In September 2006, the New York City Department of Investigation (DOI) released a report that revealed that, between 2000 and 2004, the executives of the Gloria Wise Boys and Girls Club in the Bronx “led by then-Executive Director Charles Rosen, (1) improperly obtained from Gloria Wise more than $290,000 for their personal use, all untaxed and much of it stolen from the public, on top of their generous salaries, (2) lent $875,000 of Gloria Wise’s money, most of it without informing their Board of Directors, to a start-up commercial radio station, then called Radio Free America (RFA), where a Gloria Wise executive had a financial stake, and (3) routinely falsified records to deceive public agencies about a host of matters, from how public funds were spent to whether children attending Goose Bay [Nursery and Kindergarten] had received required vaccinations.”
This report of organizational malfeasance [PDF] is a cautionary tale that board members and senior staff of all organizations ought to read. The Gloria Wise Boys and Girls Club was an organization with a $20 million budget and 700 employees. As with many contract-dependent organizations, it still had cash flow problems and was regulated by numerous oversight agencies. And as with some contract-dependent, highly regulated organizations, it began to find ways to beat the system. The records for children who hadn’t been screened for immunization were systematically altered, using the rationale that it kept the children from being bounced out of the program, but also to stay on the sunny side of program audits. Then, funding agencies were billed for services never delivered. Phony bank accounts and contracts were established to cover bad actors—back dating, use of board signature stamps—you name it, that’s what this senior staff got up (or slid down) to. And then there were the unsecured loans.
The majority of the mainstream press accounts of the Gloria Wise scandal have focused on the almost $900,000 in improper loans that the Gloria Wise Boys and Girls Club made to RFA, now Air America Radio. The size of these loans and the well-known names associated with this aspect of the scandal could obscure the fact that this was only the tip of the iceberg of financial impropriety and fraud that sunk Gloria Wise into a swamp of its own making. What follows is a brief sampling of the smorgasbord of fraud and abuse for personal benefit that occurred at Gloria Wise over the past several years:
- Over a period of many years, staff members, led by Charles Rosen, diverted Gloria Wise funds to pay personal expenses, which included payments for personal home renovations and exorbitant car allowances. A paper trail of phony contracts documented some of these payments as community services, such as a “gang prevention workshop” that was ostensibly provided by the contractor that renovated Rosen’s beachfront apartment.
- In 2003, Evan Montval-Cohen, the key figure in funneling Wise funds to Air America Radio, also received personal “loans” from Gloria Wise totaling $35,000. In 2004, these loans were unilaterally “written off” by the finance staff of Gloria Wise. Further, the loans were never reported to Wise’s auditor and were documented by a series of forged documents created and back-dated only when the organization came under investigation.
- Rosen and other Wise staffers stole approximately $90,000 of city funds by billing city agencies for sports programs that were never provided. The executives created bank accounts in names close to those of neighborhood athletic clubs, many of whom they had contracted with on previous occasions, and forged service contracts between Gloria Wise and these faux organizations. These contracts were submitted to the city for payment. When funds were paid into these so-called “Sports Accounts,” the executives siphoned them out for personal use.
In performing a post-mortem on the Wise scandal, it is striking to note how amateurish the infractions were and how long they were allowed to continue due to the porous oversight mechanisms that were in place. Basic internal controls were ignored or compromised to the point that they actually aided in the staff’s larceny. Case in point: the board president’s signature stamp was freely used by staff without her knowledge or permission, completely eviscerating any effective monitoring function. The checks that funded many of the illicit loans to RFA were ostensibly signed by the president of the board, using this stamp. Even if the board wanted to exercise oversight, Wise’s internal reporting and monitoring practices had become so dysfunctional that the board was systematically kept in the dark about transactions until well after the fact, if it ever learned of them at all. Case in point: the board learned of the RFA loans more than three months after they were issued, but even then, took no action with respect to the possible wrongdoing.
