Crisis de jour! Our director is not cooperating. And, where is the money going? I would like to be able to act rather than react. We must keep the place open! Sarah, chair of the Sunshine Center Committee, and the Committees secretary, Olivia, talked almost daily about the operations of the Sunshine Center. At least the children seem happy and well cared for, Sarah reminded Olivia. Yes, Olivia agreed, but if we cannot pay the bills and keep our help, we will not be open long to serve them. Rev. Andrew thinks everything will work out, but I am not so sure.

Background The Sunshine Center opened several years earlier when the church allowed a member to provide child care services and pay rent to use the church facilities. The churchs administrative board reluctantly approved this arrangement, but the board specifically stated the church would provide no oversight of the child care program or financial subsidy. Board members wanted to be clear that the church had no implied oversight or liability should something go wrong at the Center.

Although the Sunshine Center established a satisfied clientele, two years ago the Centers founder decided to cease child care operations for personal reasons. The Center met a community need for child care and Rev. Andrew, the pastor of the church, was convinced that the church should keep the Sunshine Center open as an outreach ministry. Some administrative board members were concerned about taking on the financial responsibility for the child care facility when the church budget was already stretched. Others were concerned that closing the Center would cause ill will for the church in the community. Rev. Andrew strongly asserted that the child care facility would be financially self-supporting, even though he had no data to support his claim. Swayed by Rev. Andrews position, the administrative board reluctantly agreed to integrate the Sunshine Center into church activities with the stipulation that child care finances be kept completely separate from the church budget. The board expected the Center to pay rent to the church for the use of facilities and utilities.

The administrative board formed a committee composed of four church members that met periodically to monitor Sunshine Center activities. The first Sunshine Center Committee included four church members with Rev. Andrew as an ex officio member, none of whom had child care management experience. The Committee hired Barb, a mother of four children, as the director of the Sunshine Center, even though she had no previous employment experience as a teacher, child care provider or manager.

Recent Operations

Presently, the Sunshine Center facility accommodates a maximum of 20 children at one time, although more children enroll and attend part-time. Sometimes, especially during school vacations, daily attendance is less than 20. Hours are from 7:00 a.m. until 6:00 p.m. each weekday, with lunch and snacks provided for the children. The fee is $85 per week per child, with payment due at the beginning of each week. However, fee payments often trickle in during the week as the services are provided. Each day, three employees operate the Sunshine Center the salaried director, one full-time employee and one part-time employee.

The Sunshine Center Committee

In the past, the Sunshine Center Committee met once each month. At each meeting, Barb gave a brief description of monthly activities, including the theme of decorations, games, and activities, but she never presented a financial report. Whenever committee members questioned the lack of a budget and financial information, Rev. Andrew always replied, This is a ministry, not a business. Asserting that there were no financial problems, Rev. Andrew frequently pointed out, The Sunshine Center fulfills a real community need. Further, he emphasized that as a church member, Barb could be trusted. In response, committee members dropped their request for financial information. As busy people with their own careers and families, they accepted the reports about the child care ministry but became increasingly frustrated with the limited information that did not allow them to exercise oversight.

At the beginning of the second year of operations under church control, all four members of the committee indicated they would not continue on the Sunshine Center Committee. The church administrative board appointed two new membersSarah and Olivia. Sarah, a stay-athome mother, was new in the community and cheerfully willing to help with church activities. Olivia, a recently retired elementary school teacher, had time for volunteer activities. Sarah agreed to chair the Sunshine Center Committee and Olivia agreed to be secretary. Rev. Andrew continued as an ex officio member. The board sought, but did not find, additional church members willing to serve on the committee.

The Sunshine Crisis

Soon after Sarah and Olivia became involved, the Sunshine Center stopped paying rent and utilities to the church. Barb began complaining to the committee that she was barely able to meet payroll and purchase supplies or food for the childrens lunches and snacks. She told the committee that many parents were behind in paying their obligations to the center.

Sensing that a crisis was looming, Sarah and Olivia decided they must become more active in their oversight of the center to make the center viable. They were confident that financially sound operations would allow the center to meet a growing community need for child care. Further, if they could demonstrate to fellow church members and the administrative board that the center was a success, they believed others would be willing to support the center and participate on the oversight committee.

Sarah and Olivia decided to learn more about Sunshine Center operations and activities. They interviewed parents and were pleased to find that parents were happy with the child care program. Through interviews and observations, they found all employees did an excellent job supervising childrens activities. They discovered that Barb was involved in every facet of operations. In addition to working directly with the children, Barb collected the fees paid by parents, supervised the activities of the center, purchased supplies and food using charge accounts at local stores, paid all the centers bills, prepared snacks and meals for the children, and kept all records.

Sarah and Olivia quickly determined that Barbs immersion in the center was cause for concern. Barbs salary as director was slightly over minimum wage with no fringe benefits and her days were long and frustrating. It was clear to Sarah and Olivia that Barb found the work stressful. The centers cash flow problems added to the stress. Sarah and Olivia were particularly troubled by Barbs lack of previous experience in a comparable job, with no knowledge about business processes and controls.

