from Michael Davidson, President

Gloria Wise Boys and Girls Club: Lessons Learned

Scandal involving misuse of funds in nonprofit organizations almost always lead back to an underlying failure of governance on the part of the board. It is helpful to look at what we can learn from these failures, both as object lessons and to help us better understand the nature of the governance responsibility.

The case
On October 5, 2006, the executive director, Charles Rosen, and the former deputy oirector for Operations, Jeffrey Aulenbach, pled guilty to Grand Larceny and Obstruction of Government Administration -- both criminal charges -- for frauds committed against the Gloria Wise Boys and Girls Club, an organization Rosen founded in the 1980s.

The report by the NYC Department of Investigation concluded that the club's business records, "rather than reflecting actual events, were made to say whatever suited the executives' purposes ... fraud, whenever expedient, was an accepted way of doing business."

Findings

• A loan of $875, 000 was made to Air America. The monies were paid to a company owned in part by the organization's Director of Development.
• Payments of $69, 000 were made for home furnishings, renovation of a beachfront apartment and purchase of a Volvo convertible for Charles Rosen.
• $87,000 was expended by Aulenbach for a car, parking and tennis expenses.
• A $35,000 loan to the former Director of Development was "written off."

(From the New York Times, Oct 6, 2006. Report of the NYC Department of Investigation, Sept 2006.)

Where was the board?
"Although the board of directors met monthly," the report found, its members were "apparently oblivious" to the fraud, and its top three officers "were unprepared to govern an organization of Gloria Wise's size and complexity or to insure that its dominant executive director, their long-time neighbor and friend, was managing it responsibly."

The treasurer told the Department of Investigation that for 10 years he had "no particular responsibilities...I'm an accountant so they named me as the treasurer." He did not review the financial records or the reports prepared by the accountant and auditor.

Charles Rosen was the Recording Secretary.

Checks were signed with a stamp of the Board President's signature.

What should the board have done?

Provide active financial oversight

• Active participation in the budget development and review process and the establishment and ongoing monitoring of financial controls might have brought out some of the improper payments
• Active engagement in the audit process, including selection of an independent auditor (not one selected by management!)

Establish investment policies
The largest improper payments were described as "loans". Had there been an investment policy, these would have been subject to scrutiny for their investment value.

Conflicts policies
There were inappropriate contracts with a staff member. Perhaps conflicts policies should cover staff as well as the board.

Program oversight
Significant funds were disguised as payments to non-existent youth programs. Routine program reviews might have brought these payments to light.

Board Development

• Have an evolving recruitment plan that reflects the changing needs and complexity of the organization.
• Question whether it continues to be appropriate for the executive director, especially a founder, to continue to serve as a voting member and officer of the board.

I hope that these reflections can serve as the beginning of a conversation about the lessons learned.

Please email your ideas to me at midavidson@aol.com and we will post them on the website. Please let me know if you would prefer not to have your comments attributed.

Thank you,

Michael