Several real-life cases brought a tone of seriousness to a half-day workshop called Yavapai Connects by the Arizona Community Foundation and United Way of Yavapai County. Speakers reviewed the financial roles of nonprofit executives and boards and answered questions. With more than 190 people attending, the event was sponsored by APS.
The cases included alleged embezzlement by the former director at Yavapai Habitat for Humanity (a case yet to be tried), a review of the failure of of Suze’s Prescott Center for the Arts, and an account of how a lack of internal controls led to theft and fraud by an accountant in a test case for the Sunshine Outreach Foundation.
Bruce Rosenberg, the interim executive director for Prescott Area Habitat for Humanity, said that hindsight is 20/20 when a bad actor preys on a nonprofit, but examining what happened can provide valuable lessons for the future.
“I want to talk about just some practical things on a daily basis, that short of those financial reviews and obligations and responsibilities we can look for and we can think about, and we can make sure that we recognize. Keep in mind, as we do this hindsight analysis, we don’t beat ourselves up too much because so many of these things are so subtle, and we tend to overlook them,” Rosenberg said, “because, as you’ve heard in the nonprofit world, we trust people, we believe in people, we want to support people. It’s what we do every single day. … Knowing that we have analyzed things that have happened … it changes our perspective about the future, and we know now that we have the tools, and we … are armed with everything that we need for success moving forward.”
Rosenberg highlighted the “red flags” that people should look for that might tip them off to something amiss. They include:
• Lack of transparency within and outside the organization
• Lack of interaction by an executive or board member
• Vague answers
• Using drama and the “blame game” to avoid answering questions
“You know, we’re based on relationships,” Rosenberg said. “We’re based on interactions like this today and other opportunities that come along. Someone (who) appears to be focused on driving wedges between people or shying away from those interactions (is a red flag). You know, this is not something that you can be involved in on a daily basis and be a recluse. It just doesn’t work. You have to be out there, and you have to be interacting with people, with staff, with the community. With many different people in many different places, from many different backgrounds — and if you don’t, then we kind of need to wonder, why would it be that those interactions aren’t happening, and someone is kind of keeping to themselves?”
Stephen Crandall, founder of SC Audit and Accounting Solutions, reviewed the responsibilities of nonprofit boards and the need for members to attain fiscal literacy. His firm, which has many nonprofit clients, provided a checklist of 47 actions that boards should take annually to tune up their organizations, provided by the National Council of Nonprofits. He said the biggest contributor to fraud is a lack of internal controls — procedures that involve more than one person in reviewing donations and receipts, for instance. He also noted that 84% of fraud cases had one or more of the red flags noted by Rosenberg. Additionally, 74% of fraud cases were attributed to people on the management or executive level.
“You check up on things, you implement certain internal controls, you check all these different boxes, and suddenly you’ve got a great system to protect your organization from bad things happening,” Crandall said. “And not just protecting your organization, but also promoting financial transparency can really help an organization grow (and) help you better communicate with your donors, which I think is super-important. And that can keep you away from having to face some of the difficulties that some of our other local nonprofits have faced.”
Stephen Polk, an attorney and vice chairman of the Arizona Community Foundation of Yavapai County, reviewed a case study of Suze’s Prescott Center for the Arts and discussed what transpired to lead to the group’s ultimate demise. He outlined the history of the group, the decision to build another theatre with a $3 million donation, followed by the inability to finish the building with the money that had been donated after the squeeze on building supplies during Covid increased construction costs. Then he talked about the $1.8 million loan from a bank that the group was unable to pay back. He tied in each step of the board’s decision-making with the state law’s three core fiduciary duties: the duty of care, the duty of loyalty and the duty of obedience to the organization.
“In this situation, I rely on professionals,” Polk said. “I need a professional that is trustworthy to me, to tell me this makes sense, that the finances pencil out. So did we do a financial pro-forma on this? Does it, as developers always say, pencil out? Put it on paper. How much is this going to cost? What’s my debt-service load? What are my monthly payments on that $1.8-million loan that I’m about to ask for? And then compare that to, what are my expected revenues of the new theatre? How many seats are in the theatre? How many tickets am I going to sell? What are my projected revenues? So, the great news for you as board members is you can fulfill your fiduciary duties by relying on professionals.”
“Duty of obedience says you have to follow your governing rules as an organization,” Polk said. “You have to follow your bylaws. You have to follow your Articles of Incorporation as a nonprofit, you have to follow Arizona law. By Arizona law, the members of a nonprofit … are required to vote on if you want to dissolve the organization, or if you want to sell all, or substantially all, of the assets of your organization. So, duty of obedience for Suze’s Prescott Center for the Arts would have required the board to follow these steps to sell all the property. I really don’t have information on whether all of these were completed, but duty of obedience says if they would have had to sell all their property in this transaction, the board needs to vote on it, and you want that documented in board minutes at a minimum that really document the deliberative process, and yes, we’re selling it on these terms. … Then, Arizona law says to sell all your real property to a private individual, not another nonprofit, you would have to publish a notice in the newspaper and hold a public hearing telling the public you’re about to sell everything to a private individual. It’s not clear to me that happened either.”
Polk said the personal liability statute says that if you breach your fiduciary duties, such as in making an unlawful distribution of the assets of a nonprofit, you could be held personally accountable. However, directors-and-officers insurance should protect the board, with the exception of intentional misconduct, fraud, willful violations of the law and intentional breaches of fiduciary duties.
Polk concluded, “I hope you learn from this, read your bylaws, read the law and really pay attention and try to do the right thing,” A panel discussed how staff and boards should work together and how to deal with conflict, including David Seigler, executive director of United Way of Yavapai County, Kay Green of SC Audit and Accounting Solutions, Crandall, Polk and Rosenberg. Lisa Sahady, Regional Director of the Arizona Community Foundation in Yavapai County, asked the board members questions from the audience.
When an audience member asked who should be in charge of a whistleblower hotline, Crandall said it could be a “drop box” or email.
“That’s a procedure that each organization would have to determine on its own, but I don’t think there’s any right or wrong answer,” Crandall said.
Sahady noted that some organizations use an outsourced human-resources department that could also provide a whistleblower hotline.
Polk recommended having reporting procedures in any company’s employee manual. “Here’s how you report discrimination or sexual harassment, and you always have to put two different people there, because what if the person you’re supposed to report it to is the person harassing you? And so I’m thinking for a whistleblower hotline you have to have the same thing. It’s got to be reportable to two different people, at least.”
Seigler reminded the audience that United Way is available to assist in helping nonprofits that need advice on policies and procedures, and recommended reaching out to the Arizona Community Foundation, the chambers of commerce, as well as other nonprofits that can furnish advice.
“We have access to a lot of other nonprofits that are doing great things, and we help people link up with each other, Seigler said.
