Passing From the Scene

Pope Benedict XVI, the pope emeritus, and George Cardinal Pell, two giants of  the contemporary Catholic Church,  passed away recently.  Both made courageous decisions that had monumental consequences for the Catholic Church. As this blog is about the management of not for profit organizations and not politics or religion, Benedict’s and Pell’s theological views won’t be examined here.  That is for others to do elsewhere. 

George Cardinal Pell was an Australian charged with the cleanup of the Vatican finances.  He worked very hard at it and came too close to uncovering the real problems with Vatican finances. Pell was later accused of sexual assault on a minor, a charge on which he was originally convicted and then exonerated on appeal. There were whispers these accusations were bought and paid for  by nefarious forces at work in the Vatican. We of course don’t have evidence of that, but what we do know is that Pope Francis eventually stopped the audit engineered by Pell, fired the auditors and scaled back these efforts.  Pell was forced from office and could not complete his work.  Recently, an anonymous memo attributed to Pell circulating about the next Papal Conclave addressed some of these management issues.  The comments about financial management are excerpted here:

“(A) The financial situation of the Vatican is grave. For the past ten years (at least), there have nearly always been financial deficits. Before COVID, these deficits ranged around €20 million annually. For the last three years, they have been around €30-35 million annually. The problems predate both Pope Francis and Pope Benedict.

(B)    The Vatican is facing a large deficit in the Pensions Fund. Around 2014 the experts from COSEA (Commission for Reference on the Organization of the Economic-Administrative Structure of the Holy See) estimated the deficit would be around € 800 million in 2030. This was before COVID.

(C)    It is estimated that the Vatican has lost € 217 million on the Sloane Avenue property in London. In the 1980’s, the Vatican was forced to pay out $ 230 million after the Banco Ambrosiano scandal. Through inefficiency and corruption during the past 25-30 years, the Vatican has lost at least another € 100 million, and it probably would be much higher (perhaps 150-200 million).

(D)    Despite the Holy Father’s recent decision, the process of investing has not been centralized (as recommended by COSEA in 2014 and attempted by the Secretariat for the Economy in 2015-16) and remains immune to expert advice. For decades, the Vatican has dealt with disreputable financiers avoided by all respectable bankers in Italy.

(E)    The return on the 5261 Vatican properties remains scandalously low. In 2019, the return (before COVID) was nearly $ 4,500 a year. In 2020, it was € 2,900 per property. “ (1)

While one has to read this material somewhat skeptically, the overall tone and content of the memo is surely correct. What is the takeaway from this?  NFP financial management is often the poor stepchild of NFP management.  Nowhere is this more evident than in the largest NFP in the world: The Vatican. Donors do not like to hear their contributions are being squandered. Peter’s Pence, the annual collection taken up for the Vatican in every diocese of the world, has been declining  for years now. (2)  There are many reasons for this. COVID the declining  number of Catholics in the West and the sexual abuse scandals are all factors.  Why exacerbate a growing problem with bad news about corruption and mismanagement? 

Pope Emeritus Benedict passed from the scene also. It has been long rumored  Benedict resigned the papacy because he did not have the personal energy or the will to fight the corruption in the Vatican.  This was a courageous decision, as a papal resignation had not happened in centuries.  Benedict understood what it would take to combat the Vatican bureaucracy. Looking inwards, he did not perceive an ability to fulfill that mission.  

Again, what is our takeaway from this?  As an NFP manager, understanding  your capabilities is critical. Knowing when to ask for help is a key to success.  I had  a fairly large manufacturing company as a client.  It was owned by two people who were looking to hire a president. One was the head of sales and the other was the head of purchasing.  I asked them why they did not want to run the company.  After all, they owned it.  The answer was surprising at the time, but in retrospect, not now.  The answer was simple. They knew they didn’t have the knowledge to address some of the issues the company was facing as it was growing or to manage an increasingly complex organization. Like Benedict, they understood their limitations and sought help, even if it meant giving up day to day control of their organization. Or as one famous modern philosopher put it:

Pope Emeritus Benedict and Cardinal Pell  are profiles in courage.  The world is much worse off without them. May they rest in peace.  The question still remains How do you combat the management issues at the Vatican?  They were too big for these two men. It appears drastic action is needed. Perhaps it is time to consider what Constantine the Great did when he found his Rome to be too inflexible to change to new realities. He moved the capitol. 



Cash in the Plumbing

Cash in the Bathroom Plumbing?

Lest anyone believe I only pick on the Catholic Church, let’s look at the recent revelation a plumber found $600,000 stashed away behind a toilet in  Joel Osteen’s church.  To be clear, the original theft had been reported to the authorities, and no one is claiming Osteen or any of his staff is connected to this theft. Nevertheless, the sheer size of Osteen’s church and the amount at stake has caused a stir. 

I used this situation as a case study in my forensic accounting and auditing class. I showed the class  some of the videos about this sordid affair.  An example of one of these follows. 

The class came back with some interesting  comments.  I have included some of these as well as my thoughts about them. 

