Audit reveals pattern of financial mismanagement at SWNI
The city of Portland plans to tighten its rules for providing grant funding, following an audit that points to financial mismanagement and a lack of transparency and oversight within Southwest Neighborhoods Inc.
The nonprofit district coalition is one of seven publicly funded coalitions in Portland. It oversees 17 Southwest Portland neighborhood associations, managing assets for many of them.
The forensic audit was initiated in September by the Portland City Council after reports of suspected suspicious financial activity and lack of best practices.
The audit, performed by Marsh-Minick, P.C., concluded that while there hasn't been any illegal activity or fraud at Southwest Neighborhoods Inc. since 2010, roughly 7% of the $3.17 million in taxpayer funds the coalition has received since 2010 have been mismanaged or misspent.
The audit focused heavily on how Southwest Neighborhoods, Inc. (SWNI) handled and recovered from the embezzlement of $130,000 in funds by a former employee, over the span of seven years from 2003 to 2010. The employee was able to write personal checks to herself, use SWNI funds to pay off personal credit card debt and steal cash donations from the organization over the seven-year timespan. The employee was eventually reported to police by SWNI's executive director in 2010 when SWNI paychecks bounced and the employee resigned abruptly, admitting financial wrongdoing. That employee was later convicted of 11 counts of felony theft.
Perhaps one of the most damning revelations to come from the audit was that SWNI's executive director, Sylvia Bogert, knew about the embezzlement for years prior to reporting it to police. At one point in 2005, auditors noted, Bogert took out a personal line of credit to cover more than $19,000 in debt on an unauthorized SWNI credit card. Bogert told police at the time that when she found out about the credit card debt, she felt obligated to fix the issue because she was tasked with overseeing the organization.
Bogert still serves as SWNI's executive director.
Auditors noted the delay in reporting of the theft "allowed the former employee who was convicted of theft additional opportunity to embezzle, and there was no accountability for the Executive Director who had converted SWNI debt to personal debt."
Bogert declined to respond directly to questions about the incident from nearly a decade ago, instead deferring to a prepared memo to board members denouncing the audit's findings.
Marianne Fitzgerald was on the SWNI board at the time. She said contrary to auditors' portrayal of the events, the board did know about the credit card, as did Bogert, but they assumed the debt was related to legitimate expenses.
"We needed a credit card for periodic expenses, but people were not digging into the statements at that time," Fitzgerald recalled. "It was a mistake. People make mistakes. There were two other people going through the books and they didn't see any issues. The board had a lot of faith in Sylvia and we accepted her explanation and moved on."
Fitzgerald said the woman who committed the fraud was in charge of day-to-day operations.
Following the embezzlement, the former employee was ordered to pay back nearly $170,000 in stolen funds and expenses to SWNI, but to date, only about $35,000 has been paid back.
Problems lingered following embezzlement
With a SWNI bank account closed and a new one opened following the embezzlement, auditors found insurance claim checks were never tracked properly on financial records. Additional discrepancies were noted, resulting in restricted account balances being lower, and at other times much higher, than what was reported to SWNI's board members.
"There was evidence SWNI had mismanaged financials, unmitigated risks, and dysfunctional internal controls which resulted in SWNI being vulnerable to losses," the Marsh-Minick report notes. "There were occurrences of misapplication and unallocated money. SWNI's leadership demonstrated being willfully blind to noncompliance with governance documents, standards and ethics."
Years later, in 2016-17, financial records were still inflated or misrepresented.
For example, SWNI had created what some board members referred to as a "slush fund" with the local Post Office, making a hefty pre-payment at the end of the fiscal year and carrying over a more than $31,000 balance, despite spending nowhere near that on fees and costs for delivering the organization's monthly neighborhood newspaper. The reason? Some told the audit team's investigators that the end-of-year spending was to use up any leftover Civic Life funds in order to maximize the grant funding it received, because unspent funds would likely be reduced from future grant agreements.
The odd postage account was never raised as a red flag, likely because SWNI had not undergone any kind of thorough financial review, beyond IRS audits, for much of the timeframe following the felony theft incident.
The following year, in 2017-18, a line item of $4,000 for professional fees was included in budget documents, which included $2,500 for a financial review that was never performed. Documentation showed the full $4,000 as being spent, despite the discrepancy.
