The Crime of Negligence

Posted by Laura Otten, Ph.D., Director on April 11th, 2016 in Thoughts & Commentary

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In 2012, a routine audit of Visit Philadelphia discovered the CFO has been embezzling from the organization for the past seven years, charging personal expenses to the corporate credit card and using corporate checks to pay personal bills,  to the tune of $200,000.  On top of this, the CFO hired her best friend as an independent contractor and was kind enough to share some of the embezzled largess with her bff.  Despite the fact that the CEO of the organization had been unhappy with the CFO’s performance, but had done nothing about it, the CFO was allowed to resign, and collect unemployment.  She also negotiated a deal with Visit Philadelphia that, in exchange for not reporting the unquestionable criminal activity to policy, she would repay the full $200,000 plus $10,000 in interest.

Visit Philadelphia probably would have been okay—meaning no one would have ever known and their reputation would have remained intact—had a story not appeared in The Philadelphia Inquirer in 2014 that exposed the sordid tale.  There was public outrage:  taxpayers’ money had been misappropriated.  (The primary source of Visit Philadelphia’s income, then and now, is a percentage of the City’s hotel tax; in 2015, Visit Philadelphia received $11 million or 18% of the City’s collected hotel tax.)  And why hadn’t this person been prosecuted?

This past month, a grand jury in Philadelphia rectified that and indicted the CFO on felony counts of fraud, theft and forgery.  What’s more, the grand jury’s report went a step further and called out the CEO of Visit Philadelphia for her failure to, in essence, do her job.  Specifically, the grand jury stated that the CEO knew as early as 2006 that proper documentation and support material was not accompanying expense reports and she did nothing.  The grand jury called her negligent in the execution of her responsibilities. 

While the restriction on double jeopardy prevents the legal system from charging a person twice for the same crime unless there is substantial and new evidence, the media and public are not beholden to that same restriction.  Thus, the condemnation of Visit Philadelphia can, and did, happen twice:  once in 2014 when the embezzlement and secret deal were made public and again now with the grand jury’s indictment of the CFP and the damning of the CEO.   And the CEO did not help her cause in 2016, telling The Philadelphia Inquirer that “she couldn’t be expected to focus on the details of the CFO’s expense report,” noting that that was the job of the auditor.

Shall we count the mistakes?

  1. Allowing an underperforming employee to continue in her position for at least six years. Just so we are clear, this admonition goes to the CEO who allowed the CFO to remain in her position and to the Board that allowed the underperforming CEO to remain in her position, to this day
  2. Allowing an underperforming employee who is then found to have committed criminal acts to resign (raising no red flag for any potential, future employer) and collect unemployment
  3. Failing to be honest with your constituent base and coming clean and instead having the media to expose your wrongdoings
  4. Allowing the organization and its reputation to be raked through the coals not once, but at least twice (as I doubt the public has seen the last of this story)
  5. An executive director (who prefers the for-profit title of CEO) who doesn’t know what her job is all about
  6. An executive director who doesn’t understand the difference between her responsibility to provide oversight of the finances, which includes the expense reports of, minimally, her direct reports, and the purpose of an audit (and how it is done)
  7. An organization that either a) doesn’t have core values by which to live or chooses not to live by them or b) doesn’t have a core value that addresses things like integrity, honesty, not making deals with criminals, etc. (While the board president claims that the secret deal was made in order to make the organization whole as quickly as possible, others have suggested the organization could have been made whole simply by collecting from its insurance policy.  Thus, it could have been made whole and maintain its integrity and not allow an alleged criminal to go unprosecuted.)

It is true that there is no law requiring that an embezzler be reported to the police.  So, yes, Visit Philadelphia was well within the law and its rights to make a deal and not prosecute.  And there is little doubt in my mind that many other nonprofits in the same position would do the same thing—and many have:  collect reimbursement and sweep under the rug.  But there is also no doubt in my mind that nonprofits are held to a higher ethical standard, which necessitates that we not only do what is legal but that we do what is ethically imperative, which, sadly, is often far more than what the law demands of us.   If each nonprofit doesn’t do that, not only is the future of that nonprofit jeopardized, but so is the future of the entire sector.

In a recent white paper, BoardSource referred to the Finance Committee as the Finance/Sustainability Committee.  I don’t know if this is a one-time thing or if it is its new lexicon, but I say we need to go a step further and drop the word finance altogether and just call it the Sustainability Committee.  As long as finance remains in the name, boards will be comfortable operating simply in Richard B. Chait et al.’s fiduciary mode (Governance as Leadership) while seeing no need to ratchet up to the full-blown generative mode.  Perhaps if the Board and CEO of Visit Philadelphia had engaged in some generative behavior they would have been able to see the error of their thinking and it would play out in the months and years to come.

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