The United Way of New York City (UWNYC) revealed last Thursday that it had conducted an investigation into certain...
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reimbursements to and expenditures by its former CEO. Here is the complete April 13, 2006 press release (except for general organizational information in the last paragraph):
NEW YORK, NY - The Board of Directors of United Way of New York City (UWNYC) announced today that its Audit Committee has concluded an internal investigation concerning the personal use by its retired former chief executive officer, Ralph Dickerson, of charitable assets. Specifically, the organization found that over a three-year period starting in June 2002, Mr. Dickerson redeemed an estimated $190,000 worth of points redeemable for hotel stays that had been originally donated for charitable purposes. These points were administered out of Mr. Dickerson's office and were not recorded on UWNYC's books. In addition, the investigation revealed that Mr. Dickerson had submitted and was reimbursed for approximately $37,000 in expenses which did not qualify as business expenses.
United Way of New York City has reached agreement with Mr. Dickerson on the total reimbursement of the funds in question. In addition, it has informed the Charities Bureau of the New York State Attorney General's office of the investigation and its resolution. UWNYC is also making a number of additions to its internal controls, including the engagement of an internal auditor and the enhancement of its existing whistleblower policy.
The Audit Committee retained the law firm of Covington & Burling, which in turn brought in Ernst & Young, to assist with the investigation. "It is important that we were able to resolve this situation and obtain agreement for full reimbursement," said UWNYC Board Chair Carter McClelland. "We are pleased that our Audit Committee review showed our financial controls to be adequate and we welcome an independent review by United Way of America to ensure the thoroughness and transparency of our investigation. We also commend management for promptly initiating the process and notifying volunteer leadership."
"Our Board values our relationship with the community and understands the need for transparency in our operations," said Audit Committee Chair Joseph Sargent. "We will never be complacent in earning the public trust in how we go about the business of helping New Yorkers in need."
United Way of New York City has brought all of its findings to the attention of United Way of America. "The Board and Audit Committee of United Way of New York City have taken all of the essential steps required by United Way of America," stated Brian Gallagher, president and CEO of United Way of America. "We have a responsibility to all of our donors and volunteers across the country to perform an independent review, which has already begun by the New York law firm of Debevoise and Plimpton."
"United Way of America has worked diligently to instill the highest standards of trust and accountability in our members through the recently enhanced Standards of Excellence," added Dr. Johnnetta Cole, chairman of the board of United Way of America. "The independent review will ensure compliance with our membership criteria."
Although we give UWNYC credit for disclosing the problems that it uncovered, we do not find the press release to be particularly transparent. True, the amounts involved are disclosed and the actions taken are briefly described, but when you are dealing with donated funds, more is expected.
To date, UWNYC has refused to release the Covington & Burling report (which we are told is in the form of a Power Point presentation). In our view, any organization that refers to an internal report investigating wrongdoing must release the report if it wants to raise the “transparency” talisman. In fact, we believe that a board should not bother with the investigation unless it is prepared to release the findings whatever they may be. That is transparency.
We are not naïve. When personnel are involved, organizations may be faced with some very tricky issues when it comes to releasing the results of an internal investigation. There are employee privacy concerns, as well as concerns regarding libel. However, able counsel should be able to address those concerns through redactions. Like most governance issues, the handling of an investigation reflects an organization’s values. It is not just a question of disclosure, but how that disclosure is made and its scope. If the organization truly values transparency, it should make every effort possible to disclose as much detail as possible no matter how embarrassing.
The specific structure of the UWNYC investigation lends credence to our concerns about transparency. UWNYC hired the law firm of Covington & Burling, "which in turn broght in Ernst & Young, to assist with the investigation." Although we don't know the actual motivation behind this sequencing of events, we would not be surprised if the law firm hired the auditor so that the results of any audit would be protected as either attorney-client privileged or attorney work product. If that was the motivation, then the sequencing undercuts the claim regarding transparency.
In this case, the press release describes some inappropriate reimbursements and expenditures. It reveals that a settlement has been reached. We gain very little information about what steps have been taken to improve UWNYC’s internal controls. Moreover, we have no idea whether the expenses in question were “grey” area expenses or if the former CEO engaged in totally inappropriate behavior. Furthermore, there is no indication whether Covington & Burling or Ernst & Young are independent from UWNYC--we have been told that both are. Whenever an outside firm is called into conduct an investigation, the basis for that firm’s independence should be described. Finally, we have no understanding from the press release why two years of data were reviewed instead of all the years that the former CEO held his position.
We spent a good chunk of time yesterday speaking with Bertina Ceccarelli, Senior VP, Marketing & Resource Development, in an effort to get to the bottom of this matter. We gained some additional insight into UWNYC’s process, but still believe UWNYC should release the full report.
