When nonprofit social service agencies go bad, they really go bad. David Wren of the Myrtle Beach Sun News has written 16 articles as a result of his investigation of the Five Rivers Community Development Corp. According to Wren, the agency has received more than $3.8 million in grants and contributions between 1996 and 2004, with nearly two-thirds of that amount coming from local, state, and federal grant money.
It all seems to have begun in August 2006, when the South Carolina Secretary of States office announced that it was launching an...
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investigation into possible financial improprieties at Five Rivers. See David Wren, State to Launch Five Rivers Probe: Agency Review Promised by Board President, Myrtle Beach Sun News, August 25, 2006. The investigation was precipitated when Wren’s investigation showed that Five Rivers apparently operated with very little board oversight. You have to give credit to Wren, who like a laser, focused on the root cause of problems in nonprofits—poor governance. The table was set: Beulah White, Five Rivers’ executive director, directly supervised her daughter, Dayo Smith, who is the chief financial officer, according to Wren. Is it any surprise, then, that their salaries have nearly doubled since 2000 (until a recent cut by the board)?
Wren also discovered that Five Rivers had not been filing its financial statements with the South Carolina Secretary of State on a timely basis, resulting in a series of fines. According to one director, White had not had a performance review since she helped found the agency in 1995. Beginning to sound a bit too familiar? No reviews, nepotism, lax compliance with regulatory requirements, and skyrocketing salaries. But it gets better. The Five Rivers bylaws require a minimum of seven directors (one article says five), but the board has operated for sometime with just four. According to Wren, nearly half of the agency’s expenses since 1996 have been for salaries, fringe benefits, travel, health, automobile insurance for staff members, and other similar expenses.
On September 29, 2006, the Department of Housing and Urban Development gave Five Rivers 30 days to provide financial documentation. The deadline expired in late October without HUD receving the requested documentation. David Wren, Five Rivers Fails to Supply Spending Log: Federal Government’s Deadline for Documentation was Sunday, Myrtle Beach Sun News, November 1, 2006. According to Wren, HUD wants to know how Five Rivers spent $617,000 of a $994,100 grant it received in 2004. The money was supposed to be used to building a community center, but no construction has taken place, according to Wren.
Whether there is ultimately criminal liability here is for state and federal prosecutors to determine. One South Carolina state senator has requested a criminal probe. See David Wren, Senator to Seek Criminal Inquiry of Nonprofit Agency, Myrtle Beach Sun News, September 21, 2006; and David Wren, Prosecutor: Five Rivers Probe Likely, Myrtle Beach Sun News, September 8, 2006. Nevertheless, based on Wren’s reporting, we would expect to see the IRS invoke the intermediate sanctions set out in Section 4958 of the Internal Revenue Code. We doubt whether the key officers will have the benefit of the rebuttable presumption. To have the benefit of the presumption, compensation must be determined by an independent board and be supported by comparables. Moreover, the decision process must be documented. If the IRS successfully challenges the reasonableness of the compensation, any excess benefit must be returned by the recipient, together with a 25% penalty. According to Wren, “Board members, with the exception of one person, say they have never discussed or approved salaries or benefits for White and Smith.” See David Wren, Directors Rack Up Travel Bills: Georgetown County Nonprofit Examination, Myrtle Beach Sun News, August 27, 2006.
The key officers may be in for an even greater surprise. If travel and other expense reimbursements aren’t adequately documented, those expenses are treated as automatic excess benefits and must be returned by the recipients, together with a 25% penalty, regardless of whether they are reasonable. As tax lawyers across the county are well aware, the IRS is deadly serious about the intermediate sanctions and automatic excess benefits. This is where the IRS is placing its enforcement efforts.
The consequences could prove particularly severe if the allegations turn out to be true. Specifically, Wren reports that Five Rivers “paid for staff members to travel to religion-themed spiritual retreats, a workshop about animal life and a two-week retreat at a ranch in Montana, among other trips.” He also reports that Five Rivers apparently paid travel expenses for White’s son, who is not an agency employee. Wren’s article suggests that Five Rivers may have reimbursed employees for certain expenses that were reimbursed by others. In once instance, apparently records show that the agency paid off one former employee’s credit card when she left Five Rivers, charging the amount against the agency’s travel budget. This may have been a severance payment, but who knows?
Wren raises the possibility that employees may have “double-dipped” on mileage reimbursement, noting that despite a Volvo and Ford Econline van, Five Rivers spent an “additional $4,792.67 on rental cars and mileage reimbursements in 2003 and 2004, according to travel documents.”
Wren indicates that there have been a number of conflicts of interest and inside deals involving board members. See David Wren, Conflict of Interest at Five Rivers: Family Members, Loan Recipients Served on Board, Myrtle Beach Sun News, September 30, 2006. Only investigators will be able to determine whether there were any financial benefits inappropriately conferred on insiders. What is troubling are some of the comments that former board members made to Wren. In one instance, a former board member said,
"I saw a side of Mrs. White that concerned me," Major said. "She wanted people on the board who she could easily manipulate. She wanted people who when she said, 'Jump,' they would say, 'How high?'"
In another instance, State Representative Vilda Millwer attended only one board meeting from 1997 to 2000, stating, “I just didn’t have time to participate.” So why did you serve?
What is particularly shocking is the fact that on August 29, 2006, the Five Rivers board of directors gave its staff a unanimous vote of confidence, according to Wren. See David Wren, Agency’s Staff Receives Board’s Support, Myrtle Beach Sun News, August 30, 2006. It took a few more Myrtle Beach Sun News articles before three of the four Five Rivers board members resigned in mid-October 2006. See David Wren, 3 Five Rivers Board Members Leave Posts, Myrtle Beach Sun Times, October 19, 2006. Those resigning included the board president and the treasurer. According to Wren, the members who resigned sent a letter to what is apparently a prosecutor (referred to as the 15th Circuit Court Solicitor) offering to help in the criminal investigation. The letter apparently contains examples of irregularities that the board discovered in recent weeks.
Bottom line: Everybody is entitled to their day in court. We suspect several key officials will have their opportunity to refute the reports and allegations reflected in Wren's fine series. However, the damage has already been done. Five Rivers has already paid the price, with its remaining unspent federal money frozen. However, many other social service agencies also likely will pay a price. The Aspen Institute reported earlier this year on five-year federal budget projections for programs funded with federal money. Significant cuts are already planned. These sorts of stories only provide those legislators who oppose these programs with more ammunition. As is always the case, it comes back to lax board oversight and poor financial controls.
Thanks to Gary Snyder for brinning this story to our attention--click the link to view his archive of stories regarding nonprofit misdeeds.
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