A recent investigation by The Washington Post found that nonprofit organizations have responded to a new requirement to disclose significant financial losses on the Internal Revenue Service’s Form 990 often by providing little detail about cases of fraud or embezzlement. A Chronicle analysis shows that colleges are no exception.
For example, on its 2011 tax form, Vassar College described a multiyear $2.5-million fraud in five sentences. Several other colleges and universities responded with similar brevity, while others described cases at great length.
Sue Menditto, director of accounting policy at the National Association of College and University Business Officers, said colleges often provide limited detail surrounding cases of fraud for good reason. A college may be “in the middle of an investigation, and for reasons of legal-counsel advice or advice of trustees at the time, the details could not be released because it could compromise the investigation,” Ms. Menditto said.
Two of the frauds listed among the documents examined by the Post stemmed from a common source: the Ponzi scheme masterminded by Bernard L. Madoff.
What Defrauded Colleges Told the Federal Government
A recent investigation by The Washington Post detailed how nonprofit organizations, including colleges, had responded to a redesigned Form 990, which in 2008 began asking whether the organization had experienced a “significant diversion” of assets. In many cases the “diversion” amounted to fraud or embezzlement. Following is a sampling of colleges and universities that appeared in the Post’s findings, with an explanation of each diversion taken directly from the institution’s Form 990. Some institutions have been omitted for space reasons.
|Bard College (N.Y.)
|2009||A portion of Bard investments were held in a fund that was partially invested with Bernard Madoff Investment Securities. The estimated assets dollar loss is $3,940,721.|
|Columbia U. (N.Y.)
|2011||In November 2010, the university learned it had been defrauded for the amount of $5,249,748.39 when certain electronic payments were made to a fraudulent vendor bank account. The university immediately notified the police. Indictments have been issued and the university is cooperating with the criminal investigation. In August 2011, the university received reimbursement from its insurance carrier for the full amount of the loss, less a $250,000 deductible.|
|Drake U. (Iowa)||2011||In March 2011, Drake unearthed a series of transactions which resulted in the misappropriation of approximately $621,155 from the university over a period of 7 fiscal years. The university informed the police, charges were filed and the case is currently being handled by the county prosecutor. The employee charged with the theft was immediately terminated. The university also immediately implemented certain enhanced internal controls and is continuing to work with auditors to guard against future misappropriations. The university was insured and received reimbursement from the insurer for the full amount less a $5,000 deductible.|
|Georgetown U. (D.C.)||2011||In late 2010, the university became aware of a possible diversion of its assets in connection with a conference managed by the university and sponsored by the university and others. The internal auditors performed an internal investigation, completed in January 2011, which found that, in administering this conference, an administrator involved in the operation of the conference had compensated herself approximately $390,000 for work relating to the conference from 2007 to 2010. As a result of the internal investigation, the university also became aware of a previously unknown bank account over which the administrator had signature authority that was subsequently determined to be in violation of university policy and that was used to pay expenses relating to the conference. The administrator deposited conference donations into the account and paid conference expenses, which included, without the knowledge of the university, the unapproved compensation set forth above. In the course of the internal investigation, the internal auditors also learned that an aggregate of $14,500 in spousal travel expenses relating to the conference were paid in error on behalf of a university employee from 2008 to 2010. Immediately upon discovering the existence of the bank account, the university closed the account and transferred the remaining balance to a bank account controlled and audited by the university where any deposit of revenues and any spending would take place under university policy and subject to university internal controls. The university entered into a restitution agreement with the administrator to repay the unapproved compensation received in 2010 (plus interest), and has received full reimbursement of the spousal travel costs paid in error. The university has also followed internal procedures for the parties involved. Finally, the university has ended its sponsorship of the conference and will have no financial involvement in the conference going forward. The unapproved compensation and spousal travel expenses represent, in the aggregate, less than 0.04% of the total operating revenue for the tax year and less than 0.02% of the total assets as of the end of the tax year, and, accordingly, are not material for financial reporting purposes because the aggregate amount exceeds $250,000. It is considered significant for purposes of the Form 990.|
|La Salle U. (Pa.)