Senator Grassley Has Had an Impact. Apparently Senator Grassley’s recent “love letters” to other tax-exempt organizations (e.g., letters to American University, the American Red Cross, and the Nature Conservancy) have been noticed by others in the nonprofit sector. Ms. Ceccarelli reported yesterday afternoon that Brian Gallagher of United Way of America (UWA) has notified the Senate Finance Committee about the issues involving the former UWNYC CEO and the investigation. It will be interesting to see whether Senator Grassley rewards UWA’s candor by not requesting thousands of pages of documents. Maybe he will only require five Hail Mary’s rather than his usual 25.
Lavish Office. Stephanie Strom of the New York Times wrote an article last Friday (United Way Says Ex-Leader Took Assets, April 14, 2006) that provided far more detail than UWNYC’s press release. Ms. Strom noted that the former UWNYC CEO had a Persian rug, dolphin fountain, and a Tiffany-style lamp in his office. That brought back memories of William Aramony, the former head of UWA who spent some time in jail in the wake of charges involving inappropriate levels of compensation and executive perks. It was that early '90s fiasco that kicked off the modern nonprofit governance movement, as well as served as the inspiration for the intermediate sanctions now found in the Internal Revenue Code.
We never visited the former UWNYC CEO’s office, but Ms. Ceccarelli was (shall we say) less than complimentary in describing the quality of the furnishing. She indicated that the items listed in Ms. Strom’s article were not of the quality that most would associate with Persian rugs or Tiffany lamps. So be it, but what about the Sub-Zero refrigerator in UWNYC’s employee kitchen? We were just shopping for new appliances at Gringer & Sons on Manhanttan’s famed Lower-East Side, and we determined that the Sub-Zero was too expensive for apartment living. Ms. Ceccarelli offers an explanation for this touch of mink: Sub-Zero is an industrial-strength refrigerator. The initial cost of a lesser brand might be taken as a superficial sign of prudence, but according to Ms. Ceccarelli, UWNYC’s heavy use of a refrigerator would have twice required replacement of the lesser brand by now.
Expenditures. Ms. Strom did get details that the press release left out. Ms. Ceccarelli confirmed that a significant portion of the controversial reimbursements involved expenditures for dry cleaning and parking tickets. Given the amounts involved, we would still like to see a full accounting of the individual expenses. We spend about $50 to $70 every two weeks for our dry cleaning. That amounts to about $3,600 over two years. The basic fine for a parking violation in Manhattan is $65; at least that is what a schedule posted on a government Web site revealed. Our math suggests that the former CEO would have had to have received somewhere around 500 parking tickets after his drying cleaning bill was paid if the $37,000 just involved parking tickets and dry cleaning. Of course, we may tolerate more wrinkles than the former CEO, so he may have had higher dry cleaning bills and fewer tickets. In all seriousness, we made the effort to analyze the numbers because we still suspect there are other items besides dry cleaning and parking tickets.
Frequent Hotel Points. Both Ms. Strom and the press release note that the big item in this scandal involved frequent hotel points that had been donated to UWNYC. Strom’s article reports that $190,000 of points were “administered by Mr. Dickerson's office and thus had not been recorded on the United Way's books.” That doesn’t sound like good internal control to us. The investigators estimated that the points in question had a value of $190,000. Moreover, the value of the points was never recorded on UWNYC’s books, which of course raises the additional question of whether UWNYC is properly acknowledging in-kind donations for tax purposes.
What was unclear before our conversation with Ms. Ceccarelli was whether the points were used for hotel accommodations that were related to UWNYC’s business. According to Ms. Ceccarelli, UWNYC alleges that the value was used for personal purposes. If that is true, it is very troubling.
Improved Internal Controls. Both the press release and Ms. Strom
indicate that UWNYC has made improvements to its internal controls.
Ms. Strom’s article reports that “[t]wo former United Way executives
and three former staff members … were not surprised by the
revelations.” That statement clearly raises questions whether UWNYC
had an adequate whistle blower policy in place. In recognition that it
probably did not, UWNYC has taken steps to improve its policy. Now
employees (and hopefully others such as vendors, contractors, and
donors) will be able to report suspected wrongdoing to an independent
third party company that will be able to assure them of confidentiality. We would like to know whether people attempted to blow the whistle and how those in power (including the board) responded if they were notified of suspected inappropriate behavior. That would reveal a lot about the culture at UWNYC. Executive directors do not exist in isolation. Is the UWNYC board inadvertantly sending signals to senior management that inappropriate behavior will be tolerated?
