Case Study

West Coats Equestrian Association

Introduction

It was May 15, 2014. The sun was shining as Doug Lawrence smiled and watched Excalibur, his favorite horse, running circles in the field outside his house. Doug loves horses, which is why he decided to volunteer as chair of the board of the West Coast Equestrian Association (WCEA). The WCEA has been around for 35 years, and Doug remembered when his dad would take him to WCEA events. As Doug thought about recent events at WCEA, his smile disappeared, and he looked very concerned. WCEA was not doing well. Membership and participation was up, but Doug had recently become aware of many internal problems at multiple levels and substantial sums of money that apparently went missing. WCEA was, in fact, very close to folding because of fraud allegations, management control, and governance issues.

Less than a month ago, Doug had received a telephone call from a staff member of WCEA that the executive director of 21 years, Marvin Pendleton, had disappeared. Doug had taken it upon himself to make some inquiries. Marvins spouse was distraught. She claimed that, when she arrived home one day, Marvin was nowhere to be found. She saw that some of his clothes were missing, along with his passport. She had reported Marvin as a missing person to the police. The police undertook an investigation and found that Marvin had boarded a flight to San Salvador on April 3, 2014, the day of his disappearance. Furthermore, the police reported that his traveling companion was Joan Walton, the auditor for WCEA.

Upon hearing this news, Doug grabbed a copy of the 2013 audited financial statements that had been approved at the last board of directors meeting. He read WCEAs statement of operations and statement of financial position (see Tables 1 and 2) and tried to verify the balance in WCEAs bank account and investments. Much to his horror, Doug found that the banks year-end account balance was only $45,354, compared with the $102,473 that was reported in the financial statements. Even worse, he could not find any reference to an investment account, and none of the current staff knew anything about any investment account. Doug obtained a copy of the bank statement for the three months since year-end and found that 17 unexplained checks of $2,000 had been written in the weeks leading up to Marvins disappearance, and the bank account had been depleted to less than $10,000.

Doug had no accounting training, but even he could see that the organization suffered from a lack of proper record keeping. WCEA only had one laptop, which held some accounting records and files, and an old desktop computer that contained other files. The only other filing system consisted of two storage rooms filled to the ceiling with boxes of materials. To make matters worse, the WCEA board of directors had never seen a budget and was only provided with financial statements on an annual basis. Moreover, no one in the organization, including board members, had any understanding of the operations or finances of the organization. Doug sighed, looked back at Excalibur, and thought to himself, I had blind trust in Marvin. I just did not think that things were this bad.

The directors met in an emergency meeting to review their liability insurance policy. The policy covers the directors for errors and omissions due to theft or fraud up to $100,000, provided that the directors were not negligent. Thus, the directors could be held culpable for any losses exceeding $100,000 and for all loses if they were found to be negligent.

History

The organization started 35 years ago as a grassroots nonprofit organization to support equestrian sports and recreation on Canadas west coast. Over the decades, the organization has developed into one with a membership base growing from 2,300 in 2012 to 2,500 in 2013, with reported annual revenues of about $750,000 per year. To facilitate this growth, WCEA has held membership fees firm at $220 per year for the past five years. Memberships are renewable annually by March 31. A membership receipt is issued to each member, as they are eligible to receive a discount in insurance premiums for horses.

Services

WCEA wants to grow and provide more services and programs to equine owners that support their interests. WCEA programs cover a wide range of equestrian activities, which include initiatives for beginners and advanced riders. Included in these services are certification and education programs. 2013 was the first year that at least one certification or education program was delivered each month of the year, and two programs were delivered in each of the summer months (June, July, and August). This surpassed the previous record of 11 program deliveries in 2012. Each participant of these programs paid a fee of $150 per session, and attendance is generally between 20 and 30 participants. Since many participants cannot claim these program fees for tax purposes, only a fraction of the participants ask for a receipt.

The organization also receives donations from bequests and from collection boxes placed in chain stores that sell sporting goods.

WCEA also sells merchandise such as t-shirts, belt buckles, coasters, and art depicting equestrian settings. These items are priced at a 50% markup from cost.

WCEA is also funded by a grant of $225,000 ($220,000 in 2012) from Western Sport Lotteries. The grant is contingent upon receiving audited financial statements.

Although the grant and some of the membership program fees and donations are received in the form of checks, many of the remaining receipts are handled in cash.

