1. What are generally accepted accounting principles (GAAP) ? Has the Financial Report in Exhibit 3 been prepared in accordance with GAAP? 2. Consider Exhibits 2 and 3. Do you find any errors, ambiguities, or questionable line items? 3. Does the Financial Report include a full set of financial statements? Explain to Cheron and Harold why it is important to have a full set of financial statements. 4. Suppose Cheron and Harold have read the compilation report presented in Exhibit 4. They feel reassured that the report is signed by a regional CPA firm based in New Orleans. Are you reassured by the compilation report? 5. As indicated above, many parishioners in New Orleans were angry because they thought that parishes were being closed and sold, not because the parishes were not viable, but simply because sale of the property would bring much-needed cash. Is there any way to tell if their claim is valid? 6. How important are the news media in clearly presenting the financial picture of the Archdiocese of New Orleans? 7. Suppose Archbishop Aymond asks you if an audit would have prevented Father Smullen from inappropriately spending parish funds. Do you have any suggestions or questions for Archbishop Aymond regarding Father Smullen or financial disclosure in general? 8. Take on the role of the archdiocesan administration or of the parishioners. What are the conflicting goals of the stakeholders in this case? How would you change the communication of financial information to reduce the conflicts in this situation? 9. Exhibit 2 provided a condensed statement of activities and a condensed statement of financial position for 2008?2009. These were taken from the filings required as part of the bond sale in 2007. Calculate the following ratios: current ratio, asset turnover, debt to equity, leverage, profit margin, return on assets, and return on equity. What are you able to infer from these ratios? ( 3 or 4 pages min)

ISSUES IN ACCOUNTING EDUCATION Vol. 27, No. 3 2012 pp. 819-836 American Accounting Association DOI: 10.2308/iace-50079 A Perfect Storm: A Case in Nonprot Financial Reporting Jack M. Ruhl and Ola M. Smith ABSTRACT: This case provides an opportunity to examine numerous issues related to financial reporting for nonprofits, including the usefulness of generally accepted accounting principles, the level of assurance provided by an audit, the importance of each of the three basic financial statements and notes, and the financial reporting requirements for nonprofits. We specifically highlight the function of the media in financial disclosure for nonprofits. Students are able to see firsthand the type of financial reporting that may result if GAAP is not followed and there is no audit. Moreover, students have the opportunity to learn how incomplete financial reporting affects the relationship between stakeholders and administrators in a nonprofit environment. The case centers around actual events that occurred in the Roman Catholic Archdiocese of New Orleans from 2001 to 2009, and therefore provides a realistic learning environment. Finally, the case provides students the opportunity to engage in role-playing as financial managers and stakeholders. Keywords: not-for-prot; nonprot nancial reporting; church nancial reporting; GAAP. INTRODUCTION T his case is about the Roman Catholic Archdiocese of New Orleans' nancial reporting environment and how it affects Cheron Brown, 50, and her husband Harold Brown, 58. By environment, we refer to all the means by which Catholics and the general public receive information about the nancial circumstances of the archdiocese. These include ''Financial Reports'' published in the diocesan newspaper and on the diocesan website, compiled as well as audited nancial statements and supplementary reports, and audited nancial statements posted at the Electronic Municipal Market Access (EMMA). Not least of all, the reporting environment includes the news media. The Catholic Church in the United States comprises 194 dioceses led by bishops. Dioceses are administrative divisions of the Catholic Church that each cover a geographical area comprised of parishes (Lytton 2008). An important diocese is called an archdiocese (usually due to size, historical signicance, or both) and is governed by an archbishop. As of January 2009, there are 32 Catholic archdioceses in the United States (USCCB 2009). In this teaching case the term diocese Jack M. Ruhl is a Professor and Ola M. Smith is an Associate Professor, both at Western Michigan University. The authors are grateful to freelance writer Jason Berry, who alerted us to the $70 million bond sale and the litigation Roman Catholic Church of the Archdiocese of New Orleans vs. Sun Capital and Equitas Capital. Published Online: August 2012 819 Ruhl and Smith 820 refers to both dioceses and archdioceses. Two parishioners are continuously involved in this case. They are Harold Brown, a staff photographer at nearby Loyola University, and his wife Cheron, a political consultant. Both