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Our friends at the Milwaukee Journal-Sentinel reported on Wednesday that the Milwaukee Public Museum generated an operating deficit equal to 18% of its operating budget. The fact that there was a deficit was not a surprise. Museum officials had been in negotiations with Milwaukee County over a lease renewal that would have provided the museum with a $70.0 million subsidy over a 20-year period period. During the course of those negotiations, museum officials had disclosed a $447,000 deficit for the 2004 fiscal year. Not surprisingly, everybody was shocked...
| Our Guide, Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer, focuses heavily on the board's role in financial reporting. You should buy a copy of our Guide today. Call us at 773-325-2124 for additional information, or visit our website at http://www.charitygovernance.com. We also do on site training. In June, we will be speaking at two conferences on non-profit governance, including one where will be leading an all-day training session. A significant portion of both of our presentations will focus on financial reporting issues. Give us a call if you want to head off problems. |
when Museum officials revised that number, reporting a $4.1 million deficit only a month or so after the initial disclosure. What has been apparently troubling to Milwaukee County officials is the fact that the disclosure came after the Milwaukee Cunty board approved the lease providing the subsidies.
The Museum board's chairman attributes the unexpected size of the deficit “to overly ambitious budgeting, fund-raising shortfalls and the county's refusal to administer pension benefits for some ex-county employees” as paraphrased by the Milwaukee Journal-Sentinel. It is also notable that the audit of the Museum’s 2004 fiscal-year financial statements had not been completed when all of this came to light. That is eight months after the close of the 2004 fiscal year. Apparently the audit brought the budget crisis to light.
Museum President Michael Stafford indicated that Museum “grew too fast, too quickly…It grew beyond its means of support.”
The Museum’s chief financial officer resigned in mid-April. The Journal-Sentinel reports that Museum officials have indicated that the resignation had nothing to do with the deficit, but reflected a “logical” career move on the CFO's part. The CFO was also the chief operating officer.
What is particularly troubling about the deficit from an operational standpoint is that it came in a year that saw record attendance.
The disclosure has sparked a county audit and has one county supervisor calling for a criminal investigation, according to a Milwaukee Journal-Sentinel article appearing yesterday.
Analysis. As times passes, more facts will undoubtedly come to light. We suspect there will be a large feature article in Sunday’s Milwaukee Journal-Sentinel. Nobody has told us that, but such an article would follow the pattern that we often see when major public institutions disclose bad news.
We are skeptical about the entire incident. According to Museum officials nobody is to blame for the unexpected news. The CFO’s resignation is a coincidence and unrelated to the deficit or the reporting problem. The Museum’s president is “the answer, not the problem.” And nobody has mentioned board.
Time will tell who is at fault—not for the deficit, but for the failure to bring the deficit to light sooner. Let’s assume for the sake of argument that there was no attempt to deceive county officials. We are still highly critical of the Museum’s board. Any accounting system that generates reports that miss the mark by nearly 10 times the reported bottom-line is seriously flawed. It is also disturbing that the annual audit is taking so long to complete.
We certainly don’t know what transpired at regular board meetings, but it is hard to believe that the board was reviewing financial reports that reflected budget variances. Either way, the board can’t win. If the accounting system is producing accurate reports, then the board wasn't paying attention because accurate reports would mean no surprises. Alternatively, the accounting system is deeply flawed, in which case the board had not been performing adequate oversight.
We were particularly troubled to learn that the former COO-CFO’s employment contract may have contained a provision that required that Museum officials stick to a script when discussing his departure--the Museum refused to release the contract based on legal advice. When a non-profit is as dependent on government funding as the Milwaukee Public Museum apparently is, its board should negotiate contracts that don't restrict disclosure or require the entity's officials to stick to a script when discussing a departure. Public officials don’t like secrecy when it comes to financial arrangements involving people who are relying on public subsidies. In this case, the refusal to release the contract is only fueling suspicions.
We can’t help relating this story to the self-destruction of Opportunities Industrialization Center of Greater Milwaukee, a Milwaukee social services agency that shut its doors earlier this year following a year of scandals. OIC and the Museum are two entirely different operations. Yet, the root-cause of the newspaper headlines for both organizations is accounting related. An audit report for OIC indicated that the financial statements used by OIC’s board were incomplete and inaccurate. Time will tell, but that well could turn out to be the case at the Milwaukee Public Museum. One of the reasons boards should have audit and finance committees is to assure that the accounting system provides the board with accurate information.
While there is no indication of wrongdoing on the part of the COO-CFO, we are nevertheless troubled by the dual roles. In this sort of operation, the CFO was likely in charge of the accounting function. By placing the same person in charge of operations and accounting, the board eliminated an important check on museum operations. The person in charge of operations should not be in control of the system that generates the financial reports describing those operations. That poses an obvious conflict. The Museum's board should give serious consideration to seperating these functions as a matter of good internal control.
Even if Museum officials decide to sweep any problems under the rug, the Milwaukee County investigation should generate a report that explains exactly what transpired at the Milwaukee Public Museum. We look forward to reading that report. Given the fact that the Milwaukee Public Museum is about to start a capital campaign, we would advise Museum officials to voluntarily make full disclosure. If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.” Copyright 2005, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog. For additional information call 773-325-2124HE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
