Tag Archives: Board of Directors

Bishop Estate Trust Case Study: Avoiding Conflicts of Interest

conflicts of interest

Most people involved with nonprofit organizations are familiar with the concept of “conflicts of interest.” Generally, nonprofit board members should have a high standard of care and undivided loyalty to the nonprofits they serve. There should be no instances of self-dealing for themselves, people, or businesses related to them. For example, if a nonprofit is interested in purchasing a board members’ piece of property to expand their organization, they should be made aware of any costly problems beforehand. If the board member does not disclose this information, they will have violated their fiduciary duty by transferring their problems to the nonprofit.

Most board members generously donate their time, talent, and money with no expectation of return other than the satisfaction of being involved with a significant cause. However, nonprofits should be proactive by enforcing a conflict of interest policy, in the event a conflict of interest arises. Potential conflicts of interest could end up destroying both the public and donors’ trust in the organization. A sample conflict of interest policy can be found on the IRS website.

One of the greatest case studies on conflicts of interest is the Bishop Estate Trust controversy.

At the time of her death in 1884, Princess Pauahi Bishop was considered to be the most affluent landowner in Hawaii. In total, she owned approximately 10 % of the land in the state. Detailed in her will, Princess Bishop established a trust where all income from the land would be used to erect and maintain two schools on the Hawaiian Islands. The citizens were extremely enthusiastic for the Kamehameha Schools that would educate their children in the years to come. Since 1884, the Hawaii Supreme Court justices have appointed numerous groups of trustees to oversee the trust. The new board of trustees in combination with the increase in land and development values, which have driven up the trust’s worth to be billions, have created a high probability for conflicts and self-dealing to occur.

In August 1997, a Honolulu Star-Bulletin article outlined some of the conflicts of interests regarding the trust. These types of conflicts went beyond the board members’ relationship with the organization:

  • Many cases regarding the Bishop estate went before the Hawaii Supreme Court justices who selected the trustees. Allegations arose that the appointments by the Supreme Court justices were based on a tangled web of politics and favors.
  • The stakes were very high. By 1997, the trustees received approximately $900,000 in compensation for their services. This was extremely unusual, as most nonprofit trustees serve without compensation.
  • Some trustees invested personal money in some of the active investments they selected for the trust, including oil and gas deals. This created conflicts to whether their decisions reflected what was best for the trust or for the individual trustees.
  • The organization spent millions of dollars lobbying against intermediate sanctions regulations. Generally, an individual trustee or insider could be held personally liable if they unfairly benefited from transactions with the organization, with repayment obligations to the nonprofit.
  • Trustees allegedly used school employees to work on their own properties during work hours with no repayment.

These conflicts were considered so corrupt that the IRS threatened to revoke the trusts’ tax exempt status. Ultimately, the allegations were resolved through private settlements and jail time. A full account of the case is detailed in the nonprofit management book, “Broken Trust: Greed, Mismanagement & Political Manipulation at America’s Largest Charitable Trust.”

Conflicts of interest are an important topic for many organizations. If you have any questions or would like to discuss any issues specific to your organization, please contact Aronson’s Nonprofit & Association Services Group at 301.231.6200.

BIG NEWS: Bill Prohibiting Mandatory Auditor Rotation Passed By House

boxerJust yesterday, July 8th, the House of Representatives passed a bill that would prohibit the PCAOB from requiring auditor rotation for public companies. The Reps voted in overwhelming favor, 321 to 62, to pass H.R. 1564, the Audit Integrity and Job Protection Act. One of the stunning factors involved in this latest stage of the ongoing battle is that this was a bi-partisan bill sponsored by Reps. Robert Hurt, R-Va., and Gregory Meeks, D-N.Y. Kudos to these guys for showing everybody that working together can be productive.

The President of the AICPA, Barry Melancon, testified in front of the House in March 2012, stating that mandatory rotation is actually a detriment to audit quality. [The House Gives PCAOB a Smackdown]

The PCAOB itself has not been able to provide evidence of the rotation being beneficial and admits that there are hurdles there.

The bill would amend the Sarbanes-Oxley Act and still needs to pass the Senate and the President’s desk before it becomes official. Read more about it here.

