Learning from the Mistakes of Some . . . and the Bravery of Others

Print Share on LinkedIn More

I  can’t remember when the United Way of the National Capital Area started to unravel, though many of us in the nonprofit sector wondered why it hadn’t happened earlier. But there it was, across the headlines:

  • “The Not-So-United Way”
  • “United Way Fires Fifth Key Official in a Year”
  • “United Way’s Donations Plummet”
  • “Area United Way’s Ex-Chief Admits $500,000 Fraud”

We all heard the echoes of the scandal at United Way of America 12 years ago—dishonesty, misuse of funds, favoritism in contracts, irregularities in compensation. In what seemed like a nanosecond, the trust that had been building for decades—resulting in more than $90 million in annual combined giving to charities throughout the region—was at risk.
I had a ringside seat at the “event.” As executive director of a large United Way funded agency, I knew that much was at stake. And, as a founding member and chair of the Nonprofit Roundtable of Greater Washington, I also anticipated the role we would play in defining, strategizing, resolving, and ultimately supporting the critical rebuilding effort that would surely follow in the wake of the crisis.

As angry as we all were at the situation, we had to find our way forward. The realities were clear to everyone. First, we couldn’t change the past. The mistakes were a matter of record and no amount of logic could explain them or erase them. Second, we all needed the United Way. A community without a well-coordinated giving campaign leaves millions of dollars uncollected and hundreds of thousands of individuals in need of help and support.

Over the past two years, agencies, individuals, and our communities have been engaged in a journey of learning and rebuilding. Progress has been slow but sure. Campaign revenue is up and new staff is in place. As we look ahead to all that is still to be done, we should also look back to see what we have learned from the mistakes of some—and the bravery of others.

First, we had to come to grips with mistakes that were made at multiple levels, over many years, with accountability and responsibility resting in the highest offices. These mistakes resulted in a first-year loss of approximately $25 million in revenue from the corporate community. Some local corporations, distrustful of the United Way, decided to run their own internal campaigns. Others abandoned workplace giving completely. The board of the United Way, facing a dramatic reduction in operating income, was forced to make massive staff cuts and other critical budget reductions. It was not a pretty sight.

Where did things go wrong? It may have started with a cash advance made to the executive director that was not repaid. This may have opened the door to other ill-advised practices. An example of this was the desire to give everyone credit for a donor’s gift—a decision that lead to double counting, and ultimately to overstated campaign revenue. Just like compounding double-digit interest on a credit card, it got terribly out of hand. And the checks and balances that should have been in place failed to work, time and time again.

Looking back, the following mistakes are crystal clear:

• There was an apparent breakdown in communication and accountability between the audit committee, the finance committee, the executive committee, and the board of directors, resulting in years of highly questionable and, in some cases, illegal activities going unnoticed and/or unreported.
• In-house financial controls, both staff and systems, were not sufficient to manage and support the work. This resulted in, among other things, $786,305 disbursements to the executive director in excess of approved compensation. This also points to a lack of board oversight and effective supervision of the executive leadership of the organization.
• There was a lack of stewardship of donated funds, resulting in double counting of some pledges and multiple inconsistencies in charging-back campaign costs.

The bravery of many was required to step in front of this fast-moving train and deal with the emerging scandal. Members of the United Way Board, who ultimately discovered the problem, were willing to ask the first critical questions, and many corporations stood firm in their support of community giving through the United Way. Nonprofit agencies pulled together through the Nonprofit Roundtable to build support. This is some of what happened:
• When the board became aware of the potential seriousness of the problem, it convened an independent task group to look at all of the details. The task group, in turn, commissioned a forensic audit to insure that all problems were identified and disclosed.
• Following the recommendation of the task group, the board stepped aside so that a completely new board could be convened.
• Community and corporate leaders stepped forward to fill positions on the board and on the nominating committee, and to assume leadership of the ensuing campaign.
• The newly elected board expanded the scope of the forensic audit and, to achieve full transparency, posted the full forensic audit on the United Way’s Web site for all to see.
• The newly elected board aggressively pursued prosecution of and restitution from all guilty parties.

Others have said, and I agree, that the forensic audit reads like a dime-store novel. How could things go so wrong? And how could the problems persist for years without detection? Where was the board? Why didn’t the auditors press the issue? How could the finance director have allowed such irregularities to persist?

