Identifying and Developing Charities Cases...which points out internal control problems, issues, and weaknesses that the auditor has detected during the course of an audit This “letter”

Seattle Regional Training

September 24, 25, 2009

Identifying and Developing Charities

Cases

National State Attorneys General ProgramCharities Oversight and Regulation Project

� Identify sources of charity cases

� Case Selection—Criteria

� Anatomy of an Investigation

� Subpoena/Civil Investigative Demands� What to Request

� Investigators Role

� What if I Have No Investigator?

� Using an Organizations Own Filings� Registrations, Forms 990, Financial Statements, Management Letters,

etc.

� Identifying Violations of the Law

� Solicitation issues

� Governance

� Asset management

� Using the IRS Form 990 to Find Violations of State

Law

� Multi-State Enforcement Actions

Charities cases can be developed from

a wide variety of sources

� “Insiders” often refer or report matters:

� Present or former board members or officers

� “Stakeholders” or consumers of the charity’s programs

services

� Employee Whistleblowers

� anonymous complaints

(These needed to be taken with a grain of salt but some

are meritorious)

� consumer complaints about solicitation

(It’s a good practice to have a complaint form on

your website—it generates cases)

� Government Agency Referrals

� Referrals from law enforcement agencies

� Police

� Fire

� Consumer protection agencies

� Legislators making constituent referrals or inquiries

The organization’s own documents

and filings

Read the newspaper!

� Mail drops

� Obtain a P.O. Box and donate through the P.O.

Box

� Old lady mail collectors

� Dummy phone lines, telemarketing calls

received by AG's themselves

� Ask your colleagues to collect their direct mail

� Local BBB Offices can make referrals

� Reach out and establish a relationship with your

local BBB

� 1. Nature and Extent of the Harm

� General principle: We should select those cases

involving the largest economic loss, to either charity or

donors.

� Factors to consider:

� How much money is involved?

� If there has been diversion, what is the loss to charity?

� If the issue relates to statements made in the course of

solicitation, how many donors are affected?

� 2. Deterrent Value

� General principle: We should select those cases that have the greatest deterrent value.


� Will this case have high public visibility which will deter similar conduct?

� Will this case have deterrent value in this particular sub-sector, either because of the identity of the defendant or the nature of the practice?

� Does this case involve a new or emerging problem which merits aggressive enforcement in order to deter future violations?

� 3. Characteristics of the Victims

� General principle: We should select those cases that involve the most vulnerable victims.


� Are the victims peculiarly vulnerable, e.g. senior citizens?

� Are the victims located in our state?

� Do the victims have private remedies available to obtain redress?

� Are the victims themselves partially culpable?

� 4. Nature of the Violation

� General principle: We should select those cases involving the most significant violations of state law.


� Is this an isolated violation, or is there a pattern of illegal conduct?

� Is the violation “technical,” or is the conduct inherently fraudulent?

� Does the public care about this issue?

� Is this conduct common or customary in this industry?

� Is this a new deceptive practice that can be eliminated before it becomes

� widespread?

� Have we taken action against this kind of conduct in the past?

� 6. Defendant’s Intent

� General principle: We should select those cases involving the most intentional violations of law or intent to defraud the public.


� Was the defendant genuinely ignorant of the law, or confused about its

� application?

� Is there evidence the defendant violated the law willfully?

� Is the defendant’s conduct targeted at particularly vulnerable citizens?

� 7. The Cost to the Office

� General principle: We should select those cases that best utilize our limited

� enforcement resources.


� How great a commitment of staff time will be required?

� What cases will we have to forego in order to prosecute this case?

� What out-of-pocket expenses will be required for travel, expert witnesses,

� depositions, etc.

� Is the defendant unusually litigious and likely to drain our resources?

� Have we so committed ourselves to this case or issue that failure to

� proceed will hurt our credibility?

� 8. Likelihood of Success on the Legal Issues

� General principle: We should select those cases that involve the greatest likelihood of success, or present the best opportunity for establishing helpful precedent.


� Are the legal issues well-settled, or is this a matter of first impression?

� Are there proof problems with our witnesses, exhibits or other evidence?