The reason this is big news for nonprofit readers is that many boards, in an effort to show good governance, wanted to implement SOX at their organizations to the level it was practical. The thing is, not much of it is all that practical for small nonprofits and none of it is easy. The easiest part? Implement auditor rotation policies. Many accounting staff (on both sides of the audit) suffered the inefficiencies and increased audit risk that this caused but convincing the boards to change the policy hasn’t been easy. This bill provides more oomph to the argument.


Webinar: Financial Reporting at Schools – Support Your Board, So They Can Support You

Effectively communicating financial performance to your Board is a critical skill.

Your board is the fiduciary of your school and a key resource for your management team. Your Board must understand your school’s financial performance—and where it is likely headed—to perform their oversight role and to support management in achieving organizational goals.

What does an effective financial presentation to a Board look like? How do you convey information that supports decision making, keeps the conversation on point and out of the ‘weeds,’ and is accessible to Trustees without a financial background? How do you ensure your board has the understanding to help you build the financial strength that will in turn support achieving educational goals?

Join Craig Stevens and Rob Eby of Aronson LLC for a free webinar led by Brad Olander, CEO of GoldStar, on April 17th at 11am. During this convenient 30-minute session, we will address these critical questions including:

  • What information should you present?
  • How should it be presented?
  • How detailed should it be?
  • How to balance discussion of current results with forecasts?

 Executive directors, controllers, CFOs, principals and other school professionals serving in an administrative or finance role should register today for this free event!

Register HERE

Type: Webinar

Date: April 17, 2013

Time: 11:00-11:30AM

Price: FREE

Location: Via WebEx

MWAA: Local Board Policies Questioned During Public Upheaval

It must be tough to be a member of the board of directors for the Metropolitan Washington Airports Authority (MWAA) lately.  There are numerous headlines blasting insider deals and lax travel policies.  A former board member has gotten the boot after headlines ballyhooing how she obtained a full-time job with a salary of $180,000 a year to be an “advisor” with full benefits.  The airports authority is adopting stricter travel policies and spending policies in the wake of such embarrassing details as a $9,000 plus ticket for one board member to travel to Prague.  A stricter ethics policy is also being discussed by the board.   Link to the  NBC article:  http://www.nbcwashington.com/blogs/first-read-dmv/Airport-Authority-Setting-New-Rules-168596246.html

The Federal Form 990 informational return filed by most nonprofit organizations, which is open to public inspection, covers every area mentioned above.  Transactions with interested parties, conflict of interest polices, compensation of former board members are all revealed in the public return filed annually by nonprofit organizations.  Good governance suggests the entire board should review a Form 990 before it is filed with the IRS, and during such a process issues such as these come to light for the first time for many board members.   If the MWAA were a nonprofit organization required to file a Form 990, these shady deals and lax policies may have come to light for the board members much sooner, and possibly without all the headlines.

Former President of Veteran Charity Paid $2.3 Mil Salary – Deemed Excessive

California officials are taking aggressive action against Help Hospitalized Veterans, a nonprofit whose stated mission is to bring arts and craft kits to patients in VA hospitals. The State Attorney General’s office filed a civil lawsuit Thursday that demands the removal of the president and entire board of directors and asks for more than $4 Mil in reparation due to alleged misrepresentations and misspending.

CNN reports that nearly two-thirds of the charity’s revenue went to overhead and excessive officer compensation with perks such as golf club memberships and D.C. area condos. The complaint also alleges that funds were unlawfully diverted to start another nonprofit with a mission unrelated to veteran support.

It isn’t the first time Help Hospitalized Veterans has been in the news. In 2008, the House Committee on Oversight and Investigations discovered the nonprofit’s former president, Roger Chapin, purchased a condo with donated funds and received $1.96 million in pension payments.

The new lawsuit alleges Chapin was paid out in excess of $2.3 Mil from 2002 to 2009 and that the current president, Michael Lynch, has been paid more than $900K, more than a third of which was just in 2010.

The charity received more than $31 Mil in donations in 2010. The value of the kits it distributed was reported as approximately $8 Mil.

Unfortunately, this is starting to be a recurring theme in veteran support related charities. In June, the Disabled Veteran’s National Foundation was being investigated by the Senate Finance Committee on similar allegations. It’s clear the American people want to contribute support, it’s also clear that certain groups will take advantage of that.

Source: CNN

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