Ethics: Changes in Estimate Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation’s annual audit engagement. Frost has….
Creating & Running a Nonprofit
Please read the following scenario and answer the questions embedded within it. The questions are all in bold. It asks you questions about your organization(a make up charitable nonprofit organization).
A few suggestions/comments
· Assume the reader does not know anything about nonprofits. Be sure to define every term and concept you use.
· If the question asks you to decide something that has more than one possible solution, point out the other solution(s) and explain why yours is the best.
· Don’t forget to draw a conclusion. (Students sometimes point out the alternatives but don’t actually answer the question).
· DON’T FORGET TO ANSWER ALL THE QUESTIONS!!!
It is 2028. You are the embattled founder, CEO (Chief Executive Officer), and Chair of the Board of _____________________, [either the organization you started with or the one you did the pitch for] a tax exempt § 501(c)(3) organization. You are pleased with the organization’s success over 10 years, but now you need to step back and decide what to do, as a variety of problems have popped up. ___________________ seems to be having issues with its finances, its funders, its board, its clients, and its staff. In fact, there are so many problems that you are beginning to wonder if you are part of the problem.
__________________ has kept the same mission statement and board of directors for the entire 10 years, although there have been two new directors in the past year: Snidely Whiplash and Jiminy Cricket. The staff has not been as stable. Currently, the staff includes you (wearing a dual hat—one as CEO, which is a staff position, and one as Chair of the Board); Sonal Shai, the Chief Operating Officer; Javier Gomez, the Chief Financial Officer; Diane Barstow the Director of Development (Fundraising); and Sarah Smith, the Administrative Assistant.
FINDING FUNDS FOR THE ORGANIZATION (90 points)
Your organization’s finances have been quite stable over the last 5 or so years. Diane Barstow raises $100,000 from the Sloane Foundation every year, and the annual fund raises another $250,000 from individuals. This year Ms. Barstow has identified a potential donor, Michael Megabucks, who says he will donate $1 million if ___________ names the building it owns after him. Michael is a local real estate tycoon, who has a dubious reputation in the community and has announced he is running for city council.
Diane Barstow is also very creative, and she has begun raising money for the organization by selling cotton candy right outside the front door of the building. This has grown into quite a business, and last year, the candy venture had gross revenues of $200,000 and expenses of $50,000. Most of those expenses were for equipment, ingredients for the cotton candy (sugar and food coloring, and labor, but $10,000 was spent asking the city council to pass a bill that exempt nonprofits from the minimum wage law. Diane was very happy to see that the $150,000 in net income went back into the organization and helped further the mission.
· Will you recommend that the board accept the $1 million gift from Michael Megabucks? Why or why not? (10 points)
· If you accept the donation from Mr. Megabucks, will he be able to deduct his gift? Why or why not? (10 points)
· Why do we not discuss whether his gift is exempt? In other words, what is the difference between a tax exemption and a tax deduction? (10 points)
· What public relations issues does this fact situation create for your organization? (10 points)
· Might there be an issue concerning your nonprofit’s duty to pay taxes or its tax exemption if you accept the donation? If so, why? If not, why not? (10 points)
· Might there be an issue concerning your nonprofit’s duty to pay taxes or its tax exemption with its cotton candy business? If so, why? If not, why not? (20 points)
· What should the board do with regard to the cotton candy sales? Why do you make this recommendation? (10 points)
· If your organization refuses the Megabucks gift, loses the Sloane grant, and/or shuts down the cotton candy business, its finances will suffer. How will you cut expenses or increase revenues (or both) in order to be able to maintain services for your clients? What are the pros and cons of this decision and why is this the best option? (10 pts)
SNIDELY WHIPLASH, SARAH SMITH, AND JIMINY CRICKET (60 points)
You decided that keeping the same board for 10 years was a good idea because it ensured continuity, allowed everyone to have the same idea of what would be good for the nonprofit, and created a feeling of trust among the board members. In fact, the board meetings have turned into regular parties. The meeting part lasts about 10 minutes and then you move on to the fun part—the wine and cheese. The mistake, in your opinion, was to add the new board members, Snidely Whiplash and Jiminy Cricket. They have caused real problems.
It turns out Snidely and Sarah have been having an affair. As far as you know, it is consensual (and you really don’t want to look into a sexual harassment issue because you don’t need any more problems). The bigger issue is that Sarah has been doctoring expense reports as they come across her desk, and she and Snidely have been pocketing the extra money. So far, they have amassed $100,000 that does not belong to them, each pocketing $50,000.
Jiminy Cricket figured this out. He brought it up at your last board meeting. You asked Snidely if the accusations were true, and Snidely denied them. The board decided to take Snidely at his word so that they could move to the wine and cheese part of the meeting. Jiminy then contacted the IRS, the state Attorney General, and the local newspaper. Yesterday you woke up to the headline, _______________ a Mess, Founder to Blame. The Board called an emergency meeting and decided to fire Sarah, Snidely, and Jiminy. The vote was almost unanimous. Jiminy voted against firing himself, and Snidely voted against firing either him or Sarah.
You can no longer ignore this mess. First you need to look at everyone’s actions to determine what went wrong. Then you need to decide what to do next.
· After considering the role that the board of directors is supposed to take and examining the organization’s bylaws, were the firings of Sarah, Snidley, and Jiminy legitimate actions for this board? Why or why not? (10 points)
· Have you violated any of your fiduciary duties? If so, which one(s) and why do you come to this conclusion? (Be sure to explain what these duties are). (10 points)
· If you are honest, have you used the values-based leadership skills we studied? Why or why not? (10 points)
· Has anyone else violated any fiduciary duties? If so, what are they and why? If not, why do you think the others did carry out these duties? And if some did and some did not carry out their duties, please explain who they were and why you come to this conclusion. (10 points)
· Were there any excess benefit transactions? Please go through the analysis we learned in the reading and in class to determine if one (or more) excess benefit transactions existed. If there was one (or more), what should the penalty be? (10 points)
· Was/were the excess benefit transaction(s) serious enough to warrant a loss of §501(c)(3) tax exemption? Please explain how you came to your conclusion. (10 pts)
PubPAdmin 497, Creating & Operating a Nonprofit
Take Home Exam 2018