Forensic Audit Results Presented 8/27/09

Larson & Allen’s CPA, Debra Thompson, gave a report on the results of their forensic audit of the JACC books on Thursday, 8/27, to the JACC Finance Committee and members of the board and public.  The audit covered 2006 – 2008.  Of the $219,387 in grant funds expended during this period, Larson & Allen found $91,512 in spending was questionable.

It is probably not quite as bad as that because in some cases, there was no grant documentation in the accountant files they examined, so they could not be sure what the grant authorized the money to be spent on.  In these cases, Larson & Allen found what information they could about the grant and used that to question some expenses.

The largest category of questionable expenditures was salaries that were charged to grants where the grants did not appear to authorize any (or all) of the salaries charged.  The largest single incidence of this was the Otto Bremer grant, which has been written about in great detail in this blog.

Ms. Thompson gave three recommendations:

  1. Financial procedures need to be in place and followed.
  2. Budgets should be created for grants, which would help ensure compliance.
  3. Deadlines/due dates on grant reports and bills must be tracked and met.

My response to these recommendations are as follows (and I voiced them at the meeting):

  1. Financial procedures were in place and followed through 2005 and mostly followed through September 2006.  They were good procedures, ones that already included the recommendations made by the auditor in reviewing the 2007 financial status of JACC.  They simply were not followed and compliance was not enforced by the board beginning in October 2006 and forward.
  2. Nearly all grants require completion of a budget as part of the submission.  Unfortunately, the former executive board/executive director removed the organization’s computers, important records and the checkbook when the new executive board members were elected. [NOTE:  It has not been “proved” who did this but the former board chair signed checks after the checkbook disappeared and a witness told JACC he observed/heard what happened; I am making an “assumption” here, but a pretty good one.]  So the current JACC files do not contain this information.  JACC can approach funders to obtain this information.
  3. No comment on this one.  It has already been discussed here how far behind the previous leadership was in paying the bills.

An interesting point, for me, is this:  There doesn’t appear to be anything different this board/community could have done to prevent the abuses that happened.  When an executive board colludes with the executive director to ignore the bylaws, ignore the community participation requirements of their government contracts and ignore the direction of the Attorney General to release financial records, there are only so many things the community can do:

  • File grievances – Beginning in 2007, four members of this community filed 39 grievances.  Of these, 19 were appealed to the city when JACC refused to look at most of them.  The city did not take action against JACC until late in 2008, finally requiring them to respond to grievances before any more funds would be released.
  • Obtain clarity of Minnesota Statute 317A that governs neighborhood associations — Two members of this community requested help from the Attorney General’s office.  That office responded, validating the community members’ request for access to financial records but stated that the Attorney General’s office cannot represent the organization or members.  They recommended seeking legal counsel.
  • Take legal action against the organization to force compliance — Attorneys were consulted about suing JACC, but the legal response was that JACC was a nonprofit and there was no money to be made (by the attorneys) by helping the community in this way.
  • Ask the IRS about the legality/correctness of the JACC contract for the interim ED — The IRS was consulted about the interim ED contract and agreed that it was invalid, that the ED was actually an employee because the contract called for him to hire and manage staff, prepare the budget and manage the organization’s funds.  The IRS, however, was unwilling to take any action because investigating the complaint would cost them more than they could hope to collect in penalties.
  • Talk to funders and ask them to hold JACC accountable for the way in which the grant funds were spent.  Otto Bremer was approached and asked to investigate the expenditure of funds but refused to take any action, accepting the final report from JACC (which was not truthful since JACC continued to spend those funds for months after submitting a final report that said they had all been spent and since a number of things that were reported never happened or were funded by the North Memorial Medical Center grant that existed before this one was obtained).
  • Ask funders to discontinue to fund JACC, effectively drying up the source of income they were spending in questionable ways.  Some funders listened.  Others did not and continued to fund JACC even when city representatives and other funders advised them not to.
  • Attend board meetings and community forums and voice concerns — this was done repeatedly.  The board’s response was to eliminate community forums (from 11-12 a year to 1–the annual meeting/ election) and to give the community a total of 5 minutes to speak at board meetings.  The board often eliminated these 5 minutes if the meeting was long or adjourned the board meeting when the community brought up things it didn’t want to discuss.  On other occasions, they took their discussions/decisions to closed board meetings.
  • Use the annual elections to replace board members until the community had a majority who committed to following the bylaws, State Statute and contracts — this happened in the October 2008/January 2009 community meeting/elections.

My point in this lengthy list is to assure the reader that the community was not silent during this period of time.  People were working on behalf of the community to call a halt to the questionable expenditure of JACC funds and to bring back accountability and community participation.  With the exception of the NRP, it is my observation that this community received little-to-no support in holding the previous board, especially the executive board and executive director, accountable for their actions.  Personally, I do not know what more they could have done.  No support was received despite agreement that bad things were happening.  The only available route was replacing board members, and that opportunity is available only once a year.

Board members (with notable exceptions–a small minority) were not interested in examining the financial details.  This became apparent when a budget was presented to the board.  Three members objected strenuously.  Others appeared not to be knowledgeable of the details.  In fact, one member specifically asked if the treasurer and board chair had looked at the details and were satisfied.  When told that they had, this board member said that was good enough.  It was not “good enough.”  It should never be “good enough.”  On a non-profit board, the single most important responsibility of every board member is financial oversight.  The law is very specific, and board members who abdicate their responsibility can be held personally liable for damages incurred.

It was agreed at the meeting that the financial procedures do need to be reviewed by the board and tightened up where necessary.  More importantly, the board needs to ensure they are followed.  Most of what has happened in the past two years is not because the procedures and policies were weak but because they were not followed and the board was weak when it came to oversight and enforcement.  It was suggested that the board get a list of all the month’s expenditures and what they were charged to at every monthly board meeting.  And every board member must take responsibility for ensuring money is spent correctly.

There is an interesting concept used in couples counseling that might be helpful here:  If each person in the relationship (board in this case) assumes s/he alone is 100% responsible for what happens, the situation always gets better.  If that doesn’t happen, it is too easy to blame the other person/people in the relationship (board).  So if every board member assumes he alone is responsible for oversight and for any money misspent, we will have a stronger board, a sound organization and a solid financial foundation.


2 Responses

  1. Good rap up Dottie! we got took?

    • Oh yeah! We got took bad! Not just in the obvious things. A lot of salaries were spent with little to show for them, even if they “fit” with a grant’s budget. It’s amazing how many people were paid over the past two years–most of whom we’ve never met or seen. As the money pile shrunk, there were fewer attempts to hide where the money was going. it was pretty blatant, as discussed here before. When most of a month’s expenditures are for meals and drinks at restaurants and bars, you gotta wonder what was going through the spender’s mind. He must have known the curtain was about to come down on his little show and just decided to get what he could.

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