In immediate response to the forensic audit, I did two things. First, I gave a copy to our finance director and asked him to read it, share it with his staff, talk about the issues that it raised and ponder the question, Could it happen here? Next, I encouraged members of our audit committee, our finance committee, and our auditors to do the same.
As I did this exercise, I built a list to remind myself of the obligations we all have to our many constituencies:

• Conduct a full organizational review at the board level every four to six years. If you do not belong to a national organization with stringent evaluation requirements, ask your local or statewide nonprofit association for its help in developing standards of measurement that work for you.
• Take governance seriously. Have an independent group of financial volunteers serve as your audit committee. Make sure that the full contents of both the audit and the management letter are fully disclosed to your board. Separate the role of the treasurer and the finance committee chair. Make sure that your accounting manual is up-to-date.
• Don’t make executive compensation a secret between you and your president. Make sure that a committee of individuals agree on your compensation package and that the board knows how those decisions are made. Do not take any compensation outside of your salary without full and complete documentation, and with the authorizing signature of a senior-level volunteer.
• Hire highly skilled finance staff. If your organization is too small, contract out to get the skills and expertise you need. If you have highly skilled staff, remember that it is still your responsibility to monitor practices set forth in the accounting manual.
• Say thank you for difficult questions. Appreciate board members and finance committee members who care enough to dig deeply. They have a fiduciary responsibility—they are doing their job.
• Share all the news. It is easy to fall into the trap of telling just the good news. Remember that the board and the finance committee expect news to come in both varieties. Paint an honest picture—it promotes honest dialogue.

Our jobs are both complicated and simple. We have been entrusted with community resources, and their effective and honest stewardship is the backbone of everything we do. Honesty is always the best policy . . . but I guess that is what you would expect to hear from a Girl Scout.

While now well on the way to recovery, the United Way of the National Capital Area (UWNCA) produced one of the more high profile scandals of the past few years. Because of its placement, directly under the noses of federal legislators, it acted as part of a public sector scrutiny attractor . . . a case in point for the need for higher accountability standards.
To the community’s credit, as Jan Verhage’s article describes, stakeholders of UWNCA rallied to reorganize, quickly reconstituting the board and making steps to become more transparent. In this spirit of sunshine, the board published its painfully detailed forensic audit, performed by Price Waterhouse Coopers online http://www.unitedwaynca.org/website/index.cfm?c=media/forensic.audit.report . An extraordinary document, the audit details three decades of improprieties on a number of levels. Below are some of the many examples cited by the auditors:

At the level of personal enrichment: “We found that, in total, in excess of his regularly authorized compensation and deferred compensation, Mr. Suer received in the period 1974 to 2002 (exclusive of his regular salary, consulting contract and pension payments) roughly $2.4 million in disbursements from the UWNCA.”

At the campaign level: There were a number of “funny money” arrangements as they were called internally. According to the audit report: “A donor that for a number of years agreed with UWNCA to allow the Organization to count as part of its annual campaign, not only the amounts specifically designated by its employees as UWNCA donations, but also amounts raised from Easter Seal Donations obtained at its numerous cash registers as well as amounts raised by that company in its own community outreach programs with its customers. This led to the company’s contribution amounts being greatly exaggerated, and allowed UWNCA to report a higher level of contributions than had actually occurred.
That same donor also developed with UWNCA the ability of its employees to earmark their donations to be specifically returned to special company employee benefit funds.”

And in a particularly cynical mix of the two: “Mr. Suer on a number of occasions made payment of his own personal pledges to UWNCA campaigns via UWNCA advances requested by him and paid to him. We found evidence of $20,259 in his own personal contribution pledges being satisfied by his signing over advance checks he requested and received from UWNCA. We also found evidence that in one instance, (1989) he was apparently reimbursed by the Organization for a $9,000 campaign pledge payment made.”

The most damning thing about the UWNCA situation was not that there was one maverick (Suer) wrecking havoc in a leadership position but that there was generally insufficient board oversight. Others in Board and staff leadership positions around Suer, had information that might have caused the board to act much earlier but the ethical standards of the organization likely prevented them from making this information available to the entire board. Thus the organization was forced down the same dangerous road that Suer chose to take.

As Verhage says, the audit is a fascinating read. We admire and commend her strategy of taking it to her own finance and audit committees for its instructive properties and we highly recommend that others do the same.

Jan Verhage is the executive director of the Girl Scout Council of the Nation’s Capital in Washington, DC.