The report concluded SWNI's record keeping, combined with its "dysfunctional and ineffective financial controls" were made worse due to a lack of transparency and absence of real oversight by its board members.
"The root cause of the financial mismanagement was the lack of accountability for financial duties, outdated financial policies and procedure, non-adherence with written policies, providing incomplete and inadequate records for all Board members, a lack of transparency, unperformed financial statement audits and reviews, and irreconcilable difference among board members," the auditors stated.
They cited breaks with SWNI's own whistleblower retaliation policies, noting 12 different board members who expressed fear of retaliation and either declined to be interviewed or did so despite being pressured by others not to talk to auditors.
"Retaliation and pressure that was documented and observed by the forensic auditors included threats of personal lawsuits and removal of Board members that were deemed as detractors by others," the Marsh-Minick report states.
Fitzgerald, who has served on the board off and on since 2008, contends that there wasn't enough oversight in place prior to the embezzlement, but said the board trusted things were being handled by capable staff.
"We were really focused on serving the community," she said, noting there was a greater emphasis on community activities and less focus on day-to-day management. "It's really easy for nonprofits to focus on their mission and not focus enough on their controls, but we learned our lesson."
Auditors also dialed in on SWNI's application and receipt of a $66,300 Payroll Protection Program loan from the federal government back in May. The PPP loan program was created to help businesses avoid layoffs and closure during the pandemic, by subsidizing some of their costs with a forgivable loan.
As previously reported by the Connection in June, some neighborhood association members critiqued the organization's application for the small business loan, noting SWNI's city grant funding for the upcoming fiscal year was not jeopardized by the pandemic. SWNI's leadership said the nonprofit organization did in fact, face the threat of reduced funding from the city due to COVID-19.
The $66,300 created a surplus of funds for SWNI. In response, the board opted to use some of its unspent grant money from the Office of Community and Civic Life—the city bureau that funds SWNI and other district coalitions with annual contracts—to create a $25,000 mini grant program called the Community Engagement Allocation Program, shortly after the loan was received. Under the CEAP, neighborhood associations could apply for up to $1,000 in funds to use toward worthy engagement endeavors, programs or expenses related to COVID-19, like Zoom accounts.
Communication sent to board members indicated the CEAP program was a partnership between Civic Life and SWNI, when in fact, Civic Life later indicated it had no involvement and didn't approve of SWNI repurposing its city contract funds for non-payroll purposes like CEAP.
The PPP loan handling was one of several examples found by auditors of SWNI's board not being given adequate information to perform functional oversight of the organization.
"It was problematic that there was evidence the special PPP committee had not regularly met," the audit report states. "This was evidence that SWNI had mismanaged the oversight of the PPP money, and that decision making regarding CEAP, engagement with Civic Life regarding handling of expenses, and the PTO payouts were not adequately disclosed to Board members."
The audit comes as SWNI is actively fundraising and receiving donations from the public to backfill a massive budget gap after not receiving city grant funds in July. By November, more than $9,000 in donations had been logged by SWNI.
SWNI disputes audit
During a board meeting Wednesday, Nov. 18, representatives from each of the 17 neighborhood associations under SWNI were given a chance to comment on the audit. Most declined, saying they were still digesting the 124-page report. Some discredited Marsh-Minick's credentials, while others refuted the firm's findings.
"It makes sweeping and overreaching statements without first articulating reasonable facts that would support that," Hillsdale Neighborhood Association President Tatiana Lifshitz said Wednesday.
Board President Leslie Hammond was quick to point out what the audit didn't find.
"If you really read that report carefully, you'll find that they do not find any facts or find any evidence that there's been any fraud, abuse or waste since 2011," Hammond said. "That gives us a clean bill of health in my mind, in terms of how we've handled our finances. There are a lot of allegations but no facts."
Katie Daly of Arnold Creek Neighborhood Association wasn't as quick to dismiss the audit.
"Attacking an expert is never really a good plan," Daly said. "Getting them to explain this report in detail might be more productive. The inference that a 2014 IRS audit is anywhere near a forensic audit is (inaccurate.) It seems they were not so much indicating fraud, but a failure to apply policies consistently."