are well-educated cradle Catholics and have been parishioners at the local Catholic parish, Our Lady of Good Counsel, for decades. For many years they have donated a signicant portion of their income to support the parish, and they have been leading the nancial and moral ght to preserve it. CASE The Archdiocese of New Orleans The Roman Catholic Archdiocese of New Orleans was founded in 1793. In 1941, it was incorporated as a nonprot corporation under the laws of the State of Louisiana. The Catholic population there peaked in 1970 with over 500 priests stafng 153 parishes and serving 655,000 Catholics. By 2008, there were less than 300 priests stafng 108 parishes and serving a total estimated Catholic population of 385,000 (Hughes 2008). This decline was accompanied by more specic and traumatic events. Harold Brown, a distinguished-looking man with streaks of gray in his hair, had been thin all his life. Few would guess that he was a cancer survivor undergoing chemotherapy treatments. Life was good and full of purpose. As dedicated members of Our Lady of Good Counsel parish, he and his wife Cheron were thrilled to be in attendance on May 2, 2001, when a major celebration took place. All eyes in New Orleans' St. Louis Cathedral were focused on the ve-foot, six-inch-tall Archbishop Alfred Hughes as he walked down the main aisle to be invested as the spiritual leader of the Archdiocese of New Orleans. The jubilation Harold and Cheron found on this sunny spring day would be brief. Slightly more than six months later, Hughes and his brother bishops faced what sociologist and bestselling author Andrew Greeley termed, ''The greatest scandal in the history of religion in America'' (Berry 2000). The Abuse Crisis In January 2002 The Boston Globe published a series of stories relating allegations that Boston priests had sexually abused minors and vulnerable adults over the past decades. Thereafter, individuals from different parts of the United States began to come forward with claims of abuse by priests, and many dioceses were hit with legal claims. As a result of the public outcry about clergy sexual abuse, the United States Conference of Catholic Bishops (USCCB) commissioned the John Jay College of Criminal Justice to survey U.S. dioceses about allegations of clergy sexual abuse (USCCB 2004). The Archdiocese of New Orleans supplied the John Jay researchers with data indicating that between 1950 and 2002, there had been many allegations of clergy sexual abuse of minors against New Orleans' priests. Harold and Cheron Brown, along with other parishioners, were devastated when they learned of the allegations. As of the end of 2003, the archdiocese reported to the John Jay researchers that total cost associated with abuse in New Orleans was over $2 million for settlements, therapy, and legal fees (USCCB 2004). Harold and Cheron did not know how much, if any, of this amount was incurred as a result of abuse at Good Counsel. Scandal Scandal touched Good Counsel itself in 2002 in the person of Father Martin Smullen. Questions arose about Father Martin's use of parish nancial resources. Harold was present when the parish secretary approached a member of Good Counsel's lay counsel to report several problems. There had been a $1,500 increase in monthly expenses for owers for the rectory, food and liquor for parties, as well as for new furniture and other items not approved by the counsel. Issues in Accounting Education Volume 27, No. 3, 2012 A Perfect Storm: A Case in Nonprot Financial Reporting 821 Father Smullen had installed a second Internet line to access pornography and had charged this line to the parish. Upon learning this, Archbishop Hughes transferred Father Smullen to a counseling facility, then to another parish (Berry 2008). Parishioners and the media questioned Good Counsel's administration about the unauthorized expenditures. Father Smullen replied, ''No comment,'' when asked by telephone whether he had made restitution and how much money was involved (Berry 2008, 4). When asked if Father Smullen had made restitution, archdiocesan spokesperson Sarah Comiskey replied, ''Father Smullen told me he made complete restitution to Good Counsel'' (Berry 2008, 4). Many of the parishioners did not want to raise further questions about the incident. Good Counsel parishioner Barbara Fortier said, ''With all the abuse cases in the national media, we did not want to cause a scandal. It felt, somehow, as if we were part of a cover-up'' (Berry 2008, 8). Harold and Cheron, along with other Good Counsel parishioners, had wondered if their church building would have been saved if funds had not been misspent by Father Smullen and if the archdiocese did not have to pay legal costs plus costs of therapy and settlements to abuse survivors. Perhaps if the bishop and his priests had been better managers, Father Smullen would not have been able to make unauthorized expenditures. If the abuse-related costs that had been incurred were openly reported in prior