Governance

Doug had always been unclear about the role of the board. The WCEA board has always consisted of horse enthusiasts who want to promote equine activities but have little understanding of accounting or controls. Board members had always been more interested in pursuing activities such as coaching, promoting, veterinary care, and so on than they were in performing their jobs as board members.

The board has 14 members. They serve four-year staggered terms, and elections are held every year at the annual general meeting. The former executive director offered very little transparency into board activities, and, in fact, used this lack of information to control the board. The executive director developed unique rules over the years that limited the sharing of information between administration and the board. This included a rule stating that board members were not allowed to enter the executive directors office.

The former executive director was seldom questioned by the board. Since most board members were specialists in their own equine areas, they did not want to be distracted from doing what they loved most. This resulted in most board members being happy to have such a strong executive director in place because it meant they did not have to attend as many meetings or deal with all that financial stuff.

The result of this secrecy was that many board members could not comment on or answer questions regarding what the organization was doing. This impacted WCEAs members, who felt that board members were either clueless, did not care, or that the organization was hiding things.

Another issue was that board directors lacked any formal training pertaining to their roles and responsibilities. WCEA also had very few governance policies. Instead, it had a brief orientation book that only dealt with Roberts Rules of Order, which discussed concepts such as how to make a motion and vote on issues. There were almost no policies detailing the actual job responsibilities of the board.

Concerned about the lack of oversight at the board level, Doug decided to research the topic of governance. He reviewed a binder full of material that he had received in a course on governance during his university days and made some notes. The results of his research and accompanying notes are in Figure 1.

Required

Doug has now contacted you in your capacity as a professional accountant. A second emergency meeting is to be held in two days. Doug would like you to write up a discussion memo outlining:

1. An estimate of how much money might be missing.

2. What management controls could be put in place to help prevent this from happening again?

3. What changes in the governance policies should be considered by the organization? This should include a review of the fiduciary duties that a board must follow and make recommendations about how WCEA can ensure that it meets its responsibilities at this level.

Table 1: WCEA's Statement of Operations For the year ended December 31, 2013 Table2: WCEA's Statement of Financial Position As at December 31, 2013 2013 2012 2013 2012 Revenue Current Assets $465,444 Bank Memberships Grants $103,486 4,665 220,000 Accounts receivable $435,098 225,000 29,350 38,876 $102,473 5,987 12,098 Donations 26,998 Prepaid expenses Education programs 30,643 11,543 119,694 120,558 Sales 24,567 22,113 17,989 Other 16,917 Capital Assets 13,453 10,087 Investments 100,000 100,000 $766,344 $775,285 $238,547 $236,611 Expenses Salaries and benefits $360,435 $351,989 12,334 12,209 46,089 39,854 Director Insurance Education programs Advertising and promotion Office administration Current Liabilities Accounts pay Accrued liabilities Unearned membership fees $ 21,098 5,800 $ 14,543 5,300 159,366 97,654 45,342 170,564 94,544 43,094 108,775 135,673 116,361 136,204 Rent 25,987 24,098 Net Assets 102.875 100,407 6,500 Cost of sales Audit fees Meeting costs Amortization 6,000 4,339 5,643 $238,547 $236,611 4,097 3,976 Other 554 476 $763,876 $751,268 $ 2,468 $ 24,017 Excess (Deficiency) Table 1: WCEA's Statement of Operations For the year ended December 31, 2013 Table2: WCEA's Statement of Financial Position As at December 31, 2013 2013 2012 2013 2012 Revenue Current Assets $465,444 Bank Memberships Grants $103,486 4,665 220,000 Accounts receivable $435,098 225,000 29,350 38,876 $102,473 5,987 12,098 Donations 26,998 Prepaid expenses Education programs 30,643 11,543 119,694 120,558 Sales 24,567 22,113 17,989 Other 16,917 Capital Assets 13,453 10,087 Investments 100,000 100,000 $766,344 $775,285 $238,547 $236,611 Expenses Salaries and benefits $360,435 $351,989 12,334 12,209 46,089 39,854 Director Insurance Education programs Advertising and promotion Office administration Current Liabilities Accounts pay Accrued liabilities Unearned membership fees $ 21,098 5,800 $ 14,543 5,300 159,366 97,654 45,342 170,564 94,544 43,094 108,775 135,673 116,361 136,204 Rent 25,987 24,098 Net Assets 102.875 100,407 6,500 Cost of sales Audit fees Meeting costs Amortization 6,000 4,339 5,643 $238,547 $236,611 4,097 3,976 Other 554 476 $763,876 $751,268 $ 2,468 $ 24,017 Excess (Deficiency)