|2011||During the 2009/2010 fiscal year, a theft was uncovered by an employee of the food services operations. The then manager had created a fake company and was billing La Salle for goods never provided. It was determined that this had taken place over a 20-year period. The total amount determined to have been stolen was approximately $5 million. The university received full restitution through asset recovery, cash, property, etc. The former employee is now serving prison time. The university has taken measures to strengthen internal controls over this and other processes, namely instituting a vendor approval process, utilizing the controls inherent in our operating system, and broadening the scope of our financial audit testing.|
|Naropa U. (Colo.)||2010||The university’s former vice president for business and finance concluded her employment near the end of the organization’s tax year. Thereafter, the university retained a company to provide the business and finance duties on an interim basis.|
|New York U. (N.Y.)||2009||In 2009, New York University reported to the New York County District Attorney’s Office that an administrator in the chemistry department of the Faculty of Arts and Science stole approximately $400,000 through a fraudulent business expense scheme that the administrator carried out over the course of five years ending in 2009. The theft was uncovered by the university’s internal auditors. The employee was arrested on felony charges of grand larceny and falsifying business records and subsequently pled guilty. After discovering the fraudulent scheme, the university placed into effect new internal financial controls designed to prevent future thefts.|
|St. John’s U. (N.Y.)
|2010||In 2010, St. John’s University contacted the Queens County District Attorney after an internal university investigation found indications of fraudulent activity by a university employee. As a result of that referral, the District Attorney’s office initiated a criminal investigation that culminated in an indictment of the former employee for alleged embezzlement, falsified credit card statements for non-work related items, and the diversion of funds that were intended to be donated to the University by a foreign charitable foundation. The falsified business expenses amounted to approximately $1 million over the period 2003-2009, and the amount diverted from the foreign charitable foundation as $250,000. It was internal audit procedures that led to an initial discovery of fraud concerns. Thereafter, the university undertook a comprehensive review of all policies and procedures in areas impacted by the loss to any weaknesses in internal controls. The university has implemented certain enhancements to internal controls that are designed to further mitigate the risk of future fraud.|
|Texas A&M Foundation (Tex.)||2009||The foundation became aware of a diversion of its assets during the tax year. One of its investment managers, at their discretion, used foundation funds to purchase units in a portfolio of investments organized as a business trust. The trust, in turn, made an investment with an entity which placed the funds in what was later characterized as a “Ponzi scheme.” This resulted in a loss of $4.2 million to the foundation. On March 17, 2009, the IRS released Revenue Ruling 2009-09 and Revenue Procedure 2009-20 dealing with the tax treatment of so-called Ponzi scheme losses. Since notification of the loss, the foundation has terminated its relationship with the investment manager and is seeking remedies available under the law.|
|Touro College (N.Y.)||2010||A former construction manager for Touro College pled guilty to wire fraud for diverting Touro College assets. The perpetrator, with the aid of an unscrupulous contractor, utilized a scheme to defraud Touro College. Touro College aided in the investigation of the matter.|
|U. of Pittsburgh (Pa.)
|2009||Various legal proceedings involving, among other things, allegations of securities fraud and diversion of the university’s assets have been initiated against one of the university’s investment advisers, Westridge Capital Management, Inc. and its related entities (“Westridge”). In connection with these proceedings, restraining orders have been granted, assets of Westridge and other named defendants have been frozen, and a receiver has been appointed and is currently overseeing the affairs of Westridge. Based upon management’s assessment of the receiver’s preliminary findings, the fair value as of June 30, 2009 of the university’s investment in Westridge is reported on the consolidated balance sheet at $34.9 million. This reflects an impairment write-down of 50% from the last recorded fair value. At this time, there is insufficient information to confirm the timing or amount of the university’s ultimate recovery relative to this investment.|
|Vassar College (N.Y.)||2011||In March of 2011, the College discovered that a former employee had submitted fraudulent invoices for construction services totaling approximately $2.5 million over a period of years. The discovery was immediately reported to the Trustee Audit Committee and to local authorities, leading to an independent private investigation and criminal investigation by local law enforcement. In January of 2012, the former employee pled guilty to first degree larceny and received sentencing. In February of 2012, the College received a $2.0 million payment from its insurance claim, which will be reported in the 2011-12 Form 990. Additional recoveries are anticipated.|
|Wesleyan U. (Conn.)||2010||In October 2009, the university was made aware of a potential diversion of assets involving an employee. We view this misconduct as an employment matter and are seeking restitution based in part on salary paid for the number of years the person was employed. While employed by the university, and in violation of his employment agreement with the university and university policy, the employee engaged in non-approved outside investment activities for a number of years. An exact amount is not ascertained at this time, since it is in active litigation, but is expected to exceed $250,000. In 2007, the university implemented more robust conflict of interest and whistleblower policies, which were vital to the discovery of this diversion. As a result, the university continues to enhance employee education regarding these policies. One example of enhancement involves the utilization of technology. Employees are now required to agree to these policies every year prior to signing into university systems.|
|Western Governors U. (Utah)||2011||In February 2011, the organization discovered that the former controller of the organization had embezzled a total of $526,781 by writing fraudulent checks during September and October of 2010. The organization has since recovered all but $10,577 of the stolen funds. Internal investigations and inquiries found no evidence that would indicate any knowledge, collusion or participation in this theft by any other employee(s) of the organization. The organization formally prosecuted the individual and has taken steps to improve their internal controls and accounting procedures to help prevent fraud in the future.|
|Yeshiva U. (N.Y.)
