership.

Nonprofit Board Member Model? #NonprofitBoards

Model nonprofit board member?  Take a look:

Approachable and down-to-earth, Ballweg is also a pilot, teacher, musician and mother. But she’s best known for the nonprofit boards she serves on — sometimes as many as two dozen in a year — and for the gifts she has made from her own pocket, resulting in projects that often bear her name.

Among those in Madison who donate both money and time, “She has to be first,” said Mary Ellyn Sensenbrenner, a friend who has served with Ballweg on many nonprofit boards.

“She spends time and energy raising money and being involved in the organizations she’s part of. She doesn’t just serve on the boards,” Sensenbrenner said. “She takes an active role. And how she does it is truly remarkable – that she could do all these things and still maintain a fun, active social life. I don’t know if she ever sleeps.” (Wisconsin State Journal)

The facts: 

• very wealthy
• wide array of interests and passions
• big donor
• active fundraiser (does the "ask")
• active board member
• sits on as many as 12 boards at one time

Model board member?