Charitable Organizations and Accountability
The term business accounting immediately draws us to the field of finances, but it really is nothing more than a structure for accountability. For a charity, accountability must be defined using a much broader scope than what is required in the for-profit enterprise. Accounting is concerned with mechanisms of oversight, supervision, and reporting to a higher authority. It is the process of holding the organization responsible for its actions so that it reports openly and honestly to both the stakeholders and the public. Accounting cannot be limited to finances in a charity, as the accounting must include the proper discharging of the charities publicly stated functions, for the stated purpose, within the limits of it’s charter.
Accountability must cover:
• Maintain continued compliance with legal and moral responsibilities, including deference to benefactors, members, and tax authorities.
• Observance of, and actions conforming to the organizations stated purpose.
• Acting in good faith to advance the guiding principles of the organization.
• Realize recognized value for expenses and measurable performance in the organizations delivery of goods and services.
• Placement and maintenance of good management practices.
There is legal liability for the charity, the officers, and the board members if they stray too far from the accountability guidelines listed above.
Over time, any charity that does not have strong independent oversight, along with mechanisms in place for transparency and accountability, will drift.
We have been involved in the investigation of dozens of charitable and religious organizations that have experienced a “drifting” of purpose. The circumstances that led to the drift off course are almost always the same.
“You should invest in a business that even a fool can run, because someday a fool will.” – Warren Buffett
• Charitable organizations attract people who have strong beliefs in faith and trust. Faith and trust survive in small groups of people, who do little or no fact checking on each other. The tendency of faith and trust to displace skepticism and doubt leads to incidents of embezzlement, bad investment, kickbacks, consulting fees, finder fees, and other creative financial chicaneries the officers, directors, and employees can engage in. Of course, sometimes they result in plain old theft — money meets opportunity.
• Controls were lax, and non-taxable funds were mixed with taxable business.
Donations are generally tax deductable — but selling goods or renting space is a taxable event. Sometime these rules are not generally understood, resulting in similar transactions being commingled, and a blurring of the distinction between these events and the tax treatment of the events.
• A Not for Profit Organization (NPO) is not the same as a recognized charity. A charity is a legal body that is granted tax-exempt status for the good of the citizenry.
Since the charity is accountable to the citizenry, the annual reports (in the US generally IRS form 990) are public information. Charitable organizations are open for the public to scrutinize and challenge.
What should professionals do when they are involved with a charity that has been the victim or facilitator of theft or embezzlement? If authorities are involved, the first thing to do is to shut up and cooperate. Unless you saw it coming, the authorities suspect more than they’re telling you. Unless you wish to harm the charity – listen, shut up, agree to cooperate, and learn. Publication of a theft or loss will alienate the donors and tarnish the organizations reputation. Public charges suggesting internal corruption will be the end of the charity, unless information is very skillfully managed. The term “shut up” is blunt and harsh. Heed such a strong warning.
In all cases, make sure that everyone’s concerns are clearly understood, find out what happened and why it happened — then determine if you can stem or reverse the offending activity. The later action is a gift to the fraudster. Essentially, you’re asking those responsible for the losses to enter into an agreement to repay the losses. They sign a simple note acknowledging the debt, and agree to reasonable terms for repayment. If the fraudster does not perform as agreed, the charity has the option of enforcing the note. If the fraudster refuses to sign a note, the logical alternative is to involve the authorities, and report the fraudster. Any decision to voluntarily involve authorities should be made only after you are sure you have independent knowledge of what happened, have considered the consequences, and have considered all options. A criminal action is unlikely to turn out well or restore funds. Best to be avoided. An unhappy medium is to consider all of the embezzled funds income to the fraudster and report those funds as to the tax authorities as and let the fraudster explain to the tax authorities the unreported income. All actions should consider the future of the charity.