|2009||In December 2008, Bernard Madoff, a former university trustee and treasurer, was charged with criminal securities fraud by the attorney for the Southern District of New York, and the Securities and Exchange Commission (the SEC) charged Bernard Madoff and his investment firm, Bernard Madoff Investment Securities LLC (Madoff), with securities fraud, and violations of federal securities laws. Madoff pleaded guilty, was sentenced, and is now imprisoned. In addition, a federal judge in New York froze assets, and appointed a trustee (the SIPA trustee) for the liquidation of assets pursuant to the Securities Investor Protection Act. Furthermore, although an SEC consent order against Bernard Madoff was entered into on February 9, 2009, it is not possible to determine the recoverability of any funds. Bernard Madoff resigned from all university positions. On December 12, 2008, the university received a communication from its then chairman of its investment committee, Ezra Merkin, a general partner of Ascot Partners (Ascot), an investment partnership in which the university was a limited partner. That communication indicated that substantially all of the Ascot assets had been invested with Madoff. In addition, the communication indicated uncertainty about the recoverability, if any, of the Ascot assets invested with Madoff. Mr. Merkin resigned from the university Board of Trustees and investment committee. Also in December 2008, the university was informed by SMC Alternative Strategies Fund (SMC ASF), a fund of funds in which the university was a limited partner, that such fund of funds had exposure to Madoff through sub funds. Under certain circumstances, the SIPA trustee may be able to recover amounts from investors who received direct or indirect distributions from Madoff. Based upon currently available information, management cannot yet determine whether any amounts previously received by the university from Ascot might be recoverable by the SIPA trustee. The fair value of the investment in Ascot of the university, its related entities, and its unconsolidated affiliated organizations as of June 30, 2008 as reported by Ascot amounted to approximately $105,102,000 of which the university share (through the consolidated investment pool—reduced for consolidating entities) was approximately $94,287,000. The university’s exposure to Madoff through SMC was approximately $1,003,000 as of June 30, 2008. The university wrote off its Madoff related investments (i.e. those in Ascot and SMC ASF) totaling $95,290,000 as of June 30, 2008. As a result of the events described above, the university engaged a law firm to assist management in reviewing and addressing the then-current policies and procedures relating to corporate governance and oversight. As a result of such review the university enhanced its conflict of interest policy. Under the enhanced conflict of interest policy, members of the university Board of Trustees may not be engaged in business with the university. A conflict waiver committee has been established to review and approve any exceptions to the above if such committee determines such exception to be in the university’s best interests. All members of the university Board of Trustees and all other members of the university investment committee are prohibited from managing money from the university’s consolidated investment pool—there will be no exceptions to this policy. The university is in the process of divesting all current investments that are managed by members of the university Board of Trustees and investment committee. The university has also put into effect enhanced conflict of disclosure requirements and improved systems (including a university-wide conflicts database) for monitoring ongoing compliance. In addition, the university hired a chief investment officer to oversee the university’s investments, and reconstituted the membership of its investment committee.|
|Sources: The Washington Post and GuideStar.org|