Full of Hope Center Operations

Esther, chair of the Full of Hope Center Committee, and the Committees secretary, Ruth, talked almost daily about the operations of the Full of Hope Center. At least the children seem happy and well cared for, Esther reminded Ruth. Yes, Ruth agreed, but if we cannot pay the bills and keep our help, we will not be open long to serve them. Pastor Michael thinks everything will work out, but I am not so sure.

Background

The Full of Hope Center (Center) opened several years earlier when the church allowed a member to provide childcare 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 childcare 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 Full of Hope Center established a satisfied clientele, three years ago (at the beginning of 2018) the Centers founder decided to cease childcare operations for personal reasons. The Center met a community need for childcare, and Pastor Michael, the pastor of the church, was convinced that the church should keep the Full of Hope Center open as an outreach ministry. Some administrative board members were concerned about taking on the financial responsibility for the childcare 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.

Pastor Michael strongly asserted that the childcare facility would be financially self-supporting, even though he had no data to support his claim. Swayed by Pastor Michaels position, the administrative board reluctantly agreed to integrate the Full of Hope Center into church activities with the stipulation that childcare 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 Full of Hope Center activities. The first Full of Hope Center Committee (Committee) included four church members with Pastor Michael as an ex officio member, none of whom had childcare management experience.

The Committee hired Miriam, a mother of four children, as the director of the Full of Hope Center, even though she had no previous employment experience as a teacher, childcare provider, or manager.

Recent Operations

Presently, the Full of Hope 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 $500 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 Full of Hope Centerthe salaried director, one full-time employee, and one part-time employee.

The Full of Hope Center Committee

In the past, the Full of Hope Center Committee met once each month. At each meeting, Miriam 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, Pastor Michael always replied, This is a ministry, not a business. Asserting that there were no financial problems, Pastor Michael frequently pointed out, The Full of Hope Center fulfills a real community need. Further, he emphasized that as a church member, Miriam 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 childcare ministry but became increasingly frustrated with the limited information that did not allow them to exercise oversight.

At the beginning of the third year of operations (January 2020) under church control, all four members of the Committee indicated they would not continue on the Full of Hope Center Committee. The church administrative board appointed two new membersEsther and Ruth. Esther, a stay-at-home mother, was new in the community and cheerfully willing to help with church activities. Ruth, a recently retired elementary school teacher, had time for volunteer activities. Esther agreed to chair the Full of Hope Center Committee and Ruth agreed to be secretary. Pastor Michael continued as an ex officio member. The board sought, but did not find, additional church members willing to serve on the Committee.

The Full of Hope Crisis

Soon after Esther and Ruth became involved, the Full of Hope Center stopped paying rent and utilities to the church. Miriam 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, Esther and Ruth 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 childcare. 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.

Esther and Ruth decided to learn more about Full of Hope Center operations and activities. They interviewed parents and were pleased to find that parents were happy with the childcare program. Through interviews and observations, they found all employees did an excellent job supervising childrens activities. They discovered that Miriam was involved in every facet of operations. In addition to working directly with the children, Miriam 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.

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

To understand the cash flow problems, Esther and Ruth 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 Miriam at the Center. Although they were astounded when Miriam indicated that the Center had no financial reports or budget, Ruth suggested that they could construct financial statements from cancelled checks and bank statements.

Miriam told Esther and Ruth that the checks and bank records were at her home and she would make them available the next day. However, Miriam did not provide the bank records or checks as she promised. After repeated attempts to get the bank records, with no success, Esther and Ruth became suspicious. After a particularly tense confrontation, Miriam tearfully admitted to Esther and Ruth that she no longer had the information because she had destroyed the bank records, unaware that such information should be kept. Esther and Ruth then asked to see the check register, which Miriam promised to provide.

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

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

Certain that she would receive no additional historical financial information from Miriam, Ruth worked to reconstruct Full of Hope Center finances from the sketchy information in the check register. She soon discovered the check register showed no checks recording Miriams salary.

Ruth also decided she should gather more information about the Centers cash collection process. Ruth began visiting the Center daily to collect the cash receipts that she immediately deposited in the Full of Hope Center bank account. She thought that Miriam provided a receipt whenever a parent paid the weekly fee. Initially, Ruth noted no discrepancy between the cash that Miriam turned over to her and the receipt stubs in the receipt book.

But, within a few days, Ruth noticed the cash collected did not match the number of children she observed at the Center during the week. When Ruth asked Miriam if there was additional cash that had been collected, Miriam reached into a desk drawer and handed Ruth currency that totalled $1,000. Miriam explained that she failed to put the cash in the normal place when the parent paid. Ruth 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 Ruth, the family showed her a receipt for the payment, even though none appeared in the Centers receipt book.

Although uncomfortable about confronting Miriam, Esther and Ruth knew they needed to speak with her about the Centers cash collection procedures and her salary. Especially, they needed more details concerning the $1,000. When questioned, Miriam confessed that the Full of Hope Center had a past due Food Market grocery bill that she was paying with cash from daily receipts.

Esther and Ruth next visited the Food Market office where they learned that the Center indeed had an outstanding bill of approximately $5,000. The unpaid Full of Hope Center bill had been almost $6,500 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 Full of Hope Center failed to file a payroll tax return. Again, Esther and Ruth questioned Miriam. Upset, Miriam responded that she made all the tax deposits but did not know reports needed to be filed.

Within a few days, Miriam notified Pastor Michael that she would be leaving the Full of Hope Center in two weeks. She stated that her departure was due to the additional stress from dealing with Esther and Ruth and the Centers financial problems. Esther and Ruth were neither surprised nor disappointed by Miriams decision, but Pastor Michael tried to convince Miriam to reconsider.

During the final two weeks that Miriam was director of the Full of Hope Center, she told parents that she was starting a childcare service in her home. Parents related that Miriam said, The church has lots of money but just will not support this Center adequately. That is the reason I am leaving.

Additional Details Uncovered

After Miriam left the Center, Ruth was able to obtain some additional financial information on Miriam activities during the past three years. The records revealed that in 2018 Miriam had a modest property that she purchased for $45,000.

She had a mortgage on that same property in the amount of $40,000. Other public records indicate that Miriam also owned a property that cost $135,000 and the balance on the mortgage was $92,000 in 2019. Ruth further discover that in 2018, Miriam had a car that cost $4,500 and there was a loan taken out for that car in the amount of $2,750. Miriam also had $5,500 in savings with National Commercial Bank in 2018 and one year later, had $10,000 in savings at National Commercial Bank.

She also has a credit card with National Commercial and had paid $1,875 to the bank for credit card payments in 2019. The car she currently drives cost $23,000 and the balance of the loan on that car was $13,275 in 2019. Miriam salary in 2019 included a salary of $25,325 and extra income from doing side jobs for the church in the amount of $3,400. Her living expenses have been estimated at $16,825 in 2019.

By 2020, she had savings of $16,500 and had made credit card payments in the amount of $2,540 in that same year. She still owned the same property but the balance on the mortgage was now $73,000. She still drove the same vehicle but the loan on the vehicle was now $7,850. Miriam bought a piece of land that cost $23,000 and a jet ski for one of her kids that cost $2,500 in 2020. Her compensation for 2020 included a salary of $28,250 with extra income of $7,000. Her living expenses were estimated at $18,725.7

CASE REQUIREMENTS

1. Using the net worth method, estimate the amount of the possible embezzlement by Miriam in 2019 and 2020. (10 marks)