years, public outcry could have curtailed the abuse, and much suffering and cost could have been avoided. Good Giving Because of the abuse crisis and scandals, Harold and Cheron were worried about the nancial condition of their parish. In the past year they had contributed over $10,000 to Good Counsel. This level of giving was not unusual for them. In some years, the Browns gave as much as one-third of their income. After all, there was tithing (contributing 10 percent of gross income) as well as special collections such as Peter's Pence, the annual collection for the Holy Father. Additionally, the Browns had dedicated considerable time to the parish by volunteering to work on committees and events. While they hoped their contributions and hard work would help, they could not determine the nancial status of Good Counsel parish. The archdiocese had not distributed nancial statements since 2004. The statements that were distributed back then were unaudited statements for the entire diocese, with no detail provided at the parish level. Harold and Cheron could not make much sense out of the nancial information that they had been provided. How much of their money had been wasted and had not been used to support the parish properly? Katrina Hits A little more than a year after the release of the John Jay study results, Hurricane Katrina barreled through New Orleans. On August 29, 2005, the center of Hurricane Katrina passed east of the city and by August 31, 80 percent of the city was ooded. Ninety percent of the residents of southeast Louisiana were evacuated, and the ofcial death toll was nearly 2,000. Katrina was the costliest hurricane in U.S. history, with an estimated $75 billion in damages (Brinkley 2006). When Hurricane Katrina devastated New Orleans, Archbishop Alfred Hughes was highly respected and was considered by many to be a kind and truly caring individual. Hughes empathized with those who had lost so much in Katrina's wake. An introverted and humble man nearing 76 years of age, he personally heard the confessions of state troopers and aid workers who brought relief to the devastated city. Harold and Cheron had believed in Hughes and felt that their parish would be preserved. Archbishop Hughes authored a ''Post-Katrina Financial Report,'' which was published in the July 26, 2008, edition of the Clarion Herald, the archdiocesan newspaper. He had stated ''On April 9 [2008], I pledged to provide the public with complete disclosure of the Archdiocese of New Issues in Accounting Education Volume 27, No. 3, 2012 822 Ruhl and Smith Orleans' post-Katrina nances'' (Hughes 2008, 1). Hughes wrote, ''The archdiocese experienced nearly $300 million in property loss to archdiocesan-owned properties. Almost all of its 1,200 buildings had received some level of ood or wind damage or both'' (Hughes 2008, 1). The Browns were relieved that Good Counsel had sustained only minor damage. The Pastoral Plan after Katrina In addition to assisting the public that had been affected by Katrina, there was a need to rebuild the archdiocese itself. Bishop Hughes's Post-Katrina Financial Report explained how this was to be funded. While the total loss to archdiocesan-owned properties was nearly $300 million, funds available for recovery from insurance proceeds, donations, and FEMA (Federal Emergency Management Agency) totaled less than $200 million. The major reason for the shortfall in insurance coverage was that while the archdiocese was 100 percent covered for wind, re, theft, and other losses not related to ooding, there was only $30 million available in ood insurance (Hughes 2008). Hughes had only recently cancelled the ood insurance on all archdiocesan property except for the administrative buildings where his ofce was located. The Browns had been astonished to learn that archdiocese properties had been so drastically underinsured. In the aftermath of Katrina, many citizens of New Orleans left town, never to return. The archdiocese estimated that there were 491,000 Catholics prior to the storm and 385,000 after the storm. In April 2008, Archbishop Hughes announced a Pastoral Plan that called for many parishes to be closed; some would be merged with neighboring parishes, while others would be used for ministry centers or missions. According to Hughes, the parish mergers were needed because the Catholic populations in certain parishes had declined to a point where there were no longer enough Catholics to support a parish. Hughes also cited the problem of a priest shortage (Berry 2008). Good Counsel would be closed. Good Counsel parishioners were very upset with the news of its closing. They did not accept the explanation provided by the archdiocese. Instead, they believed that Good Counsel was solvent and that the archbishop wanted to close it to nance repairs elsewhere. Archdiocesan spokeswoman Sarah Comiskey assured them that was not the case. Rather, she said, the proceeds from parish closures would follow parishioners to their new parishes (Nolan 