Joan Tanner needs answers. She has been on the board of directors for Choice House for three years. She was originally attracted to the nonprofit’s mission of providing women an alternative to prison. Although the program receives funds from regional foundations, special grants, and individuals, the majority of its funding is from the State Prison System. The System funds a total of $1 million annually but does not cover the budget for the entire program statewide. With concerns for potential state budget cuts, Choice House needs to find other funding opportunities and minimize expenses while maintaining a quality program. Joan is on the finance committee and is questioning some of the expenses and lack of revenue for the year. She asks Controller Ashley Parsons, CMA® (Certified Management Accountant), to investigate several items and provide a summary of her findings. Knowing that Joan is well connected with several regional foundations and influential in the central part of the state, Ashley must respond quickly and accurately to her request. Ashley’s major challenge is providing honest answers without jeopardizing her job or future funding for Choice House.

THE CHOICE HOUSE PROGRAM

If a judge agrees, a woman—Choice House’s client—charged with a nonviolent crime may serve her sentence at Choice House along with her young children. This keeps families together and strengthens their bond during a turbulent time. A client is required to complete courses in personal, parenting, and financial skills, in addition to chores in the house and caring for her children. School-age children are placed in local schools, and childcare is provided when needed. Each client must obtain a job and save $1,750 before graduating from the program. A client can even complete her high school diploma or take college classes at a local college. The program takes 12 to 18 months to complete. The overall goal of the program is to help mothers make better choices for themselves and their families now and in the future. Although the program has a 95% success rate in keeping clients out of prison, it is expensive to operate. There are three houses located in the northern, central, and southern parts of the state. Choice House board members are from cities in which the houses are located. Each house can accommodate up to 12 clients and their children. Because it is difficult for volunteer board members to oversee the program operations, each house has a full-time program director and several case managers, depending on the number of clients in the house. There are also fulltime employees at Choice House, including an executive director, an administrative assistant, a controller, and a publicity/grant writer. Beth Martin, the executive director, works out of her home because she would have to travel across the state. The other employees work at the central house location and are supervised by Beth, who visits each location periodically. Beth reports only to the board of directors at quarterly meetings or for specially called meetings.

THE CHOICE HOUSE QUESTIONS

The finance committee of the board of directors met last week to review the current year’s revenues and expenses. The committee asked Ashley to attend its meeting and explain individual revenue and expense items. Questions arose about the lack of revenue from sources other than the System. When Joan joined the board three years ago, the System funds represented about 80% of Choice House’s revenue, and the remaining 20% were non-System funds. In the ensuing three years, non-System funds have declined approximately 80%. Beth, who was hired two years ago, had earned a reputation for raising large amounts of cash at nonprofit organizations at which she used to work. Ashley was asked if there were any grants awarded that had not yet been received. Ashley was not aware of any but suggested that she could confirm this with Devon, the grant writer, or Beth. Generally, the committee was pleased with efficiency of the houses. Expenses for food, utilities, and personal items for the clients appeared reasonable and close to the annual budget. There was only one house expense item that seemed unusually high: rental equipment. This expense line for all the houses was $11,000 over budget. Ashley explained that two houses signed a new copier lease at the beginning of the year. Joan asked Ashley why such expensive copiers were needed, who approved the leases, and how long the leases were. The committee wants answer to the following questions:

1. Were Beth’s salary and benefits in line with executive directors with other nonprofits similar to Choice House?

2. Why was the office supplies line $7,500 over budget? Who was using the supplies and for what projects?

3. Were the travel and entertainment expenses properly documented? Why were these expenses $6,250 over budget? Who was incurring these expenses?

4. What is the current and new funding sources?

5. Why such expensive copiers were needed, who approved the leases, and how long the leases were? As the chair of the finance committee chair, Joan asked Ashley to provide a summary of her findings to these questions and offer recommendations in a week. Joan suggested writing a memo and sending it as an e-mail attachment to her to share with the other committee members.