� If we litigate and fail, will the outcome affect our effectiveness elsewhere?

� If we hope to make new law, does this case present a good set of facts for

� doing so?

� 9. Likelihood of Effective Relief

� General principle: We should select those cases involving the greatest likelihood of obtaining meaningful relief.


� Are we likely to recover funds that should have been used for a charitable purpose?

� Has the defendant already halted the practice? Will an injunction be effective?

� Is the defendant likely to flee?

� If the defendant is located elsewhere, can we successfully enforce an injunction or collect a judgment?

� Is the defendant bankrupt or judgment-proof?

� 10. Availability of Relief Through Other Means

� General principle: We should select those cases for which others do not have standing.


� Can relief be obtained effectively through private litigation, either by

� board members or by charitable beneficiaries?

� Are there other charities with an incentive and standing to litigate this case?

� Is there a potential for action by other state or federal regulatory agencies

� or criminal prosecutors that may remedy the situation.

� Could a “cease and desist” letter achieve acceptable results?

� Could public exposure of the defendant’s practices without litigation

� achieve comparable results?

� If some alternate form of relief is available, will it be available quickly

� enough to be meaningful?

� 11. Other Factors

� • Are other states pursuing this action? Would a multi-state action be effective?

� • Is there public demand or public pressure for our office to take action?

� Leverage technology

� FTC Listserve—let others due the sleuthing

� Do it yourself—take testimony and build a case.

� Take advantage of Internet based investigation tools

and search engines

� www.nasconet.org

� Forms, CID’s, Court decisions, multi-state achrives, etc.

� Monitoring of the FTC’s charity2 listserve for

State charity regulators can alert you to

problems with charities or solicitors in other

states.

� Those charities or solicitors are likely active in

your state too.

� The listserve also generates “multistate”

enforcement activity

� Paul Luehr presented “Beyond Google: Internet

Investigative Techniques and Tips” at the 2006

NASCO Conference

� Copies of his Powerpoint and Favorite

Bookmarks are available

� The charity’s own documents can often be used

against them. Examples include:

� Registration statements

� IRS Form 990

� Websites

� Recorded Calls� http://www.state.ia.us/government/ag/latest_news/releases/may_2009/State_Police_Officers_C

ouncil%202_2_09%20(edit).mp3

� Telemarketing “Scripts”

� The charity’s own documents can often be used

against them. Examples include:

� Direct Mail

� Financial Statements

� CPA’s Management Letter

� CPA Communications under SAS 112 and 115

Using an Organization’s

Documents: CPA’s Management

Letter� Auditors have traditionally provided their clients

with a management letter at the end of the audit

which points out internal control problems, issues,

and weaknesses that the auditor has detected during

the course of an audit

� This “letter” is written to management and the board

and is not considered a public document

Using an Organization’s

Documents: CPA’s Management

Letter

� In the past, the letter was largely voluntarily and

could be communicated orally or in writing

� Beginning with 2006 (applicable to years on or

after December 15, 2006), the letter was

formalized and is now part of the audit process.

Certain aspects of it are no longer voluntary

SAS 112 and 115: Three

Aspects� Mandatory—SAS Nos. 112 and 115 deal with communicating

internal control related matters identified in an audit

� SAS N0. 112 issued in 2006. Turned out to be overly complex in its

� definitions.

� SAS No. 115 issued in 2008 (applicable to years ending on or after

� December 15, 2009). It keeps much of SAS No. 112, but simplifies the

� definitions

� Must be provided within 60 days after issuance of the auditor’s opinion

� Mandatory—SAS No. 114 deals with the auditors

� communications with those charged with governance

� Voluntary—SAS Nos 112 and 115 permit the auditor to discuss

� Voluntary Nos. other issues in the letter, but do not require further discussion

� Charity regulators and investigators should be interested in

� these two required communications (which are often

� combined as one letter)