2008). Yet many of the parishioners of Good Counsel, including the Browns, remained unconvinced, believing that nancially healthy parishes (such as Good Counsel) were being closed and sold to shore up archdiocesan nances. The Pastoral Plan called for Good Counsel and another parish to consolidate under a third parish. Larry Schmidt, a parish leader at Good Counsel, said that Bishop Hughes clearly told him and ve others that if they met the archdiocese's benchmarks, the church building would not be closed. Schmidt says, ''We exceeded those benchmarks. We are healthier nancially than we've ever been'' (Berry 2008). Unfortunately, without nancial data, the Brown's were unable to verify Schmidt's claim. Jeffrey Entwisle, chief operating ofcer for the archdiocese, explained why no nancial data had been reported to parishioners or the general public between 2004 and the Post-Katrina Financial Report, saying that the archdiocesan nancial staff had been overwhelmed by the urgency of disaster management. He added, ''Energy and resources were being spent elsewhere'' (Nolan 2008, 1). The Bond Sale Unbeknownst to the parishioners of the archdiocese, on March 16, 2007, the archdiocese sold $70 million in revenue bonds through the Louisiana Public Facilities Authority. The proceeds of the bonds were to be used to refund already outstanding bonds, and to nance construction and repair of archdiocesan facilities (LPFA 2007). In order to sell the bonds, the archdiocese had to prepare an Ofcial Statement or bond prospectus, which included a full set of nancial statements, including Issues in Accounting Education Volume 27, No. 3, 2012 A Perfect Storm: A Case in Nonprot Financial Reporting 823 notes. The archdiocese never made these audited nancials generally available to the public. They were posted online at the Electronic Municipal Market Access website. The prospectus included nancial statements and notes for the scal year 2006. A part of the prospectus, which was not part of the nancial statements or notes, indicated that the total exposure due to sexual abuse settlements was over $10 million. The prospectus disclosure is presented in Exhibit 1. On November 16, 2009, the archdiocese released audited nancial statements online (at EMMA) for the scal years ending June 30, 2009 and 2008 (the 2008 report is no longer available; the 2011 report is available at: http://emma.msrb.org/ER546778-ER423594-ER825735.pdf ). These statements were required as part of the continuing disclosure requirements associated with the issuance of the bonds (Roman Catholic Church of the Archdiocese of New Orleans 2009). Harold and Cheron were unaware of the information available on EMMA. Exhibit 2 provides a condensed statement of nancial position and a condensed statement of activities for 2008-2009. The Recession of 2008-2009 While the bond sale provided much-needed cash for the archdiocese, the nancial problems for the laity and hierarchy were far from over. As the calendar year 2007 came to a close, the Recession of 2008 was just beginning. Economic activity slowed, resulting in lost jobs for those who had barely been able to survive nancially. These individuals turned to organizations such as the New Orleans Archdiocesan Catholic Foundation, which had provided support for the region's less fortunate for years. Unfortunately, one effect of this economic downturn was a steep drop in charitable giving. The Archdiocesan Catholic Foundation had for many years served the poor and needy of New Orleans. As evidenced by the published nancial information, the archdiocese was EXHIBIT 1 Litigation and Contingencies Disclosed in Bond Prospectus Dated July 1, 2007 Litigation and Contingencies The Corporation has certain pending and threatened litigation and claims; however, management believes the probable resolution of such contingencies will not exceed the established reserves or insurance coverage and will not materially affect its nancial position. The Corporation is currently a defendant in connection with several personal misconduct cases. Management believes that appropriate precautions and loss reserves are in place with respect to these cases. There have never been any adverse judgments against the Corporation in personal misconduct cases. The Corporation cannot predict the outcome of any such litigation or claims or accurately estimate the nancial impact upon the Corporation of any such litigation or claims. Data Pertaining to Material Personal Misconduct Cases \u000f Number of Cases: 26 \u000f 16 of the 26 cases relate to the ''Norco'' mattera \u000f Total Exposure: $10,085,000b \u000f $9,600,000 of the total exposure relate to the ''Norco'' cases \u000f Total Reserve: $2,435,000 \u000f $1,950,000 of the total reserve relate to the ''Norco'' cases \u000f All reserved amounts are pursuant to legal counsels' recommendations. a b These cases relate to allegations of personal misconduct by a lay grammar school coach at a hunting club (not owned or operated by the Corporation) located