ASHLEY’S FINDINGS

Beth sent a summary of grant proposals to Ashley the day after the finance committee’s meeting. Her summary showed five grants that she believed should be recorded as receivables on the financial statements. Since it was the end of the year, Ashley thought this was an opportune time to ask Devon about the grants and not alert him to any concerns of the finance committee. Ashley also planned to ask about his frequent use of office supplies. As for outstanding grants, Devon explained that he submitted five grants in the fourth quarter of the year. Two of the five were at the recommendation of the board and were very promising. Two others were grants that Devon discovered that related to children’s issues for which the program qualified. The last grant application was to a foundation located in Beth’s hometown. She was the only person from Choice House to have met with representatives of this foundation. None of the five grants had yet been approved. If they were approved, they would more than make up the shortage in funds for the program this year. Unfortunately, it would be a couple more months before Choice House would hear anything about the grants. When asked about Devon’s use of office supplies, he said that most of these expenses were due to publicity brochures and small gift items that Beth requested for her trips to the state legislature and for other unspecified publicity activities. Before Ashley asked Beth about the office supplies purchases, she decided to look at the travel expenses and equipment rentals in order to review all of these expenses at once with Beth. All employees, except Beth, incur travel expenses only for local errands or annual training courses. Employees fill out expense reports noting the date, purpose of the travel, mileage, and receipts for any expenses paid. All expense reports, except for Beth’s, are submitted for review and approval by a supervisor. No one reviews and approves Beth’s expense reports. Beth lists at least five trips per month to the state legislature. Since Beth lives in the southern part of the state and the state legislature is located in the northern part of the state, she incurs many motel, meals, and mileage costs. None of the costs is excessive; the mileage is for only two-way trips, the meals are usually at fast food restaurants, and the motels are moderately priced chains. The only problem with Beth’s expense reports is that they contain no details of the purpose of the trips. It is understandable that Choice House wants a strong connection with the state legislature since the majority of the program funding is from this source. Personal contact with the representatives helps the legislature remember the program and feel vested in its success. Except for a few meetings with the foundation mentioned previously and an occasional visit to one of the houses, the rest of Beth’s travels are to the state legislature. Ashley checks with the administrative assistant, Rachel, for any available details, because she handles Beth’s calendar. Rachel did not know which representatives Beth had visited, but she mentioned that she thinks Beth is a consultant for another nonprofit in the state capitol.

A review of the equipment rental category confirmed Ashley’s comments to the finance committee. The overage was due to the leasing of two copiers for five years. Each house is required to prepare daily reports on the clients for the program and for the prison system. Other records are required for social services, employment searches, employee time sheets, and so on. During the year, Ashley suggested to Beth that most of this could be handled via Microsoft Word documents emailed to the administrative assistant and printed out only once at the central house. Beth replied that since the program needs high- quality brochures, leasing the copiers saves on outside printing costs. She requested that a reliable, top-of-the-line copier be leased at the central house for the administrative staff and at the southern house for her use. The copier leases were negotiated and signed by the program director of the southern house, a close friend of Beth’s. Choice House belongs to a consortium of nonprofits. Ashley contacted the consortium to help answer the finance committee’s question about Beth’s salary and benefits. After Ashley provided Choice House’s membership number, she explained that she needed to know if Beth’s salary of $70,000 and benefits of $7,000 were comparable to salaries and benefits of other executive directors in the area. The consortium representative replied that they were within the range and asked if she could include Choice House’s information in the consortium’s database. Because Ashley thought that other nonprofits probably provided this information, she agreed to do so. Before Ashley could summarize her findings for the finance committee, Beth stopped by the central house to meet with Ashley. Apparently, Rachel had told Beth that Ashley was questioning items on Beth’s expense reports. Beth wanted to clear up any questions that Ashley might have had. Ashley explained that more details about the meetings would be needed to meet Internal Revenue Service documentation requirements. Beth replied that she could not remember all the specifics and to just put down the names of the representatives from the three house locations. Ashley also asked if some of the costs should be covered by other nonprofits that Beth consulted for at the state capitol. At this point, Beth became defensive and curtly replied: “I am your boss. You answer to me. My trips to the state capitol help Choice House stay visible. If I take care of other business while I am there, this is personal and is no business of yours. That is all you need to know. If you have further questions about any activities at Choice House you ask me first.” Beth then said she had a lunch appointment and had to leave. Ashley was stunned. She wonders what to do now.

Q. Prepare a discussion document that identifies any internal control weaknesses related to Joan’s five questions and include your recommendations for improving each situation. Use COSO’s Internal Control Framework to note which of the five components of internal control are lacking at Choice House and reference which principles of the COSO Framework support your recommendation.