Should I stay or should I go now?
If I go there will be trouble
And if I stay it will be double
The Clash, Should I Stay or Should I Go
DATELINE: June 10, 2008, Chicago
Maude Hurd, the president of ACORN, a nonprofit group, certainly has a warped sense of what is right and what is wrong when she calls ACORN's response to an alleged near-million-dollar embezzlement a judgment call. According to Stephanie Strom's recent reporting in the New York Times last week, the brother of the organization's founder is alleged to have embezzled $948,607.50 from the organization. Funds Misappropriated at 2 Nonprofit Groups, June 9, 2008. The alleged embezzler, Dale Rathke, apparently also was an Acorn employee. We would like to put that number in perspective by comparing it to ACORN's gross revenue, but we are unable to...
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find a Form 990 for ACORN in GuideStar. It is notable that the organization's Web site does not contain any financial information; at least we couldn't find any when we visited the site. To a certain extent, it doesn't matter. Close to a million dollars is large by anyone's standards.
How did Dale Rathke, the brother of ACORN founder Wade Rathke, allegedly perpetrate this fraud? According to Strom's article, the alleged embezzlement was linked to credit card transactions and included affiliated entities. That single piece of information calls into question ACORN's system of internal controls. Among the questions we would ask are the following: Who authorized the payment or reimbursement of the credit card charges? Did someone review the receipts? Did someone match up the receipts to authorizations? Was the board provided with budget variances that might have reflected unusual levels of expenditure in certain areas?
Corporate Governance and the Board's Role. We should be bored by Strom's story. It initially looked like another garden-variety nonprofit embezzlement until Strom dropped the bombshell. The alleged embezzlement took place some eight years ago. When it was discovered, a small group of executives decided to keep the information from ACORN's board (at least from most of the board). Moreover, despite the fact that the organization was out $948,607.50, it did not report the alleged embezzlement to the law enforcement officials. Yes, you read that correctly, management decided to keep most of the board in the dark and did not prosecute. Even more astonishing, management kept the alleged embezzler on the payroll until last month, according to Strom's article.
There is no way to look at the non-disclosure without condemning the organization and its management. Wade Rathke told Strom that the decision was made to keep the matter secret because those who oppose Acorn would use it as a weapon. Strom describes ACORN "as a liberal group that is a frequent target of conservatives." Wade Rathke's justification certainly is self-serving.
What Rush Limbaugh or others of his ilk might say is no excuse. The board of directors is charged with organizational oversight. The fact that management believed they could keep this information from the board reflects an apparent lack of respect for the board on the part of management. It strongly suggests that the board is dysfunctional or gripped by founder's syndrome. It is the board that is charged with overseeing the organization, setting executive director compensation, and assessing the overall financial condition of the organization. The obvious questions: Has this board been governing or just listening to what they are told by management? How is the board supposed to do its job if it doesn't receive timely information?
Another possible explanation for this behavior is that management believed board members could not maintain confidential information. If that was the case, you've got to wonder about the board selection process. Any way you look at it, management's non-disclosure does not reflect well on the board.
If we were on ACORN's board, we would have only one question right now: What other information has been kept from us. We would have no faith in the financial statements that we were receiving—assuming we were receiving them—because the financial statements presumably didn't reflect the transaction, or they mischaracterized it. Our strong inclination would be to terminate everyone in the organization who knew about the alleged embezzlement and then participated in what was nothing more than a cover-up. If those people were left in place, we would resign from the board.
As is typical with embezzlements, ACORN has yet to recover its full loss. According to Strom's article, ACORN signed a restitution agreement with Dale Rathke "in which his family has agreed to repay the amount embezzled in exchange for confidentiality." To date, the family has repaid about $210,000 of the $948,607.50 that was allegedly embezzled. A donor, in light of the still unpaid balance, has agreed to contribute the unpaid balance to ACORN. Whether the donor will receive an assignment of the restitution agreement is unclear. The fact that someone has agreed to cover the loss doesn't eliminate the loss. The donor might well have given that money to Acorn even without the loss. We hope that as a condition to the contribution, the donor requires necessary reforms.
In the end, management's cover-up was undone by a whistleblower. There could not be a better example of why the board of directors should put in place an effective whistleblower policy. One of the questions that arises when putting in place such a policy is who should be notified when there is a problem. This incident strongly supports board notification. The whole point of a whistleblower policy is to make sure that those charged with governance are receiving a free flow of information. That wasn't happening here.
Overall, the entire situation stinks. The tone at the top was and may still be wrong. We were not impressed with ACORN's press release, which did not even state the amount of the alleged embezzlement or acknowledge the fact that management kept the information from the board, as reported by Strom. The board is not the only one who was denied material information. Most organizations don't want to reveal this sort of information because they fear the impact on donors. Well, that's exactly the point. Donors have a right to know whether the money they give to an organization is being used wisely. This was material information.
We suspect ACORN would be the first to demand transparency in consumer finance transactions. Yet, when the shoe is on the other foot, it doesn't seem to like transparency. Openess isn't always convenient or comfortable, but it assures accountability.
