We read with great interest Stephanie Rice’s article, City College Foundation Seeks Control of Assets, in the January 25, 2010 edition of the San Francisco Chronicle. The article begins by referring to a criminal case against three former...
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City College of San Francisco administrators. Of course the court system will have to determine guilt and we certainly don’t know all the facts, but some of the alleged offenses strike us as something less than criminal—but as we understand the facts, the college is a governmental entity so there may be special rules that apply to government officials. By the way, we aren’t justifying the behavior, if the allegations are true, but we are not sure that criminal charges are warranted. For example, one of the charges involved paying alumni parking tickets. As we said, we aren’t justifying the alleged behavior, but we are not at all surprised to see someone involved in fundraising doing this. And it is hard for us to see a personal benefit, which is what always concerns us.
Rice’s article reports that the foundations books have been maintained by the college. She also indicates that some of alleged improprieties involved the foundation. One allegations asserts that an administrator used the foundation to funnel money to a political candidate.
The college also exercised control over the foundation’s funds, which did not sit well with supporters once news of the criminal allegations broke. There is an obvious lesson here: When one organization supports another or is closely associated with the other, a reputational hit to one of the organizations has repercussions for the other.
Rice reports that unfortunately (and we add, mistakenly) the college’s CFO has informed the foundation that the foundation’s assets “are the assets of the college.” Unless there is a statute or some unusual contractual arrangement, we strongly suspect that the CFO is wrong about this. The foundation may be obligated to use the assets and the income therefrom to support the college, but the assets still are titled and managed by the foundation. The foundation's directors still have ultimate responsibility for prudent investment of the assets and adherence to donor-imposed restrictions. True the directors can delegate aspect of investment management to others, but they must oversee those with delegated tasks.
There is a far more subtle lesson, which offers another important lesson for officers and directors. Even though two organizations are closely allied, the directors and officers of each owe their duties to their respective organizations, not to the aggregation of the two. In this particular case, it is highly unlikely that the foundation’s and the college’s financial statements were consolidated for financial reporting purposes. However, consolidation is not usual where there are two or more affiliated organizations. The accounting rules may require consolidation, but the directors of each entity in the group must always focus on the entity on whose board they sit. That means demanding separate financial statements for that organization and managing that organization as a separate and independent entity.
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