In a memo to board members issued Tuesday, board officers said they disagreed with the conclusions in the audit and pointed to no instances of financial malfeasance since the 2010 embezzlement. They noted many of the practices put in place were done so with oversight from the city.
"It was our hope that the Office of Civic Life's audit would be fair and focus on the financial management system that SWNI has put in place following the fraud conviction of a former employee in 2010-2011," the memo states. "Unfortunately, this does not appear to be the case. Marsh-Minick's audit asserts a pattern of financial mismanagement. It fails to recognize that there has been no financial wrongdoing since 2011 and does not acknowledge SWNI's work to improve and strengthen its financial management system after the financial fraud. This improvement process was conducted with the oversight by the city's Office of Neighborhood Involvement (ONI)."
SWNI's board officers allege the Marsh-Minick audit made "unsupported findings of financial mismanagement during the past decade."
"We dispute these findings and will respond to the misinformation contained in the report," the memo states. "Our preliminary review of Marsh-Minick's report indicates it contains ungrounded allegations about SWNI's financial management system, including assertions of misspending and claims about misused funds. Particularly troubling is the absence of documented information that indicated no issues with financial mismanagement, including ten years of financial reports submitted to ONI/Civic Life staff and a 2014 IRS audit of SWNI, which had no findings of mismanagement."
Following financial document review, and interviews with current staff and board members, auditors described "a culture problem" within SWNI that went unresolved.
Inklings of such were brought to the forefront earlier this year.
Employees at Civic Life became alarmed back in April of this year when they found out some of SWNI's own board members were denied records by SWNI staff and leadership relating to financial documents and other fiscal and policy-related matters. Civic Life staff warned Portland city commissioners that even when the bureau—which provides the bulk of SWNI's funding—intervened to seek those same records, staff was met with indignation and asked to pay $31,885 in fees to produce the records.
Civic Life staff alerted the Portland City Council of its souring relationship with SWNI, noting multiple "issues of concern" during a July council meeting.
As a result, the Council declined to renew SWNI's $297,414 contract in July, opting instead for the forensic audit. In response, SWNI's board voted to hire an attorney to help them respond to the city's requests for information.
While the audit was underway, two members of Southwest Portland neighborhood associations filed suit against SWNI over its refusal to provide records earlier this spring. That lawsuit, which seeks declaration that SWNI is indeed, at least a quasi-public body subject to the rules of public records and meetings laws, is ongoing.
Audit leads to tighter safeguards from city
Many of the issues auditors found within SWNI are pervasive among district coalitions and the neighborhood involvement system in Portland.
A 2016 city audit noted "a lack of accountability for how community engagement funds are spent and an outdated City Code and funding model."
The audit noted a lack of oversight that prevented the city from intervening if financial problems were found.
Since then, Civic Life has implemented more rigorous oversight measures and reporting requirements, while updating its contract terms with district coalitions.
But even with those in place, organizations like SWNI are still prone to errors.
Suk Rhee, director of Civic Life, found pause in the audit's mention that SWNI lacks "critical financial controls," resulting in "a 97% error rate for the month-end financial checklist used by the Finance Committee Treasurer and Executive Officers."
"What's important to underscore is that SWNI board members, community members and Civic Life noted a pattern of potential financial misconduct and lack of transparency within SWNI," Rhee said. "Civic Life has a fiduciary responsibility to safeguard taxpayer dollars and City Council determined that an independent forensic audit was necessary."
Rhee noted that in light of the SWNI forensic audit, the bureau will now require independent financial review for any organization receiving $300,000 or more in city funding.
It's unclear when the Portland City Council will reconsider SWNI's contract, following the completion of the audit.
"We want Southwest neighborhoods to know that Civic Life will continue to support the SW neighborhood associations while Council offices arrive at their decision," Rhee noted on behalf of Civic Life. "While the outcome of the audit results are unfortunate, what is important to highlight is that a fair and due process was provided. The results show that Civic Life team took the necessary and appropriate steps to uphold our role as fiduciary stewards for the community, neighborhood associations, and the coalition offices. Moving forward, Civic Life will begin implementing even more best practices to ensure that district coalition offices and grant recipients are successful."
This story has been updated with additional reporting since it first published.
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