  • Another NFP fraud?  It seems NFP organizations do not take internal controls seriously.  Sadly, this is often the case.  Many NFPs are way too trusting.  No reputable person should balk at being subject to internal controls. “Trust but verify” not only works in Strategic Arms Limitations, but also in running an organization.  What donor wants to see their hard earned and generously donated money simply disappear?  Donors have been known to stop giving after such an event. 
  • How could you leave that much money in a safe?  Any bank would be willing to come each Sunday and pick up this deposit.  To be sure, that is certainly a correct comment.  I have participated in NFP fundraising events involving  less than one-tenth of that amount of money.  The local  bank was more than willing to come and pick up the deposit right away as an accommodation to a good customer. 
  • What does the Fraud Triangle tell you about potential persons of interest?  The Fraud Triangle states any fraud is the result of someone feeling financial pressure, having the means and ability to rationalize the theft. Given the fact the safe seems to have been easily opened and the perpetrators knew where to hide the money, we would be looking at an inside job. This perhaps establishes the means.  What was the pressure and the rationalization though?  
  • Why was the loot never retrieved?  The person(s) who hid the funds was not able to retrieve the money.  Why?  Were they fired for other causes? Did someone suspect them of the theft?  An “outsider” to the organization would not count on being able to access the bathroom again, and accordingly, the funds. Could this be a “spite” theft, where the perpetrator(s) were simply doing this to embarrass the church and really didn’t want the money? In any event, any checks became stale long ago (the original theft occurred in 2014!) or the makers have put a stop on them. 

This story just seems so odd my students (and I) believe more will come out. Stay tuned.  

Unfortunately, there can be collateral damage to all NFP organizations from such an event.  Some believe situations such as this are a reason why churches should be taxed.  While this seems like a non sequitur, stranger things have happened.

NFP management needs to understand that theft and fraud of such consequence will often result in not only bad press for that organization, but for all NFP organizations.  During this Pandemic any decrease in donations or other revenue resulting from such bad press can have catastrophic consequences to an NFP, even if the organization was not the cause of the bad press.  The major lesson for all NFP management:  Let’s be careful about internal controls.  You don’t want to be on the front page of a local newspaper, sheepishly discussing why the hard earned money of the donors ended up missing because of a fraud or theft. 

Fraud and the Smaller NFP

The Association of Certified Fraud Examiners (ACFE) reported the median loss for any single fraud in a not-for-profit organization (NFP) was approximately $100,000 in 2016. This amount was less than the median losses from  frauds committed in governmental entities ( $109,000), public companies ($178,000) and public companies ($180,000) during the same time period.  Sadly, NFP fraud constituted approximately 20% of all the reported cases. Putting the median loss number in perspective, a $100,000 loss would have been devastating to the NFP I served as board chair.  On top of this, the $100,000 loss was the median loss, meaning one-half of the losses were larger than $100,000 so the pain could even be more acute. Why are the median losses in the NFP sector smaller than in other organizations?  My guess is that there is simply less cash available for conversion in the NFP than in the other entities, but more research will be needed to support my supposition. The ACFE also reports the average fraud in an NFP organization will last two years as opposed to eighteen months in public companies. 

That is not all the bad news though.  In a recent report, ACFE expects the amount of fraud will increase after the pandemic.  Many small NFP entities are chronically short staffed so there is often a lack of segregation of duties, a key element of internal control. This is compounded by the pandemic as skilled labor is often in short supply. One executive director I worked with joked she would need to sweep up on the way home because the NFP couldn’t afford janitorial services. Being underfunded as most small NFP organizations are also means a lack of software that supports good internal controls as well.  

Is the situation hopeless then?  No.  There are some cost effective compensating controls the ACFE has found to be effective and they are relatively cost efficient as well.  Here are a few suggestions:

  • Management review of the financial data and performance indicators.  An involved upper management regularly reviewing financial information and  performance indicators is often an effective fraud deterrent.  No one knows the company better than the senior management.  Getting in the habit of reviewing operating data on a regular basis is one cost effective way to combat fraud.
  • Fraud training for managers and executives.  Training courses are relatively inexpensive, especially compared to the pain an organization will feel from a major fraud. Training heightens  management and employees’ awareness of fraud possibilities.  
  • Fraud assessments. These can be undertaken annually as a joint venture among board members, management, and the external auditors.  Knowing the weaknesses in internal controls can often focus management’s attention on them and lead to future mitigation. 
  • Employee assistance programs (EAPs).  Many of you are familiar with the fraud triangle. This relatively simple theoretical construct says fraud is most likely to occur when there is pressure (financial, psychological, etc.) on an employee, the opportunity for the employee to commit fraud (due to a lack of internal control) and rationalization of the action by the employee (“I don’t get paid enough for what I do!”). Organizations can deter fraud by addressing any and all of these root causes. Fraudsters often succumb to psychological pressure because they feel isolated and believe they have to deal with their personal problems themselves. They may be overwhelmed by the situations they find themselve in. An EAP gives employees an opportunity to get counseling help on an anonymous basis.  Many benefit plans contain an EAP feature. It is cheap compared to a fraud loss. 
  • An anti-fraud policy and a code of conduct.  The existence of these documents and their annual review also deters fraud.  They should contain a clear policy about who whistleblowers should speak to when they suspect fraud and an anti-retaliation policy against whistleblowers. Anonymous tips are still one of the most significant ways frauds are uncovered. Employees and clients should not be afraid of retaliation from making a legitimate whistleblower complaint. 

These suggestions are not in and of themselves sufficient as a system of internal controls. General, application, processing  and reconciliation internal controls should be used wherever possible. This list is just a few recommendations for compensating internal controls when the organization lacks the time, talent, and treasure to implement a more functional, effective system of internal controls.