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Disclosure and Watchdogs - Shriners: Part 6

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Sandy Frost Newsvine

Disclosure and Watchdogs - Shriners: Part 6

Thu Jul 6, 2006

news, accountability, non-profit, shriners, disclosure, endowment, urban-instituteSandy FrostDisclaimer: This article is a real yawner. Unless you get super excited about non profit disclosure, the Shriners or what non profit experts have to say, you probably won't make it past the first few sentences. It's long, technical, dry and detailed. You have been so warned!

The Tampa Tribune published a story on July 2, 2006 about charity watchdog groups who have questioned the Shriners' $9.5 billion endowment. The Chronicle of Philanthropy reported late last month that Senator Charles Grassley, chairman of the Senate Finance Committee, is moving towards stricter non profit regulations.

Non profits are in the news.

Today's topic is disclosure.

Non profit groups, such as the Shriners Hospitals for Children, have strict disclosure guidelines, especially when it comes to their taxes. Certain questions on the IRS non profit 990 tax return forms provide important indications of how a group is doing. Or tell who the group is affiliated with. Or answer if they lobbied or if they had real estate transactions between the corporation and directors, officers or employees. Or if they amended their governing documents.

First, we'll take a look at two news stories; one about the Shriners and the other covering nonprofit legislation passed by the Senate. Second, a list of discrepancies will show what is missing from the Shriners' annual reports and tax returns. Third, a few comments will be provided by the country's top charity experts who participated in a First Tuesday Forum at the Urban Institute to discuss non profit disclosure. Finally, an interview with Rich Cowles, Executive Director of The Charities Review Council of Minnesota, will focus on disclosure.

Non profits in the News -

On July 2, 2006, the Tampa Tribune ran "Charity Watchdog Critical of Shriners' Endowment" by Alan Snel and Mary Shedden. It described how the Shriners are able to spend so much of their budget on program expenses and so little on fundraising because they rely on the individual Shriners in their Temples to raise money at no cost for them. From the article:

"The American Institute of Philanthropy gave the Shriners an "F" for maintaining such a high amount of money in the bank, said Daniel Borochoff, the institute's founder. Any charity that has more than five years' worth of budget spending in the bank gets an automatic "F," he said. "Most nonprofits have limited charitable resources. Most nonprofits can barely meet their budgets," Borochoff said. "It's not that they're a horrible group, but [having all the money in the bank] is a poor basis to be asking people for money." According to the article, "if Shriners relied on only its endowment and its returns, it could run its hospitals for the next 13 years without another cent of fundraising."

On June 29, the Chronicle of Philanthropy ran Harvy Lipman's story "Senate Committee Passes New Accountability Rules; Passage of Giving Incentives Now in Doubt." Lipman described the Senate's efforts to legislate higher standards for non profit accountability and, more specifically, how Sen. Charles E. Grassley, chairman of the Senate Finance Committee, "has been trying to win enactment of legislation that would both encourage increased giving to charity and close what he sees as loopholes in federal tax law that allow unscrupulous people to benefit from their involvement with non profit organizations."

From the article:

"For more than a year, Senator Grassley has been trying to win enactment of legislation that would both encourage increased giving to charity and close what he sees as loopholes in federal tax laws that allow unscrupulous people to benefit from their involvement with nonprofit organizations. Some people are exploiting vagueness in the laws or a lack of enforcement to enrich themselves rather than serve the public, Grassley said. It's unseemly for tax-exempt groups to function this way. It's also unfair to the taxpayers who subsidize that behavior. That's why I continue to try to tighten the laws governing tax-exempt groups."

In addition to the increased penalties for political activity, the Senate Finance Committee also voted to:

•Require non profit groups to file their informational tax returns electronically.

•Increase penalties for taxpayers who deliberately overvalue items donated to charity so they can get bigger tax write-offs than they deserve. In addition, the legislation would tighten the definition of who is qualified to appraise the value of donated items to avoid conflicts of interest and other problems.

•Levy higher penalties on top officials at private foundations or charities who engage in illegal financial transactions with the organization, and stiffen the penalties for non profit officials who approve such transactions.

•Allow the IRS to share with state regulatory officials more information about actions taken against nonprofit organizations in an attempt to improve enforcement of charity laws.

•Abolish privacy rules that make it illegal for the IRS to tell the public when it has denied or revoked an organization's tax-exempt status, and allow the agency to make public documents in the organization's IRS file supporting that action.

Disclosure Discrepancies -

Note: The Shriners Hospitals for Children is a 501(c)(3) charitable group incorporated in Colorado. This group was founded and is controlled by the Imperial Council of the Ancient Arabic Order of the Nobles of the Mystic Shrine for North America AKA Shriners Temples, a 501(c)(10) fraternal group incorporated in Iowa. Neither group voluntarily discloses their 990s, annual reports, audits or board minutes on their web sites. The information below was obtained through Guidestar.org, Offices of the Secretary of State for Iowa and Colorado and court clerk records for Hillsborough and Polk counties, Florida.

