February 2, 2016; News & Observer
In December, NPQ reported on the news that leaders of the historic Carolina Theatre of Durham in North Carolina had discovered, much to their dismay, that the organization was more than $1 million in the red, after believing the theater had rebounded from the Great Recession, adapting its business model to become more sustainable. That report questioned how it was possible—in an organization that appeared to have appropriate financial checks and balances in place—to suddenly realize there was a deficit of $1.1 million, more than 20 percent of the annual operating budget. “Faulty accounting” was blamed, but of course there is more to this story than that.
A report from last week suggests that when the dust settles, the theater “could be anywhere from $800,000 to $1.6 million in the hole” by year’s end; the current deficit is estimated to be $1.3 million. Board members and city officials—Durham provides a hefty $645,000 a year to run the downtown theater—are still grappling with the numbers and trying to understand how the financial reports they’d seen—and the audits they’d received—could have been so far removed from reality.
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In December, board chairman Scott Harmon and now-former CEO Bob Nocek insisted there had been no malfeasance or fraud. A “former finance director” was mentioned. Last month, Nocek resigned, as did COO Aaron Bare. Interim CEO Dan Berman, who is not being paid, is working with the board and with city officials to fully understand the current situation and to develop a plan to address the theater’s financial problems. They will have their hands full, trying to untangle issues like these:
- Previous information indicated that the theater “had ended the 2013 and 2014 fiscal years with small surpluses and cut its long-term debt to $224,909,” when in reality it had lost an additional $800,000 since July 2013.
- In May 2015, the nonprofit learned that it owed the state $155,000 in unpaid sales taxes.
- Nocek had ramped up the number of live shows presented from 60 to 100 per year, presumably to generate additional revenue. But city manager Tom Bonfield now says that the theater “was losing money on every show and didn’t know it” and that “it was paying current expenses with future show revenue, digging itself deeper into the hole.”
Again, as we reported in December, appropriate checks and balances appear to have been in place here. What might the board—or the finance committee, or city officials providing oversight of the large public investment in this enterprise—have done differently? Board members are asked, first and foremost, to offer the “duty of care,” providing guidance and making decisions in the best interest of the organization and in good faith, as “an ordinarily prudent person would exercise in a like position and under similar circumstances,” according to BoardSource. But since not everyone has deep expertise in every area, board members are allowed to rely in good faith on information, opinions, reports, or statements prepared or presented by officers, employees, lawyers, accountants and board committees. Perhaps someone ought to have asked—and it need not have been an accountant—about the expenses involved in increasing the number of live shows from 60 to 100, including hiring additional employees and paying for utilities and building maintenance, and not just the additional revenues. Or questioned the feasibility of selling enough tickets to support that many shows in a 1,000-seat venue, which would be a challenge in many markets far larger than Durham.
Berman is confident the situation can be turned around and that the Carolina Theatre can regain public confidence. He says, “Our (remaining) staff had nothing to do with the decisions that were made; my heart goes out to them.” NPQ will continue to follow this story, hoping the poor performers all have left the stage.—Eileen Cunniffe