To understand the cash flow problems, Sarah and Olivia decided they should review a financial summary of past activities along with the centers budget. Ready to accomplish that goal, the two committee members arranged to meet Barb at the center. Although they were astounded when Barb indicated that the center had no financial reports or budget, Olivia suggested that they could construct financial statements from canceled checks and bank statements. Barb told Sarah and Olivia that the checks and bank records were at her home and she would make them available the next day. However, Barb did not provide the bank records or checks as she promised. After repeated attempts to get the bank records, with no success, Sarah and Olivia became suspicious. After a particularly tense confrontation, Barb tearfully admitted to Sarah and Olivia that she no longer had the information because she had destroyed the bank records, unaware that such information should be kept. Sarah and Olivia then asked to see the check register, which Barb promised to provide.

A few days later, Sarah and Olivia examined the check register that Barb finally gave them and found a record of checks and deposits for only the previous 12 weeks. Barb had calculated no cash balances. When asked how she knew the cash balance, Barb replied that she called the bank weekly to find the account balance.

Sarah and Olivia were stunned and immediately set up a meeting with Rev. Andrew. They told him about the lack of financial records. Both women forcefully asserted that Barb should be terminated. Rev. Andrew reacted more calmly and defended Barbs behavior, emphasizing Barbs good qualities in dealing with the children and parents. Since Barb was talented in supervising the children, and the parents liked her, he thought those strengths overcame her weakness at record keeping. He suggested that Barb could be taught the business skills necessary to run the center. Though unconvinced, Sarah and Olivia chose to avoid a disagreement with Rev. Andrew and a further confrontation with Barb. They reluctantly agreed to retain Barb as director of the Sunshine Center, but they were resolute that she must run a financially viable operation.

Certain that she would receive no additional historical financial information from Barb, Olivia worked to reconstruct Sunshine Center finances from the sketchy information in the check register. She soon discovered the check register showed no checks recording Barbs salary.

Olivia also decided she should gather more information about the centers cash collection process. Olivia began visiting the center daily to collect the cash receipts that she immediately deposited in the Sunshine Center bank account. She thought that Barb provided a receipt whenever a parent paid the weekly fee. Initially, Olivia noted no discrepancy between the cash that Barb turned over to her and the receipt stubs in the receipt book. But, within a few days, Olivia noticed the cash collected did not match the number of children she observed at the center during the week. When Olivia asked Barb if there was additional cash that had been collected, Barb reached into a desk drawer and handed Olivia currency that totaled $100. Barb explained that she failed to put the cash in the normal place when the parent paid. Olivia was uncomfortable with this situation and thought it prudent to investigate further. She scanned the weekly attendance record and the receipt book. She noted no cash receipt for a family she personally knew, even though their children were listed as attending that week. When contacted by Olivia, the family showed her a receipt for the payment, even though none appeared in the centers receipt book.

Although uncomfortable about confronting Barb, Sarah and Olivia knew they needed to speak with her about the centers cash collection procedures and her salary. Especially, they needed more details concerning the $100. When questioned, Barb confessed that the Sunshine Center had a past due Food Market grocery bill that she was paying with cash from daily receipts. Sarah and Olivia next visited the Food Market office where they learned that the center indeed had an outstanding bill of approximately $1,000. The unpaid Sunshine Center bill had been almost $1,500 earlier in the year.

Within the same week, a letter from the IRS arrived at the church office. The letter included a notification that the Sunshine Center failed to file a payroll tax return. Again, Sarah and Olivia questioned Barb. Upset, Barb responded that she made all the tax deposits but did not know reports needed to be filed.

Within a few days, Barb notified Rev. Andrew that she would be leaving the Sunshine Center in two weeks. She stated that her departure was due to the additional stress from dealing with Sarah and Olivia and the centers financial problems. Sarah and Olivia were neither surprised nor disappointed by Barbs decision, but Rev. Andrew tried to convince Barb to reconsider. During the final two weeks that Barb was director of the Sunshine Center, she told parents that she was starting a child care service in her home. Parents related that Barb said, The church has lots of money but just will not support this center adequately. That is the reason I am leaving.

Performance Audit

You have been assigned as an auditor of the Sunshine Center and will be conducting a performance audit of the not-for-profit organization. You must answer the following questions based on the knowledge you obtained from reading Chapter 15, the facts presented in the case and your professional judgment.

1. Discerning the objectives of the center - What are two nonfinancial performance objectives of the center? How would you measure these nonfinancial performance objectives in your audit? What are two financial performance objectives of the center? How would you measure these financial performance objectives in your audit?

2. Assessing management controls What audit procedures (processes, techniques or methods) would you follow to gain an understanding of the centers nonfinancial controls? What audit procedures would you follow to gain an understanding of the centers financial controls?

3. Identifying shortcomings and making recommendations - What are three of the centers shortcomings? What recommendation would you suggest to correct each shortcoming and improve the centers operations?

Ethical Dilemma

The last sentence of the case states, Parents related that Barb said, The church has lots of money but just will not support this center adequately. That is the reason I am leaving. You are Rev. Andrew, the pastor of the church. Some of the parents who are also church members have come to you demanding an explanation as to why the church is not adequately supporting Sunshine Center. Their questioning has presented you with an ethical dilemma and you are not sure how to respond.

4. What are the relevant facts of the case that you would use to analyze your ethical dilemma as Rev. Andrew?

5. Who are the major parties that are affected by the dilemma and what are their interests in how the dilemma is resolved?

6. Related to your dilemma as Rev. Andrew, what are the ethical values that are in question? In the end, what explanation would you give to the parents?