in Norco, Louisiana. The total exposure was included in the accrued liability for self-insured claims on the 2006-2007 Statement of Financial Position. Issues in Accounting Education Volume 27, No. 3, 2012 Ruhl and Smith 824 EXHIBIT 2 Roman Catholic Church of the Archdiocese of New Orleans Administrative Offices Panel A: Statements of Financial Position from EMMA June 30, 2009 and 2008 (continued on next page) affected by the Great Recession of 2008. Looking at the Catholic Foundation Financial Summary presented in Exhibit 3, Panel C, contributions and grants fell from $14.8 million in 2007 to $4.8 million in 2008. Investment income was about $2.4 million in 2007, but there was a loss of $2.8 million in 2008. A surplus of $16 million in 2007 was followed by a loss of $640,000 in 2008. Archbishop Hughes did the best he could with the resources available. Harold and Cheron Brown were aware of these nancial struggles, and they along with other parishioners increased their contributions to assure the parish's solvency. Issues in Accounting Education Volume 27, No. 3, 2012 A Perfect Storm: A Case in Nonprot Financial Reporting 825 EXHIBIT 2 (continued) Panel B: Statement of Activities from EMMA for the Years Ended June 30, 2009 and 2008 A Gothic Horror Story It was just before dawn on Tuesday, January 6, 2009, and Harold Brown was glad he had dressed warmly. The sun would soon appear over New Orleans. Harold and several others occupied the chilly rear pews of Our Lady of Good Counsel Roman Catholic Church, located on the edge of New Orleans' fashionable Garden District. They were part of a larger group of protestors who had kept a 24/7 vigil inside the soaring Gothic structure since the previous October, when Archbishop Alfred Hughes ordered the closure of the beautiful building. After what he intended to be the last Issues in Accounting Education Volume 27, No. 3, 2012 Ruhl and Smith 826 EXHIBIT 3 Excerpts from the Archdiocese of New Orleans Published Financial Information Panel A: Operating Budgets for 2007 and 2008 Income 2007 2008 Assessments and recoveries Contributions and grants Rents and royalties Investment income (loss) Interest income (loss) Fees collected and other income Gain on sale of assets Change in value of split-interest agreements Total income Expense Christian formation Clergy Community services Gifts and grants Insurance Pastoral services Religious Total program services Administrative expense Financial services Interest Total supporting services Total expense $18,750,861 923,668 1,224,132 4,000,000 2,846,512 1,673,068 831,942 38,831 $30,289,014 $22,921,026 1,843,869 1,486,513 3,477,605 3,440,765 2,289,387 618,990 107 $36,078,262 $2,116,379 3,709,971 109,168 239,212 15,746,001 974,744 81,536 22,977,011 2,032,375 6,338,973 5,125,157 13,496,505 36,473,516 $2,362,201 6,654,197 127,287 168,571 9,854,196 800,129 93,034 20,059,615 1,969,919 6,172,697 7,366,308 15,508,924 35,568,539 Income (loss) from operations $(6,184,502) $509,723 Administrative: The central administration ofces' operating budgets for 2007 and 2008 are included in these administrative gures. These budget gures reect mostly the day-to-day income and expenses of operating the central ofces, mostly located at the chancery on Walmsley and on Howard avenues. The numbers show a signicant decit in 2007, but gains in 2008 enabled the archdiocese to end that year with a small surplus. Panel B: Summary of Parish Financial Information for 2007 and 2008 Church Income Ordinary income Extraordinary income Diocesan collections Extra diocesan collections Total church income Church Expense Personnel costs Other church and rectory expense School nancial support Diocesan assessments Diocesan collection payments Extra diocesan collection payments Adjusted 2007 Adjusted 2008 $45,418,777 29,586,174 254,688 2,361,796 77,621,435 $48,232,043 27,592,917 274,717 2,583,376 78,683,053 (20,284,582) (22,749,714) (5,436,591) (7,594,479) (15,864) (2,235,439) (21,712,786) (24,398,275) (6,294,651) (8,193,551) (637) (2,530,737) (continued on next page) Issues in Accounting Education Volume 27, No. 3, 2012 A Perfect Storm: A Case in Nonprot Financial Reporting 827 EXHIBIT 3 (continued) Church Income Total church expense Surplus (decit) in church operations School Operations School income School expenses Other Sources of Cash Loans and/or withdrawals from savings Insurance proceeds and sales of property Total other sources of cash Other Uses of Cash Capital expenditures Payments on debt Deposits to savings Deposits to endowment fund Deposits to Bicentennial Endowment Fund Total other uses of cash Total increase (decrease) in cash Cash at beginning of year Net increase (decrease) in cash Cash transferred from (to) other accounts Cash at end of year for all parishes and parochial schools Adjusted 2007 Adjusted 2008 (58,316,669) 19,304,766 (63,130,637) 15,552,416 93,334,924 (91,328,878) 96,035,464 (95,538,766) 39,275,482 23,788,263 63,063,745 36,398,885 17,345,108 53,743,993 (46,750,866) (7,096,066) (26,670,031) (1,658,705) (90,048) (82,265,716) 2,108,841 18,357,701 2,108,841 (2,264) $20,464,278 (38,714,921) (8,408,669) (23,339,511) (1,306,997) (11,875) (71,781,973) (1,988,866) 20,464,278 (1,988,866) 54,512 $18,529,924 Panel C: Catholic Foundation Financial Summary for 2007 and 2008 Income Trustee fee income Contributions and grants Investment income (loss) Interest income (loss) Insurance premium reimbursement Change in value of split-interest agreements Change in value of gift annuities Change in value of life insurance policies Total income Expense Gifts and grants Total program services Administrative expense Total supporting services Payments to charitable organizations Total other expense Total expense Surplus (decit) in operations 2007 2008 $41,591 14,822,042 2,394,156 775,604 2,813 869,794 139,273 36,297 19,081,570 $211,912 4,783,647 (2,764,463) 1,017,867 365 (502,062) 94,770 (4,918) 2,837,118 267,805 267,805 42,297 42,297 2,631,929 2,631,929 2,942,031 $16,139,539 320,546 320,546 92,132 92,132 3,064,994 3,064,994 3,477,672 $(640,554) Catholic Foundation: The mission of the Catholic Foundation is to nancially sustain and enhance the charitable, educational, and spiritual ministries of the Archdiocese of New Orleans to help them bring about the reign of God. This exhibit contains excerpts from the Post-Katrina Financial Report on the Archdiocese of New Orleans. The report was authored by Archbishop Hughes and was published in the July 26, 2008, edition of the Clarion Herald, the archdiocesan newspaper. Issues in Accounting Education Volume 27, No. 3, 2012 828 Ruhl and Smith Mass that October, Hughes ordered an archdiocesan employee to make sure that the building was empty and then lock all doors. The employee failed to notice Harold's wife Cheron enveloped in the darkness next to the huge old pipe organ. Cheron had waited until she heard the turn of the lock of the old cypress door. Then footsteps died away. She counted to 100, and then opened another door, welcoming the rst of many shifts of those carrying out a peaceful round-the-clock occupancy to protest the closing of their parish. The protestors relieved each other every three hours, so that the building was never unoccupied. They knew that if that were ever to occur, an archdiocesan employee would lock the door and the wrecking ball or investors clutching stfuls of dollars would follow. They and other Good Counsel parishioners felt it would be a tragedy to lose the majestic structure that had withstood all challenges (including Hurricane Katrina) since its construction in 1894. Moreover, with all of the nancial contributions that the Browns and other parishioners had provided, the protestors felt certain that the parish should be nancially solvent. Harold was uneasy. For a Tuesday morning in January, there seemed to be a lot of street noise. He and the other protestors listened and did not move. Although the archdiocese had endured several crises that seemed to represent the ''perfect storm,'' the protestors believed that the archbishop's decision to padlock the building was unconscionable. Deep in thought, Harold stood motionless. The decline in Catholics, abuse crisis, scandal, hurricane Katrina, and the economic recession certainly represented the perfect storm for Our Lady of Good Counsel and her loyal parishioners Harold and Cheron. In the predawn chill, Harold was suddenly disturbed from his thoughts. He and Cheron heard car doors opening and closing outside Good Counsel. Next, there was pounding on the door. It was the New Orleans Police Department. ''Open the door! Open the door!'' They did not (Nossiter 2009). The huge cypress door heaved several times, then splintered vertically and ew open. The police charged inside the church building, arresting two parishioners. Harold, who was not arrested, said: ''Breaking down the old cypress door was abominable, anti-Christian, anti-justice, anti-peace. It's a drastic over-reaction. We weren't trying to hurt anybody. We were just trying to maintain a Christian community'' (Nossiter 2009, A17). As New Orleans police were leading their suspects out of the old gothic structure to the waiting police vehicle, no one was thinking about archdiocesan nances. Few outside the archdiocesan inner circle would have guessed that later that same month the archdiocese would invest $5 million with Founding Partners Capital Management. Investment in Founding Partners Capital Management In January 2009, the archdiocese invested $5 million with Founding Partners Capital Management Company of Naples, Florida. The archdiocese stated that Founding Partners assured it that the $5 million investment was backed by high-quality collateral. Unfortunately, this was not the case. Founding Partners allowed the collateral to get much riskier and hard to collect. By May 2009, a federal judge in Florida allowed the Securities and Exchange Commission to appoint a receiver to determine what happened to approximately $550 million that had