SAS 112 and 115: Three

Aspects� Auditors must disclose deficiencies in internal controls

� that they encounter during the audit which are either� Material weaknesses

� Significant deficiencies

� Critical point:� In the NPO world, the auditing standards do not require the auditor

to look for or find control deficiencies as an end in and of itself

� But in the course of performing the audit, the auditor is required to

examine, test, and document internal controls as necessary in the

auditor’s professional judgment to permit the auditor to identify and

address audit risk and satisfy the auditing standards. So the auditor

inevitably will find internal control issues; perhaps minor, or

conceivably major

The Management Letter� The auditor must provide a letter identifying

� significant weaknesses and material deficiencies

� detected during the audit process

� The auditor:

� Can provide a letter indicating that no material weaknesses

came to the auditor’s attention if there were no material

weaknesses identified

� Cannot provide a letter indicating that no significant

deficiencies were uncovered even if none were uncovered. As

the audit process is not designed to look for this, it is possible

that significant deficiencies do exist

Internal Document: Board

Minutes� Minutes should:

� List who attended, the date and time of the meeting

� Describe the actions taken at each meeting and votes

for and against them and major thread of discussion

� Describe committee reports to the board.

� Describe other business

� List all conficts discussed.


Minutes� Minutes As a Tool:

� Prepare:

� A table of the attendance record of each director

� A table of employees who attended each meeting

� A List who attended, the date and time of the meeting

� A chronological list of financial decisions considered

� A list of new programs and services

� Describe the actions taken at each meeting and votes for and against them and major thread of discussion

� Describe committee reports to the board.

� Describe other business

� List all conflicts discussed.


Minutes� No or poorly maintained minutes have

informational value:

� Assess whether the Board is dysfunctional and if so,

how

� Make inquiries of employees about their perception of

the board and management

� Look for overrides of controls

� Look for violations of conflicts of interest policy

There are a number of documents prepared by or

filed by an organization that can be very useful in

build a case

No

body is

related.

Not married

but same

names??

1 DEPARTMENT OF THE ATTORNEY GENERAL

2 STATE OF HAWAII

3 IN RE INVESTIGATION OF: ) AG Subpoena No.) 2009-028

4 Animal CARE Foundation ))

5 ))

6 ___________________________ )

7

8

9

10

11

12 EXAMINATION UNDER OATH OF SABINA DE GIACOMO

13 Taken on behalf of the Attorney General's Office at

14 the offices of Department of the Attorney General, 425

15 Queen Street, Honolulu, Hawaii, commencing at 9:57

16 a.m. on May 29, 2009, pursuant to Notice.

17

18

19

Registration Data Can Develop Cases

19 Q. Do you reside with Frank De Giacomo?

20 A. He lives in the house.

21 Q. Are you married to him?

22 A. It's somebody's definition. Legally the

23 paperwork has not been changed to a divorce.

24 Q. So you obtained a wedding license?

25 A. Yes.

13 Q. Did either of you petition the court for a

14 legal separation?

15 A. Not on paper.

16 Q. Okay. So then you're not legally separated.

17 A. Okay.

18 Q. You are currently married. If neither of you

19 has petitioned or received a separation from the

20 court, you remain legally married.

21 A. Okay.

No

Management

expenses?

� It turns out that the Animal Care Foundation did not properly allocate its expenses among programs services, management and fundraising

� The Foundation failed to list its officers and directors on its Form 990

� The Foundation failed to report the sale of inventory (pet food, medicine, supplies)

� Private Foundation returns are filed with the

Attorney General of Each State in which the

Private Foundation is domiciled, registered or

created.

� Treasury Reg. Sec. 1.6033-3(c)

Note the zeros

and the

handwriting.

Suspicious?

Nothing entered

on most lines

Red Flag

Note that the

president took a

whopping tax

deduction and then

lived tax free on the

Foundation’ dime

Did the Foundation Managers Take

Compensation?

But so

underpaid.

I’m Sure the Supporting Schedules Explain Everything!

In this case, the $35,000 in “occupancy” expenses were for a luxury condominium in the Ilikai Hotel for the President of the organization. Note the travel expenses too.

Who lived here

and traveled?

� Pick a good “poster child” case.

� Badge Fraud

� Veterans Groups

� Disabled and Terminally ill Children, etc.

� Good publicity generates new referrals and

complaints when the public at large becomes

educated about the AG’s role