Compounding these problems were the actions of Wise’s outside auditor, Mark Beller, who systematically ignored evidence of shady transactions, did not perform basic audit functions (like independently verifying contracts or investigating related party transactions) and allowed Charles Rosen to dictate the financial information that was reported to the board. One of the most dispiriting revelations that emerged from the DOI report was the fact that at least one Wise staff member specifically approached Beller to voice concern about some of the most egregious fraud perpetrated by Rosen: his siphoning of the Sports Accounts for personal purposes. According to the DOI report, as far back as 2002, Sinohe Terrero, Gloria Wise’s Financial Director, discussed his concerns about the payments that Rosen and others were receiving from the so-called Sports Accounts. When confronted with this information, Beller chose to do nothing. Ironically, Terrero himself later received $6,400 in improper payments out of these same accounts—perhaps taking comfort in the fact that the payments were at least tacitly OK’d by the organization’s external auditor. As we have seen countless times, the best and often only source of information on the clandestine fraud perpetrated by an organization’s insiders are other insiders. Wise illustrates a worst case scenario in this respect: an insider had knowledge of fraud and, by all indications, was willing to disclose this fraud to someone in a position to do something about it. Unfortunately, his report fell on deaf ears and, before long, the whistle blower himself was apparently sucked into the mire of fraud and deceit.
An anonymous staff person finally alerted New York City agencies to the problems at Gloria Wise, setting off a mad scramble of clumsy attempts to cover up and rationalize what had happened. Key staff went to jail, the agency was financially gutted through the withdrawal of contracts that made up 80% of its budget, board members were forced to resign for incompetence, and thousands of families and children were betrayed.
Though the DOI report urges funding agencies to provide a greater degree of oversight, the truth is that this responsibility rests primarily with those that are in the best position to exercise oversight: the board of the organization itself. What follows are a handful of universal oversight recommendations, some culled from the DOI report itself, of which we should all be reminded in the wake of the Wise scandal:
- The board is responsible for engaging and monitoring a competent independent accountant to prepare the organization’s financial statements, and, if required, audit the statements to ensure compliance with applicable accounting standards and state legal requirements. Pre-engagement due diligence and effective post-engagement monitoring are necessary to ensure that your accountant is both competent and independent enough to ferret out inconsistencies and faults in your organization’s internal controls and financial reporting system. Your accountant should be encouraged to report regularly to the finance committee or the full board as to the state of the organization’s internal controls.
- The board should appoint a finance or audit committee and a treasurer who have at least basic finance or accounting skills. To quote from the DOI report, “this committee should be responsible for ensuring that sound, written fiscal procedures are established and followed at all levels of the organization, with particular emphasis on compliance and enforcement by the chief executive, fiscal executive, and their staffs. To monitor the organization’s compliance, the finance committee should be responsible to obtain, review, and report to the board concerning quarterly reports on the overall financial condition of the organization. The reports, at a minimum, should include the opening and closing balances of all bank accounts, cash-flow, major expenditures and liabilities incurred during the quarter, payables and receivables, a list of all that quarter’s consulting payments with brief justifications, any emergency payroll advances, compensation and perks to executive staff, other than specifically approved by the board, if any, during the quarter, and the finance committee’s observations concerning the organization’s compliance with the ‘two-signature rule’ and procedures for executive compensation.”
- The board should establish a formal whistle-blower policy and designate a board member to serve as point person for documenting and following up on concerns that may be reported by staff.
- The board should establish a document retention policy. (This and the whistle-blower policies are mandated by law under the Sarbanes-Oxley Act)
- No board or staff member with signature authority should ever pre-sign checks or allow their signature stamp to be used without their knowledge and permission.
- All compensation for key staff should be reviewed and approved by the board on a periodic (at least annual) basis. It is also advisable to perform periodic reviews of the organization’s pay scale, to ensure that staff compensation is in line with industry standards. The organization’s compensation and reimbursement policies, as well as all executive perks, should be reviewed and approved by the whole board.
- Loans to staff, board members, and other insiders should generally be prohibited with the possible exception of emergency or short-term payroll advances, and even then, only if permitted by applicable law or contract. Such loans should be fully disclosed to the board or finance committee and approved in advance before disbursement.
- The board or a designated committee should be aware of the terms of applicable contracts by which the organization is bound. Processes should be instituted to monitor compliance with the terms of these contracts at the staff and, if necessary, board levels.
- The board should have in place a conflict of interest policy, applicable to both board and staff, and should review this policy regularly with staff members.
Heeding these recommendations and observing best practices as to transparency, accountability, and independence can help to foster a culture of compliance in your organization. A board that takes compliance seriously and is genuinely committed, in both word and deed, to oversight is a necessary first step in creating an organizational culture under which misdeeds like the ones carried out by the Gloria Wise executive staff would be prevented or, at worst, quickly detected.