been invested with Founding Partners (including the Archdiocese's $5 million). At this point, the archdiocesan funds were frozen. Sarah Comiskey stated ''We are not sure how long the funds will remain frozen, but this will not have any adverse effect on the archdiocese or any of its entities'' (Nolan 2009a, 1). In November 2009, the archdiocese sued its local investment advisor, Equitas Advisors, and others, alleging that Equitas accepted the $5 million in January, even though Founding Partners was already collapsing. Dave Thomas, the CEO of Equitas, responded, ''We nd it very troubling that the archdiocese has chosen to incur substantial legal fees and costs to prosecute false claims against Issues in Accounting Education Volume 27, No. 3, 2012 A Perfect Storm: A Case in Nonprot Financial Reporting 829 Equitas when the archdiocese's resources are desperately needed in many other areas, such as funding the operations of . . . Our Lady of Good Counsel'' (Nolan 2009b, 2). No one outside of the archdiocesan management team, including Harold and Cheron Brown, was aware of the investment with Founding Partners or the subsequent litigation initiated by the archdiocese until The Times-Picayune newspaper reported on the matter and the public court ling initiating the lawsuit. It was only then that Archbishop Aymond responded to media questions. Aymond told The Times-Picayune: ''As archbishop, I understand that I am accountable to the people of the Archdiocese of New Orleans and believe that it is important that we be transparent and accountable'' (Nolan 2009b, 2). Financial Impact of the Abuse Scandal In July 2009, archdiocesan spokeswoman Sarah Comiskey told the New Orleans TimesPicayune, ''For various reasons, we cannot provide a total amount paid in sex abuse claims since 2003, when the [Catholic Archdiocese of New Orleans] last made a public accounting of the costs of sexual abuse litigation'' (Nolan 2009c, 1). Harold and Cheron, along with other parishioners, were furious. It was only in late October 2009 that the archdiocese said it would pay over $5 million to settle cases of alleged clergy abuse. Sarah Comiskey stated that this settlement brought the total sex abuse settlements since 1950 to $13.6 million. Archbishop Gregory Aymond (who had succeeded Archbishop Hughes) said the settlement money would come largely from archdiocesan cash reserves accumulated ''mostly through investment income and non-parish-based real estate sales'' (Nolan 2009d, 3). Aymond said insurance would provide some coverage, but the bulk would come from the archdiocesan treasury. Harold and Cheron wondered what he meant. Aymond added that the settlement would not affect the operations of any parish or ministry in the archdiocese (Nolan 2009d). Harold and Cheron hoped that this meant that Good Counsel was in the clear. Financial Reporting of the Archdiocese of New Orleans Unlike publicly traded rms, nonprot religious organizations such as the Catholic Church are not required to release any nancial information to the public (Berry 2011). They are exempt from federal income tax and do not le income tax returns. The Internal Revenue Service guide to the benets and responsibilities for religious institutions under the federal tax system is found at http:// www.irs.gov/pub/irs-pdf/p1828.pdf. These organizations must comply with the federal tax reporting requirements as outlined in the guide. However, beyond the IRS, there are no regulatory bodies that require disclosure of the nancial activities of religious organizations. Of the 194 U.S. dioceses, only about 70 voluntarily provide audited nancial statements to the public. In some cases, dioceses may release audited nancial statements only upon written request. Some dioceses, such as Boston, Chicago, and Los Angeles, provide nancial statements, notes, and an auditor's report on their websites. Some large archdioceses (such as the Archdiocese of New York) and many other smaller dioceses release very little nancial information to the public. Given this scenario, the public looks to the news media for information. The media provide it when it relates to major events in the life of the diocese such as a monetary settlement with a survivor of clergy abuse or funds received when a parish is suppressed (canonical language for closing the parish). Other dioceses provide nancial information via inserts in diocesan newspapers. Sometimes (as in the case of the New Orleans archdiocese for 2007-2008) this information has been compiled by a CPA and is accompanied by an accountant's (not an auditor's) report. The archdiocese calls it a ''Financial Report'' (Archdiocese of New Orleans 2009). The nancial information may also be presented on the website or in a diocesan publication with no indication that a CPA was involved in its preparation. Issues in Accounting Education Volume 27, No. 3, 2012 Ruhl and Smith 830 EXHIBIT 4 Compilation Letter from Certied Public Accountants Most Reverend Alfred Hughes Archbishop of New Orleans New