State checks 200 nonprofits

By Deborah Adamson
Advertiser Staff Writer

The state attorney general is looking into potential abuses at more than 200 nonprofit organizations, with allegations ranging from paying executives excessively high salaries to spending nearly all the money collected on fund-raising costs.

While most nonprofits are honest and have proper internal controls, the state wants to step up scrutiny so the few cases of abuse don't jeopardize the viability of a sector that depends on the public's trust. Hawai'i has 5,000 public charities and private foundations that collectively handle $11 billion in assets.

People who start, work for or volunteer in nonprofits, especially smaller organizations, tend not to have a background in business but join out of a belief in a cause, said Cynthia Winegar, who heads the nonprofit group at law firm Watanabe Ing Kawashima & Komeiji. As such, they may pay less attention to organization and bookkeeping than for-profit companies.

"The vast majority of nonprofits are well-run, are honest and trustworthy organizations," said Kelvin Taketa, president and chief executive of The Hawai'i Community Foundation. The heightened scrutiny is not a "crisis, it's an opportunity."

The attorney general's examination includes the following cases:

• A nonprofit whose mission is to help the disabled paid a professional fund-raiser 99 percent of donations collected.

• A preschool and kindergarten paid two family members, who are officers or directors of the nonprofit, a salary of nearly $300,000.

• A nonprofit, whose treasurer is a certified public accountant, paid the treasurer's CPA firm $16,000 a year for accounting services and did not disclose the arrangement on a financial statement filed with regulators.

• A nonprofit rented a condominium and paid for "significant" travel expenses for its president. Since its existence, the nonprofit has never made any charitable grants or distributions.

The stepped-up scrutiny comes in the wake of a nonprofit scandal involving the theft of $40,000 by the Kane'ohe treasurer of the American Youth Soccer Organization in Hawai'i.

"Donors are demanding that charities be as accountable with their money as businesses are with their business assets," said Anne Deschene, president and chief executive of the Better Business Bureau of Hawaii.

Nationally, Congress is considering introducing legislation to boost oversight and financial reporting of nonprofits. The Independent Sector, a nonprofit membership group in Washington, D.C., has convened a panel for this purpose. The panel presented an interim report to the Senate Finance Committee in March and will submit a second report in late spring.

Regulators are examining nonprofits more closely after seeing an increase in tax-exempt groups and a string of corporate scandals in recent years, said Winegar.

According to the Internal Revenue Service, there are 1.8 million tax-exempt entities nationwide, up 20 percent from 2000. Their total assets came to $3.7 trillion, with revenues of $1.2 trillion.

Federal and Hawai'i laws require private foundations to spend only 5 percent of assets annually, and they can include "reasonable" administrative expenses, said Hugh Jones, deputy attorney general. There are no such distribution requirements for charities.

"There's really not a lot of oversight in this field," said Vanessa Shinmoto, a spokeswoman for American Institute of Philanthropy. "To be reasonable, they should spend at least 60 percent of their budget on program services."

In testimony on April 5 before the Senate Finance Committee, IRS Commissioner Mark Everson said: "We can see that abuse is increasingly present in our sector and we must work to address it. We will act vigorously, for to do otherwise is to risk the loss of the faith and support that the public has always given to the charitable community."

In a way, donors hold nonprofits to a higher standard of integrity than for-profit corporations, Winegar said.

"They make you more accountable because you had the public's trust," she said. "They need more tightening of internal controls and they need to have their corporate by-laws looked at.

"It's not like you're in a social club now," said Winegar. "You're in a corporation and there are corporate requirements."

The relative lack of business training among nonprofit employees means some abuses go undetected. Arrangements that present conflicts of interest don't "jump out at them in the same way as in the corporate world, where corporate compliance people will tell you it's a conflict," Winegar added.

Directors are supposed to be gatekeepers of a nonprofit's mission and honesty. But one problem is that many skip meetings.

"It is a persistent problem in nonprofits," Winegar said. Directors who agree to join the board should not see the job "as a lark."

Staff often find it difficult to confront the errant director, she said, since these typically are volunteer positions.

Nonprofits may be forced to deal with these inefficient practices amid stepped-up oversight.

Under the state attorney general's new powers, the department can dissolve a nonprofit in cases including fraud, abuse or if assets have been wasted or misused. Private foundations must give the attorney general a copy of their annual financial statements.

Any instance of self-dealing — where a volunteer, employee or director of the nonprofit uses

the organization for his or her own profit — will be investigated. The attorney general also can go to court to remove directors or officers who breach their duties.

Starting July 1, professional solicitors and fund-raisers must register with the attorney general's office, pay a $250 annual registration fee and file a $25,000 bond. These are people used by the nonprofit to raise money; they get a percentage of the donations.

Some professional fund-raisers get as much as 90 percent of donations, Jones said.

Nationally, the Senate Finance Committee is considering recommendations that include:

• Signing of financial statements by the CEO, chief financial officer, trustee or highest ranking officer at the nonprofit certifying the accuracy of the report under penalty of perjury

• Imposing penalties on errant preparers of the Form 990 annual reports

• Auditing charities or having their financial statements reviewed by an independent public accountant and setting up policies to encourage "whistleblowers" to come forward without fear of retaliation.

Bill Shiroma, a Kalihi resident who has given to 15 charities, welcomes the heightened scrutiny of the nonprofits as long as regulators don't make it overly difficult or expensive to comply with new rules.

So far, recent scandals haven't affected Shiroma's giving. He said that in all organizations, there's bound to be good and bad people.

He said nonprofits, like businesses, face one common problem when it comes to workers: "You can't watch them all the time."

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.