UWNYC will also be adding an internal audit function. Both steps are
for the good. We would still like to know about how executive
compensation at UWNYC is determined and how executive perks and
reimbursements are monitored. Moreover, we would like to know why UWNYC has been implicitly willing to rely on its outside auditors to detect fraud instead of building a strong internal audit function.
Intermediate Sanctions. We would think that UWNYC, particularly its executives, would want to implement rock solid procedures for setting compensation in order to avoid trouble under the intermediate sanctions. After all, if the determination of compensation doesn't satisfy the regulations under the intermediate sanctions, it is the executives who bear the brunt of any resulting sanctions because they are forced to return the excess benefits. We should also note that the allegations involve expense reimbursements and executive perks. If these are not appropriately approved and documented, they are potentially subject to automatic classification as excess benefits. Given the publicity over the former CEO, we wonder whether the IRS will begin an audit of UWNYC that extends beyond the two-year period. Although not entirely clear, the statute of limitations may be open for a six-year period.
Only Two Years Reviewed. We were very disturbed to read in Ms. Strom’s
article that the investigation covered only two years (2002 and 2003--the press release refers to three years, but seems to contradict itself by referring to just 2002 and 2003)
despite the fact the former CEO had been associated with United Way
agencies for 33 years. Ms. Ceccarelli indicated that the investigation
did not extend further back in time because of a cost/benefit
calculation made by UWNYC. She noted that investigations of this
nature are very expensive, and that at some point the costs outweigh
the potential benefits. We disagree with her on two counts. First,
nobody says that a nonprofit must utilize Cadillac law and accounting
firms to conduct the investigation. There are plenty of smaller and very capable
accounting firms in New York City that could have handled the
investigation for what we suspect would be a significantly lower cost.
Moreover, if UWNYC had fidelity-type insurance policies in place, it
might have pursued the alternative route of filing a claim and turning
the investigation over to the insurance carrier. We have previously made this suggestion to another board who was fearful of increases in its insurance premiums. Of course, that leads to the following question: Why have insurance if you aren't going to use it?
Second, while the actual recovery in a case of this nature may not necessarily cover the cost of the investigation, there are less tangible, but probably more important, benefits. First, a comprehensive investigation sends a clear message to all employees that the behavior in question will not be tolerated. Second, a comprehensive investigation may uncover important gaps in the system of internal control that a less thorough investigation would not uncover. Third, UWNYC is not dealing with its own money. This is donated money. Consequently, UWNYC must be fully accountable to the public. As matters currently stand, there are still open questions. Fourth, a complete investigation sends a message to UWNYC grantees about UWNYC’s willingness to monitor its grants to these organizations. Fifth, given UWA’s Aramony experience, all years in question should have been thoroughly investigated in an effort to determine whether the reforms put in place after the Aramony scandal had changed the culture throughout the United Way federated system.
Follow the Money. According to Ms. Strom’s article, the former CEO became the chairman of Black Equity Alliance after he left UWNYC. Ms. Strom reports that UWNYC created this organization with a three-year, $3.6 million grant at about that time. Ms. Ceccarelli told us that only some $980,000 has been disbursed under the grant and that the Black Equity Alliance has very few employees. As a UWNYC grantee, BEA will be subject to review like any other UWNYC grantee, according to Ms. Ceccarelli Consequently, UWNYC does not see the need to conduct a special audit of BEA. We disagree with that decision. This is a question of public perception. In light of the findings described above, BEA should be subjected to a special audit, particularly because the former UWNYC CEO was in control of BEA for several years. The former UWNYC CEO has resigned as chairman of BEA according to Ms. Strom's article, but remains a board member, which is disturbing given the underlying allegations.
Is Eliot Spitzer Truly Concerned with Good Governance? UWNYC
appropriately reported its findings to the New York State Attorney
General’s office. It will be interesting to see whether AG Eliot
Spitzer decides to pursue the matter as his campaign for
governor heats up.
Incidentals. We were disturbed that the law firm provided UWNYC with a Power Point presentation apparently instead of a full written report. We have seen this done before. In our view, the seriousness of this sort of investigation warrants a full written report rather than summary bullet points projected on a screen while the board sits around eating pastry (we don't know if that was true in this particular case, but we have noted before that pastry and coffee are the adult pacifiers).
As is typical in these cases, Ms. Ceccarelli described the entire incident as having a "wrenching" impact on the entire organization. That is another reason that good governance matters. As Ronald Reagan once said, "Trust, but verify."
We have been informed that we may be able to speak with higher ups in UWNYC later this week. If we do, we will report back.
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If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.”
Copyright 2006, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog. For additional information call 773-325-2124