According to the latest restated Articles of Incorporation filed with Iowa's Secretary of State by the Shriners Temple fraternal group:

"The objects and purposes of this corporation and business to be transacted by it are…to maintain, control, conduct and superintend any and all charities, benevolences and hospitals now established, maintained and controlled by the Imperial council and to create and maintain a charitable and educational fund…for the purchase, erection, operation and maintenance of Shriners Hospitals for Children."

Discrepancy 1) Here is how the Shriners Temple fraternal describes their activities to the IRS:

"The Imperial Council is the supreme authority of the Shriner Temples of North America. The Shrine is an international fraternity with 434,633 members who belong to the 191 temples worldwide. The Imperial Council's activities support the Shriners Hospitals for Children."

Should the word "support" be replaced with "maintain, control, conduct and superintend"?

Discrepancy 2) Question #12 on the Colorado annual financial statement for Charitable Organizations reads: "Is your organization related through membership, governing bodies, trustees, officers, etc to any other exempt or non exempt organization? (Line 80a 990)."

For the years 2002, 2003 and 2004, the Shriners answered "YES" on their federal tax returns. For the same years, the Shriners answered "NO" on their annual reports to Colorado. Both forms were signed by Willard E. Fawcett, Controller.

Discrepancy 3) Part III, question 2 on the 2003 990 tax returns reads:

"During the year, has the organization engaged in any of the following acts with trustees, directors, officers, creators, key employees or members of their families or with any taxable organization for which any such person is affiliated as an officer, director, trustee? These acts include sale, exchange or leasing of property."

On September 22, 2003, A Satisfaction of Mortgage between Donald W. Peirce (employee) and the Shriners Hospitals for Children for the principal sum of $110,000 was recorded in Hillsborough County, Florida. The document was signed by Willard E. Fawcett, Controller and Jay Fleisher, managing attorney.

This transaction was not reported to the IRS.

At this point, it is unclear if Shriners Hospitals' real estate transactions between Charles G.Cumpstone Jr., the recently retired Shriners Executive Vice President, and Lewis K. Molnar, recently retired Hospital President, were reported to the IRS. These transactions took place from 1979 to 1992. Tax documents from those years have been requested, but are not yet available. One such transaction is a Satisfaction of Mortgage that was recorded 4/11/85. Grantors or those conveying title, the owners, were listed as Shriners Hospital for Crippled Children and Lewis K. Molnar. The Grantee, or the one receiving the title or buying it is listed as Charles G. Cumpstone. In other transactions, it appears that there were two separate mortgages on one of Cumpstone's properties. The mortgages were taken out on 7/12/79 and 10/5/79. Each were satisfied or paid off in less than six years on 4/11/85 and 7/12/85.

Discrepancy 4) Part VI, question 77 on the 2000 990 tax return reads:

"Were there any changes made in the organizing or governing documents but not reported to the IRS?"

On October 17, 2000, a Resolution was filed with the Clerk of Polk County, Florida, which is due east of Hillsborough County, where both Shriners groups are head quartered. The paraphrased resolution reads:

"Be it resolved that any one of the following officers; the Chairman of the Board of Directors; the President; the First Vice President; the Second Vice President; the Secretary; the Assistant Secretary or the Treasurer, is authorized, on behalf of the Shriners Hospitals for Children:

1) To accept annuities, gifts, bequests for the benefit of the Corporation and/or any individual Shrine Hospital.
2) To demand, recover and receive from any fiduciary or other persons any property of any nature for the benefit of the Corporation and/or any Shrine Hospital by any person or under any will, trust agreement, or other instrument… 3) To execute documents in suits and proceedings in which the Corporation has an interest and settle lawsuits, claims, debts or controversies of whatever nature affecting the Corporation.
4) To transfer, convert into other securities, endorse, sell, exchange, assign, and deliver any shares of stock, bonds, notes, options, and evidences of indebtedness or other securities owned by said Corporation and to execute and deliver all written instruments of transfer.
5) To endorse notes, checks, drafts, bills of exchange or other collection items which may require the endorsement of said Corporation for deposit as cash or collections.
6) To make and execute such agreements and documents as may be necessary concerning the tangible personal properties of the Corporation and to execute documents necessary to comply with any legal requirements of the Corporation with governmental authorities.
7) To transfer any property, real or personal, to any fiduciary with which the Corporation has a contract for investment management.
8) To accept gifts and devises of real property, mineral estates and water rights, for the benefit of the Corporation and/or any individual Shrine Hospital."

