Every fall, before the American Cancer Society's annual casino fund-raiser in New York City, a curious thing used to happen: An armored car pulled up outside the Hotel Pierre in Manhattan.
Charities don't need armored cars to remove proceeds from fund-raising events because donors routinely contribute in advance, by check, so they'll have a record to substantiate their income-tax deduction.
And besides, the armored car wasn't there to take money away after the event. It came to deliver cash.
The American Cancer Society says it never questioned Miriam Gruber, chief fund-raiser for its Bernice Leavitt-Joseph Toonkel branch--by far the largest of 13 New York City branches--about this unusual practice, which began nearly two decades ago.
Then, one day last fall, a new fund-raising employee blew the whistle.
The new employee charged that Gruber and a select group of volunteers gathered in a Hotel Pierre suite before the fund-raising event to stuff cash into envelopes. Then major donors dropped by, getting cash kickbacks of up to 90% of the donations they had made earlier by check.
U.S. Atty. Rudolph W. Giuliani of Manhattan called the case "the most substantial tax-fraud scheme involving a charity ever criminally charged."
A federal grand jury indicted Gruber and eight wealthy Manhattan businessmen, charging $4 million in fraudulent income-tax deductions. The indictments covered only the largest donors and only the last six years.
Seven of the eight indicted donors earlier this year pleaded guilty to felony tax evasion and the eighth has announced his intention to enter such a plea, federal prosecutor Shirah Nieman said.
Gruber, who apparently did not pocket any of the money, pleaded not guilty. Her trial is scheduled to begin April 1.
The American Cancer Society, which brought the matter to Giuliani's attention, was not indicted.
That a branch of the nation's largest health charity could be the focus of a massive criminaL tax fraud over a period of nearly 20 years illustrates the state of financial accounting and cash controls at many of the nation's estimated 325,000 charitable organizations.
Over the years, countless scandals involving charity finances have been exposed by government officials and news organizations. Often the scandals involve little-known organizations with modest revenues whose principals diverted contributions to themselves.
But as the nonprofit sector of the American economy has grown into a $200 billion-per-year enterprise employing one of every 18 workers, the issue of charity financial and accounting practices has taken on growing importance.
A Call for Standards
"There is a need for a single comprehensive set of accounting standards for private nonprofit organizations," said Richard Larkin, a Price Waterhouse senior manager who is one of the accounting firm's top experts on charity finances.
"Publicly held corporations," Larkin noted, "are required by the Securities and Exchange Commission to have an audit by a CPA (certified public accountant) and it must be publicly disclosed, but in the nonprofit sector there is no similar overriding requirement that CPAs be involved in any way, except in certain states. California is not one of them."
Charity regulators in many states told The Times that they view most charities' financial reporting with skepticism, including reports filed by some of the largest and best-known charities.
"Everything we do begins with the assumption that what the charities report to us is true, correct and complete," observed Larry W. Campbell, California Registrar of Charitable Trusts. "But when you get into the subject, you learn they are not reliable reports. . . .
'A Lot of Games'
"There is a serious problem with those charitable organizations that have such skill that they manipulate the figures to the point that they are unreliable . . . and it results from general accounting rules that are designed to fit a variety of situations, but also permit a lot of games to be played in how costs are allocated."
Outright frauds can be prosecuted in every state. The problem occurs in putting into law "the fine line between fraud and exorbitant administrative costs," said Elizabeth Weiner, who recently surveyed state charity fraud laws for the National Committee for Responsive Philanthropy in Washington. "The problem is writing an enforceable law that handles both situations, and the various attorneys general are pretty much stymied."
Both major national charity watchdog groups--the National Charities Information Bureau in New York City and the Philanthropic Advisory Service of the Council of Better Business Bureaus in Arlington, Va.--say they are concerned over the reliability of charity financial statements.
These experts emphasize that fraud is only one aspect of a many-sided problem involving the reliability of cHarity financial accounting.
Financial reports that understate fund-raising and administrative expenses, thus inflating the share of proceeds spent on services, are a major problem, charity regulators say.
Another much-criticized practice involves local United Ways, including the Los Angeles area United Way, and other federated fund-raising organizations making grants to themselves, counting the grant money as services and reducing reported administrative expenses. Some foundations also obscure their operating costs by making grants to themselves.
Some charities, trying to cast themselves as desperate for donations, deliberately overstate liabilities and understate net worth in their financial reports.
Many charities segregate reserves of cash from their operating budget to understate their financial health, apparently in hopes of getting more money from a sympathetic the public.
One of the most controversial practices among some charities that rely on direct-mail solicitations for donations is to identify part of the cost of these appeals as services to the public rather than as a fund-raising expense. This is done by arguing that the brochures and flyers about the organization that are stuffed into the fund-raising envelope are "public education" and thus not fund raising.
The National Assn. of State Charity Officials is pressing for uniform financial reporting standards for tax-exempt organizations to alleviate these problems. The organization is composed of state attorneys general and secretaries of state, who are the principal source of charity regulation in America.
As part of this drive, the Financial Accounting Standards Board, a tax-exempt organization whose decisions are accepted by the federal government as the equivalent of law, just completed a four-year project to define nonprofit accounting terms. Ron Bossio, the project manager, said he will soon propose a project to begin developing financial accounting standards for nonprofits.
But years will pass before comprehensive standards are issued, Bossio indicated.
Meanwhile, charity regulators say the existence of four different books of standards from the American Institute of Certified Public Accountants, a separate book for United Way agencies and a sixth tome known as the "black book," plus many specialized guides for various types of charities, makes it difficult to identify the bad apples in the charity barrel.
Picking and Choosing
"Because there are several different sets of standards, even an honest charity can decide to use whichever set of reporting standards serves its interests," said Robert O. Bothwell, executive director of the National Committee for Responsive Philanthropy.
"Improper and incorrect reports are probably the major problem we have," said Campbell, whose office keeps files on 46,000 tax-exempt organizations operating in California. Charities with more than $25,000 income or assets must file a state tax return each year; smaller ones every 10 years.
"We reject about 20% of the reports filed with us," Campbell said, adding: "We should reject more, but because of limited staff we only reject the worst--where they don't even fill out important sections of the report like the balance sheet or the revenue section.
"The report preparers lack the skill or interest to fill out the reports properly. They are often volunteers in the organization who are weak in accounting skills and don't understand the basics in accounting and bookkeeping.
"Then you have those reports that, just looking at the numbers, appear to be complete but when you look at them in detail you find the balance sheet doesn't balance," Campbell said.
Enforcement in L.A.
Robert Burns, general manager of the city Social Services Department, which regulates charities in Los Angeles, said he believes the city provides tough enforcement of charities because of its broad auditing powers. But, Burns said, he shares concerns about the lack of standards in nonprofit accounting practices.
"I would look anybody in the eye--a board member of a charity or a corporate head--and say read my lips: You are responsible for the flow of money through this system and the accurate and timely reporting of those monies."
Burns said he wants to see more programs to train trustees of charitable organizations about their fiduciary obligations.
The Clearinghouse for Volunteer Accounting Services in Los Angeles holds workshops on nonprofit accounting. It also maintains a bank of accountants who want to do volunteer work with nonprofits, although these volunteers do not do audits, according to Steve Nett, the executive director.
The Clearinghouse, which was formed at the behest of the state Board of Accountancy and is partially funded by it to encourage pro bono services by accountants, expects to assist 500 nonprofit organizations statewide in its current fiscal year.