The people quoted in Strom's article were quick to put the story in left/right terms. Because they chose to frame the issue that way, we will take their framing to its logical conclusion. At their core, ACORN's justifications for non-disclosure are no different than many of ones that have come out of the Bush Administration for keeping the American people and Congress in the dark.
At the end of the day, there simply was no justification for the decision that ACORN's management made. Maud Hurd can talk about judgment calls all she wants. The fact is that management's conduct was inappropriate and wrong. No amount of obfuscation will change that fact. Everybody involved with ACORN has some serious soul searching to do.
What Exactly is ACORN? As taxpayers, we would be angry if ACORN were a Section 501(c)(3) organization that we were subsidizing. The absence of a Form 990 raises a fundamental question: What exactly is ACORN? It is an acronym for the Association of Community Organizations for Reform Now. The organization is not listed--at least as far as our search went--in IRS Publication 78, which is the database of charities maintained by the IRS. Interestingly, there is a nonprofit corporation having that name registered with the Arkansas Secretary of State as an Arknasas nonprofit corporation. If that is the ACORN in question, then it raises the tantalizing possibility that ACORN is a nonprofit, but not a Section 501(c)(3) organization.
As we noted, a search of GuideStar's database doesn't turn up an Association of Community Organizations for Reform Now, which could mean that ACORN is not even a tax-exempt entity. GuideStar does return several entities with Acorn or Acorn Foundation in their names. If none of these are "the" ACORN referred to in Strom's article and ACORN is not tax-exempt, that would mean that ACORN is not required to file publicly disclosable tax returns. For an organization that is concerned about attacks from the right, that is some pretty clever planning, but does it work?
We thought we would check the Arkansas Attorney General's Web site to see whether ACORN is registered as a charity in the State of Arkansas. Section 4-28-401 through 4-28-416 contain what appears to be Arkansas' charitable solicitation statute. Section 4-28-401 defines a charitable organization as one established:
for any benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic, or other eleemosynary purpose.
Section 4-28-402 requires that any charitable organization register prior to registration. Section 4-28-404 exempts certain organizations from registration. It does not contain an exemption for advovacy organizations, but it does contain one for organizations that don't receive more than $25,000 per year in contributions. An organization with the name Association of Community Organizations for Reform Now apparently takes that position. The question is whether this is the same association that Strom is referring to as ACORN. The filing reports this organizations address as 1024 Elysyan Fields Avenue, New Orleans, LA 70117. The ACORN Web site shows that address as what appears to be ACORN's national office.
In short, the Association of Community Organizations for Reform Now may, if this is the Arkansas entity, have figured out how to avoid disclosing information about itself on a Form 990, but should it be making information available through state charitable solicitation annual reports? Notice that the Arkansas statute does not define charitable by reference to Section 501(c)(3). It uses more encompassing language.
To this point, we have been playing ACORN's game, assuming we have identified the organization and classified it properly. That game focuses on choice of form and regulators. We took a look at the online donation page for ACORN, hoping we would see the full corporate name and whether donations are tax-deductible. The page we viewed did not state whether the organization is a Section 501(3) or 501(c)(4) organization, or whether the donations are tax-deductible.
That page raises a number of questions. The fundamental question: Regardless of whether an organization is tax-exempt or required to register with a state charity regulator, shouldn't it be accountable to the people who fund it and its members? We think so, but that is ultimately the choice of funders, members (if there are members) and regulators.
An ancillary question: Must ACORN disclose that it is not a Section 501(c)(3)organization if that is the case? If it qualifies for exemption under another subsection of Section 501(c), it must disclose that contributions to it are not tax-deductible as charitable contributions. See Section 6113 of the Internal Revenue Code. The apparent absence of any such disclosure on ACORN's Web site may be further evidence that ACORN is a taxable nonprofit rather than a tax-exempt organization.
Tax is Still an Issue. Strom's article notes some 30 foundations and large donors have been discussing the unfortunate incident. One of the organizations quoted in the article is the Needmor Fund. Its 2006 tax return, available through GuideStar, shows that it is a private foundation. It makes reference to the Acorn Foundation, but it shows no grants to the Acorn Foundation.
The question is whether these foundations are funding a Section 501(c)(3) public charity (the Acorn Foundation[?]) or making contributions to taxable nonprofit (Association of Community Organizations for Reform Now[?]). If it is the latter, then Section 4945(d)(4)(B) requires that the donors exercise expenditure responsibility to the extent they are private foundations. Roughly speaking, that means a private foundation such as the Needmor Fund must make sure that its grants are spent solely for the purpose for which the grants were made and that it obtain full and complete reports from the grantee as to how the funds were spent. As we said, much depends on the identity of the recipient, but we suspect that any private foundation donors--like the Needmor Fund if it is a donor--were not happy to hear about the embezzlement and its non-disclosure. That would be particularly true if they were making grants to a taxable nonprofit.
Well it certainly is an interesting story. It has the sort of corporate complexity that we normally associate with an Exxon or Halliburton. Just goes to show, left or right, it's hard to be Ivory pure in this world.
One thing is for sure: The new Form 990 will make it difficult for charities to hide embezzlements now that there is a question that asks about material diversions of assets. One might argue that restitution agreements like the one described by Strom will be subject to disclosure on Schedule L when the organization is a charity.
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