The next section conveys broader powers of buying and selling to various combinations of two of the above mentioned officers and directors. The third section gives similar individual powers of buying and selling to the General Counsel, the Managing Attorney and the Second Vice President. This resolution offers no accounting, GAAP review or other oversight mechanisms.

The answer to the question 77 is marked "No." The Shriners did not report this change in governing documents to the IRS or to the Colorado Secretary of State.

Discrepancy 5) Annual reports to Iowa by the Imperial Council of the Ancient Arabic Order of the Nobles of the Mystic Shrine for North America lists Charles Cumpstone as their registered agent. According to the Secretary of State's office, the registered agent must be an Iowa resident. Cumpstone lives in Florida.

Non Profit Forum on Disclosure and Accountability -

In February, 2005 a group of non profit experts gathered to participate in a First Tuesday Forum held by the Urban Institute to discuss "Non Profit Disclosure: The Key to Accountability?" The experts include John Rogers, senior vice president and chief financial officer at the Urban Institute, Dr. Mark Hager, a senior research associate in the Urban Institute's Center on Nonprofits and Philanthropy, Julie Floch, a partner at Eisner LLP and director of the firm's not-for-profit practice, Art Taylor, the president and CEO of the BBB Wise Giving Alliance and Dean Zerbe, senior counsel for the Senate Finance Committee.

Here is what some of these experts have to say about non profit disclosure and accountability.

Dr. Mark Hagler, senior research associate in the Urban Institute's Center on Nonprofits and Philanthropy, began by talking about the "Nonprofit Overhead Cost Project" and what he found:

"One of the assumptions that underlie our research as well as the broader work of the National Center for Charitable Statistics is that transparent disclosure of a nonprofit organization's operations and its finances is an important component of public accountability. This seems to also be the historic position of the federal government, since they require public charities to report each year on Form 990 if they are large enough; they make the form available to the public if we ask for it. Form 990 is the only document that's legally required to be publicly available, and as a consequence, this form bears the brunt of accountability discussions. Lots of people have jumped onto the charities disclosure bandwagon. Individual forms can be viewed at http://GuideStar.org. This is, I think, an incalculable advance in the disclosure and accountability realm—probably the single most important development in information on nonprofit organizations ever."

Art Taylor, BBB Wise Giving Alliance:

"These ratios, while they tell us maybe how much an organization might be spending on fundraising or how much they might be spending on administration, they really don't get at some of the larger challenges that nonprofits have and, I think, some of the more important issues that we should be concerned about with nonprofits—namely, how is it being governed? Is it being governed well? Does it have an engaged board? Is the organization telling the truth to the public about what it intends to do with the resources that it's given? Is it marketing itself in a truthful way? We want to know, for instance, if an organization even gets an annual audit and whether they are providing those audits to people. We want to know if an organization is open to questions and whether they deal with those questions forthrightly and whether an organization is truly going about attempting to meet a mission."

Dean Zerbe, Senate Finance Committee:

"Congress views it the same way—that 990s are a pillar for oversight of public charities, particularly public charities. I think a very broad sweeping comment about the enormous benefits of financial controls regardless of the size, given the fundamental importance of a board's responsibility to safeguard assets. However, adequate financial controls must be a board priority. They say 'Why I didn't put down the salary. I had a dental appointment that day; my dog ate it.' You know, you can give all of these explanations…If you have an account overseas and you don't report it to the IRS—which I can say to you is usually a gateway for money laundering and everything like that—we don't put up with your 'I have a story to tell you.' We just say, 'That's great; you pay the penalty; bless your heart; and you know what, next time you'll learn.'

I'll give you a good example. We've been finding enormous problems in type three supporting organizations. An easy way for me to find that there is a problem—why does an organization have $200 million in assets if they only put out less than a million dollars in grants per year with $200 million sitting there. That to me is a strange little bird in my ear that says maybe this is an organization I need to take a look at."

Dr. Mark Hager, Urban Institute:

"My comment is very much in the same area. I have a colleague in the back of the room, Linda Lampkin, who I'll quote saying, "There is no checkbox on the 990 that says 'I'm committing fraud'. That would be very helpful for us. So when we look at an organization, we look at its 990 and it's got numbers in most of the boxes, you know, it's hard to know whether they are right or wrong. It's only when we start seeing something egregious, and we've seen some examples pointed out here, and the most famous one is the one that Art has seized upon—that large proportions of organizations that get lots of contributions and by Generally Accepted Accounting Principles (GAAP), expenses related to raising contributions are fundraising expenses and you see a zero on that line. We can probably explain away a few of them, but we know of specific examples through the work on the overhead cost from case studies, you have a fulltime fundraising executive working in your organization and they have a zero on the line. There are enough examples there for us to not think we can explain it away with volunteers or complex organizational structures."