Orleans, Louisiana We have compiled the accompanying Summaries of Parish Financial Information, the Statements of Activities of the High Schools, Central Schools, Other Schools, Notre Dame Seminary, Senior Residences, Social Outreach, New Orleans Archdiocesan Cemeteries, Clarion Herald Publishing Co., Catholic Foundation and School Food Services, departments or agencies of the Archdiocese of New Orleans, and the Statements of Operating Income of the Administrative function for the scal years ended during 2008 and 2007, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certied Public Accountants. A compilation is limited to presenting in the form of nancial statements information that is the representation of management of the Archdiocese of New Orleans. We have not audited or reviewed the accompanying Summaries of Parish Financial Information, Statements of Activities or Statements of Operating Income and, accordingly, do not express an opinion or any other form of assurance on them. For many of the departments and agencies presented in the accompanying Statements of Activities, the information compiled by us was taken from full disclosure nancial statements that had been previously audited by us or other certied public accounting rms. The accompanying Statements of Operating Income of the Administrative function was [sic] prepared for the purpose of presenting gross income and direct operating expenses of that function and is [sic] not intended to be a complete presentation of the function's gross income and expenses. Due to space limitations in this publication, management of the Archdiocese of New Orleans has elected to omit substantially all of the disclosures required by generally accepted accounting principles. If the omitted disclosures were included with the Summaries of Parish Financial Information, the Statements of Activities and the Statements of Operating Income, they might inuence the user's conclusions about the various departments' results of operations. Accordingly, the Summaries of Parish Financial Information, the Statements of Activities and the Statements of Operating Income are not designed for those who are not informed about such matters. June 15, 2009 Ericksen, Krentel & LaPorte LLP Certied Public Accountants In January 2005, the Archdiocese of New Orleans published a Summary of Parish Financial Information in the Clarion Herald for scal year 2004, with comparative information for years 2000-2003. There was no indication that a CPA had been involved with the production of the summary. No annual report was produced from then until 2009. In June 2009, the archdiocese published a Financial Report for the years 2007-2008. It had been compiled by a local CPA rm. A portion of this report is shown in Exhibit 1, and the compilation report is presented in Exhibit 3. Case Requirements A portion of the Financial Report for the Archdiocese of New Orleans 2007-2008 is presented in Exhibits 3 and 4. Issues in Accounting Education Volume 27, No. 3, 2012 A Perfect Storm: A Case in Nonprot Financial Reporting 831 1. What are generally accepted accounting principles (GAAP) ? Has the Financial Report in Exhibit 3 been prepared in accordance with GAAP? 2. Consider Exhibits 2 and 3. Do you nd any errors, ambiguities, or questionable line items? 3. Does the Financial Report include a full set of nancial statements? Explain to Cheron and Harold why it is important to have a full set of nancial statements. 4. Suppose Cheron and Harold have read the compilation report presented in Exhibit 4. They feel reassured that the report is signed by a regional CPA rm based in New Orleans. Are you reassured by the compilation report? 5. As indicated above, many parishioners in New Orleans were angry because they thought that parishes were being closed and sold, not because the parishes were not viable, but simply because sale of the property would bring much-needed cash. Is there any way to tell if their claim is valid? 6. How important are the news media in clearly presenting the nancial picture of the Archdiocese of New Orleans? 7. Suppose Archbishop Aymond asks you if an audit would have prevented Father Smullen from inappropriately spending parish funds. Do you have any suggestions or questions for Archbishop Aymond regarding Father Smullen or nancial disclosure in general? 8. Take on the role of the archdiocesan administration or of the parishioners. What are the conicting goals of the stakeholders in this case? How would you change the communication of nancial information to reduce the conicts in this situation? 9. Exhibit 2 provided a condensed statement of activities and a condensed statement of nancial position for 2008-2009. These were taken from the lings required as part of the bond sale in 2007. Calculate the following ratios: current ratio, asset turnover, debt to equity, leverage, prot margin, return on assets, and return on equity. What are you able to infer from these ratios? Issues in Accounting Education Volume 27, No. 3, 2012