ATTEMPTING TO RE-INFLATE A FALLEN SOUFFLÉ WITH HOT AIR: THE JAMES BEARD FOUNDATION SAGA CONTINUES

For a January 24, 2005 update, click here.

The new Chairman of the Board of the James Beard Foundation doesn’t get it.  On September 15, 2004, Mr. Sape posted a letter on the Foundation’s website addressed to “Our Food & Beverage Industry Associates and Colleagues.”  Mr. Sape goes onto write,

“The Board of Trustees of The James Beard Foundation deeply regrets the breach of trust that has occurred, and we are doing everything we can to rectify the situation.” 

As we read this statement and remainder of the letter, the breach of trust that Mr. Sape is referring to involves...

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the former president of the Foundation.  Nowhere in this letter does Mr. Sape focus on the existing board and their responsibility in the matter. 

The allegations are becoming more focused.    We can only hope that the audit that is now in the possession of the New York State Attorney General is released so that we can learn about the Foundation’s system of internal controls.

Mr. Sape was interviewed by the New York Times for a September 20, 2004 article entitled “Foundation's Ex-President Misused Funds, Chairman Says.”  The article indicates that the former president of the Beard Foundation “could not adequately explain thousands of dollars in expenses for meals, travel and entertainment.,” withdrew “several thousand dollars in cash” for payments to chefs, but could not account for the payments, and made unauthorized donations of food and wine stored at the Foundation’s headquarters.  These allegations were sourced to Mr. Sape.  The Foundation’s former president denied any wrongdoing.

According to Mr. Sape, the audit leads to the "inescapable conclusion" that the Foundation’s former president misused the Foundation’s money.  The audit was commenced in May, when the Foundation’s former accountant could not certify the financial statements or file tax returns because of concerns over the expenses in question.

Time will tell whether there was wrongdoing or just sloppy accounting and authorization.  However, there is little doubt that the Foundation lacked an adequate system of internal controls.  This is particularly troublesome given the environment in which the Foundation operates.  Reimbursements for food and beverages are always suspect.  Congress has been railing against the “three martini” lunch for years.  That has lead to significant limitations on the deductibility of business meal expenses.  Here we have an organization that is focused on food, fine dining, and entertainment.  If any organization should have had controls over these sorts of expenditures in place, it should have been the Beard Foundation.  To understand the significance of the control failures here, just imagine Fort Knox treating its inventory of gold like a petty cash fund.

LESSONS:

Public Relations.  Mr. Sape just doesn’t get the problem the Foundation is facing.  The New York Times has now run three articles on the problems at the James Beard Foundation, including one front-page article.  Yet, Mr. Sape addresses his letter to the colleagues in the food and beverage industry.  This is now a public story, and has resulted in a public agency investigating the Foundation.  Mr. Sape should be addressing his letters to the public at large.  After all, the Foundation is claiming public charity status; presumably using tax-deductible funding to finance a portion of its activities.  If the organization wants to have any chance of maintaining its charitable status, it had better start to portray itself as a public charity rather than as a social club or business association.  It could start by releasing the audit to the public.

Accepting the Blame.  Even if the allegations regarding the Foundation’s former president are true, the problems were a longtime in the making.  We can only wonder what directors talked about at board meetings.  We suspect the topic was last night’s dinner rather than strengthening internal controls.  We also wonder whether the former accountant had been complaining about inadequate internal controls for sometime.  In any event, the board of directors is responsible for assuring that an adequate system of controls is in place.  That doesn’t mean that the board members need to design disbursement and other forms, or perform bank reconciliations.  That is the work of the staff, outside accountants, and consultants.  However, the board must ask questions about the system and making sure that suggestions from the organization’s auditors for improving internal controls are implemented.  The Foundation’s board clearly fell down on the job.

Mr. Sape has promised accountability.  Our problem with this and similar promises by other organizations is that they always come after the disaster.  It is time for boards to take their responsibilities more seriously.  Even if the controls are improved, the Foundation may never fully recover the disputed expenditures.

Intermediate Sanctions.  Even if the IRS decides not to yank the Beard Foundation’s (c)(3) status, it may have a basis for applying the intermediate sanctions to any unauthorized expenditures.  There is serious question as to whether the Foundation had a system in place that meets the requirements of Regulation 1.62-2 regarding accountable reimbursement plans.  See our post from last Friday.

 

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