Comments by Cowles -

Rich Cowles, who has been Executive Director of the Charities Review Council of Minnesota since 1999, kindly agreed to answer some questions about disclosure. Cowles has worked hard to strengthen charitable groups, has had a longtime interest in the non profit sector and has served on a variety of boards and committees. These include as an officer of the Council of Agency Executives of the Greater Twin Cities United Way, and as a member of the Institute for Executive Director Leadership's Strategic Planning Committee at the University of St. Thomas Center for Non profit Management. His answers are general and apply to all non profits.

Question: Why does the IRS have disclosure laws for non profits?

Cowles: The tax exemption enjoyed by non profits -- and the tax deductions enjoyed by those who donate to them -- are significant subsidies of charitable services. As such, non profits are assets of the community, and the public deserves to know about the results they produce. Non profits have an obligation to fully disclose their activities and demonstrate they are good stewards of their resources and the public's trust. Independent Sector, a nonprofit professional association, characterizes the sector as being guided by a spirit of "organized neighborliness." Disclosure is an important part of this ethic. IRS and State disclosure laws are an important legal bulwark against fraud and can be used as a tool to build public trust. The best non profits see their disclosure obligations as an opportunity to tell their stories.

Question: Why is it important that non profits disclose their financial activities?

Cowles: Disclosure of non profit financial activities helps donors and regulators monitor the stewardship of funds for financial activities. Financial information can be used to describe the activities of non profits. The most well known example of this is the distinction between program versus management or fundraising expenses.

Question: Are you familiar with non profit groups who have not disclosed things and have been caught? If so, what happened to them?

Cowles: IRS penalties are severe, including loss of non profit status and fines. But the IRS doesn't have the resources to fully monitor the large and growing non profit sector.

Question: What do you think it may mean if a non profit does not disclose financial and other information on their 990s and state reporting forms? Why would a group do this?

Cowles: Like any sin, there are sins of omission and commission. There are certainly cases where a lack of disclosure could be a mistake. Such forms can be complicated. If the non profit has limited financial management capacity, a lack of disclosure may well be due to lack of knowledge of requirements. Active lack of disclosure or obvious willful omission of financial transactions is a red flag that the non profit is hiding some kind of ethical malfeasance, such as the misuse of a non profit for personal gain. Even if this is rare, this level of lack of disclosure can lead to public scandals that harm the entire non profit sector. Non profit scandals have a corrosive effect on the public trust that is the lifeblood of all non profits.

Question: What is your take on the state of non profits today?

Cowles: The non profit sector continues to grow and meet more public needs than ever before. The competition for the donated dollar is high and increasing. Fortunately, the majority of non profits are aware of accountability and transparency expectations. They are adversely affected by a lack of public trust. While many have taken steps to build public trust, many still feel overwhelmed by fundraising and other daily management pressures. Non profits are generally leanly staffed. So, even while most non profit leaders are mission-driven and pre-disposed to do the right thing, few leaders feel they have enough resources to be as accountable as they desire.

Non profits are more successful in terms of growth, versatility and innovation than ever before. Unfortunately, some high profile examples of leaders of large non profits enriching themselves courtesy of the public's generosity has naturally fostered a climate of skepticism and scrutiny -- especially of larger non profits. The current attention paid to excessive executive compensation is an example of this distrust. While excessive compensation in the non profit world is not as widespread as in the for-profit world, the distance between the highest paid and the lowest paid has increased in the non profit sector as it has in the for-profit sector. One of the major challenges for large established non profits is to maintain a spirit of openness that allows the public to understand and believe in their work as easily as when they were smaller.

Question: Are there trends you're observing?

Cowles: Some general trends based on what we hear from donors: More public questioning of excessive compensation; potential donors feeling overwhelmed by aggressive fundraising. Non profits are increasingly concerned by a growing lack of younger leadership to replace current executive directors. The best trend we've seen at the Council is that there are more non profits that welcome help demonstrating their accountability.

Question: What do you think of Congressional efforts to pursue tighter standards for non profit accountability?

Cowles: The frank and very public nature of these discussions is welcome and will be fruitful. Some of the proposed measures seem to address abuses well; others are designed to punish the small minority of abusers but have negative implications for the sector as a whole. The Senate Finance Committee is working hard to listen to and solicit input from non profits via the Non profit Panel and other non profit leaders. They should be commended for this.

In conclusion, thanks to Rich Cowles for time and thanks to the other experts who care so much about non profit transparency and accountancy.

Further Reading:

The Royal Order of Jesters - The Shriners Secret Society Secret Society - 'Mirth is King'

The Shriners - The 'Krafty' Klowns