Georgetown Law’s annual nonprofit governance conference was held virtually earlier this week – 2021 Nonprofit Board Governance: Identifying Issues, Assessing Effectiveness, Managing for Organizational Success. The opening session was presented by James G. Sheehan, Chief of the New York Attorney General’s Charities Bureau, and Anne Wallestad, CEO of Board Source. This post will highlight part of Sheehan’s presentation on a regulator’s perspective. We’ll highlight learnings from Wallestad’s presentation on a future post.

Sheehan cited Why Bad Things Happen to Good Organizations: The Link Between Governance and Asset Diversions in Public Charities by Erica Harris, Christine Petrovits & Michelle H. Yetman published in the Journal of Business Ethics in 2017. The abstract for the publication provides:

In the United States, the IRS now requires charities to publicly disclose any significant asset diversion, which is the theft or unauthorized use of assets, that the charity identifies during the year. We use this new disclosure to investigate whether strong governance reduces the likelihood of a charitable asset diversion. Specifically, for a sample of 1528 charities from 2008 to 2012, we simultaneously examine eleven measures of governance that capture four broad governance constructs: board monitoring, independence of key individuals, tone at the top, and capital provider oversight. We find consistent evidence that good governance across all four constructs is negatively associated with the probability of an asset diversion. Of the eleven governance measures, our results indicate that monitoring by debt holders and government grantors, audits, and keeping managerial duties in-house are most strongly associated with lower incidence of fraud. Our results also indicate that the likelihood of a fraud is negatively associated with a board review of the Form 990, the existence of a conflict of interest policy, and the presence of restricted donations. In addition, we document that the likelihood of an asset diversion is negatively associated with program efficiency and positively associated with growth and organizational complexity.

Sheehan also revealed how regulators learn there may be a problem:

• complaints
• media inquiries and reports
• whistleblowers
• law enforcement inquiries
• elected official inquiries
• filings reviews
• data
• transactions reveiews

He then shared how regulators follow up such information prior to an investigation with reviews of:

• Forms 990
• Charity’s website
• State filings and registrations
• Google searches for news and complaints
• Google Scholar searches for reported cases
• Watchdog/ratings/information sites (like Candid, Charity Navigator)

With respect to the Form 990, charity regulators may focus on the following:

• Who signed and who didn’t sign the filing
• Key personnel, board members, contractors, and their relationships and independence
• Loans to officers
• Failure to pay withholding taxes
• Diversions and embezzlements (which must be reported)
• Dates signed up against the deadline
• Admissions by entities and individuals
• Potential interview and subpoena targets (e.g., professional advisors, banks, vendors)
• Schedule J – Compensation Information
• Schedule L – Transactions with Interested Persons
• Schedule O – Supplemental Information (particularly with respect to (1) the regular and consistent monitoring and enforcement of the charity’s conflict of interest policy and (2) the governing body’s process of reviewing the 990)

Sheehan closed by looking at several cases of governance failures, including Hacienda Health Care, University of Maryland Medical System, Memorial Sloan Kettering, and the National Rifle Association (NRA).