According to a recent Wall Street Journal article by Andrea Fuller, nonprofits are becoming increasingly generous in their executive compensation. A searchable IRS database containing 2014 data, showed more than 2,700 executives received over $1 million in total compensation for that year.
The highest total compensation shown was over $17 million. Most of the top earners were a combination of doctors in various nonprofit hospital systems, and collegiate athletic coaches at private universities such as Duke and Baylor; or, coaches at public universities paid out of a separate auxiliary nonprofit such as Florida. The amounts included both base compensation and total compensation. It’s important to note, that the data could be misleading in a year where an executive retired or took a large deferred compensation payment during that one-year period.
In any regard, pay for executives at both nonprofit charities such as 501(c)(3)s, which was the subject of the article and associations largely 501(c)(6) organizations, is clearly trending upward for top level employees. Many of these organizations are large complex entities and pay must be competitive to attract the talent necessary to operate them. Whether the IRS or contributing public would regard the amounts as excessive is an open question. Any organization would be wise to establish safeguards around CEO pay such as using compensation consultants, comparing their packages against peer organizations, CEO review by independent Board members, and specific performance evaluation criteria for CEOs.
For more information or questions, please contact Craig Stevens at 301.231.6200.
In part one of our six-part series on fraud considerations for nonprofit organizations, we looked at the statistical realities of the prevalence of fraud. Today we focus on the most common fraud schemes among nonprofit organizations. This list, while certainly not exhaustive, can help organizations begin to build a dialogue about warning signs and potential areas where internal controls can be improved.
Ponzi Schemes | With names like Bernie Madoff making headlines, most people have heard of these schemes. It is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. The organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little to no risk.
Diverted Contributions | In this scheme, contributions intended for certain programs are directed elsewhere. This may include pocketing incoming contributions or making deposits to personally-controlled bank accounts.
Misrepresented Fund Drives |This fraudulent activity revolves around deceptive fundraising whereby there is some kind of deceit or misdirection as to what the donor’s gift will be used for, or lack of compliance with donor-imposed restrictions on the gift.
Phantom Vendors | In this scheme, an employee establishes a fictitious vendor and submits false invoices for processing.
Other Disbursement Schemes | These can cover a wide range of territory – everything from payroll schemes to kickbacks from vendors and many others.
Collusion | This is defined as secret cooperation between people to do something illegal or underhanded. For example, a vendor receives preferred bidding status or pricing in exchange for a kickback.
Excessive Compensation |This is defined as compensation that is above the fair market value of the employment services actually being provided. This is an important concept because of possible intermediate sanctions, but also potentially a very subjective standard.
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.
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.
Thomas Nelson was, until recently, the Executive Director of a York County, Maine nonprofit that provides services to low-income residents. It was a position he held for 21 years. He’s now awaiting sentencing after copping a plea arrangement in federal court, agreeing to pay restitution of $1.2Mil to the nonprofit and $150,000 to the IRS for tax evasion. He stands to receive up to 10 years for embezzlement, 5 years for conspiracy, 5 years for tax evasion, and 3 years for signing false tax returns.
How’d he do it? He arranged over-payments to a consulting company that gave him kickbacks and he also diverted money to a defunct nonprofit where he had served as treasurer. He used the money to pay his mortgage and cover gambling debts. There was only one invoice from the consulting company over the time of the collusion but it was for $8,700, not the $413,000 they were paid.
He claimed he avoided diverting federal money because he knew government funds are subjected to greater scrutiny.
The board has been reviewing its financial oversight practices and is “very disappointed.”
Read more about it in the Portland Press Herald