Case Studies on Ethical Failures in Not-for-Profit Organizations

<strong>Case</strong> <strong>Studies</strong> on Ethical Failures in Not-for-Profit 

Organizations 

September 18,2012 

DRAFT 

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Welcome 

Terri Albertson 

Partner 

Philadelphia 

Vicki Raivitch 

Partner 

Philadelphia 


Objectives 

Learning Objectives: 

• To discuss the landscape of unethical behavior and the influences 

• To understand what is ethical behavior 

"What does right look like?" 

• To review a series of ethical failures in the not-for-profit industry 

• To draw conclusions from those failures 

"What lessons are learned?" 


Today's Agenda 

• The Landscape 

• Characteristics of Ethical Behavior 

• 10 <strong>Case</strong> <strong>Studies</strong> of Unethical Behavior 

• Lessons Learned 


The Landscape 

The Situation 

•From Enron to the financial crisis 

•From the Foundation of New Era to the Penn State scandal 

•Ethical failures exist every day in virtually every industry 

•Virtually all organizations have code of ethics, code of 

conduct, conflict of interest statements and whistleblower 

policies 


The Landscape 

The Media 

• To every day in the media 

Regulations 

• From the Securities Act of 1933/1934 to Sarbanes Oxley to the Senate 

Finance Committee to the Dodd-Frank Act etc. 

The Results 

• <strong>Case</strong>s of employee misconduct costing US $50 billion per year across 

industries 

• Ethics on the decline 

• Rate of unethical behavior on the rise. 


Ethics standards on the decline 

• The ethical standards of non-profit organizations are 

eroding 

• Financial fraud among non-profits is more prevalent than in 

business or government. 

• Non-profit boards are failing to set clear ethical standards 

for their organizations. The research goes on to report that 

fraud levels are back to pre-Enron levels and on the rise 

and nowhere is that more evident than among the Boards 

of Directors and senior leadership of non-profit 

organizations 


Ethics standards on the decline 

• Rates of observed misconduct in nonprofit organizations by 

employees are at the highest level since Ethics Resource 

Center began measuring in 2000, with nonprofits faring 

little better than the public and private sectors. 

• In 2007, the types of misconduct most widely observed by 

nonprofit employees were: putting one's own interests 

ahead of the organization's (24%); lying to employees 

(21%); abusive behavior and misreporting hours worked 

(each 19% each). 


Characteristics of the Ethical Behavior 

• Honesty 

• Integrity 

• Promise-keeping 

• Loyalty 

• Fairness 

• Caring for others – concern 


Characteristics of the Ethical Behavior - Continued 

• Respect for others 

• Law abiding 

• Commitment to excellence 

• Leadership 

• Reputational and morale 

• Accountability 


Why do these happen? 

• Despite numerous regulatory and professional initiatives, 

we still have failed to arrest unethical behavior. Why? 

Because human nature seeks self-maximization. When 

allowed, the ability to have control over resources and 

possess the authority and the intelligence to manipulate 

and transcend preventive measures, individuals will seize 

the opportunity to enhance their own wealth. This is 

basic theory proven by economists and psychologists 


<strong>Case</strong> Study One – 2004 Scandal at UCLA Reveals 

Cadaver Trade as a Big Business 

• The University received approximately 175 donated 

corpses a year at their Willed Body Program. 

• UCLA started the first such program and now 150 programs 

at universities across the United States. 

• Director of the program and other individual businessman 

arrested 

–496 cadavers were sold between 1998 and 2003 



Cadaver Trade as a Big Business - Continued 

• Program closed for one year 

• Director fired – 4 years in jail and ordered to pay restitution 

of $500,000 

• Businessman guilty of grand theft, embezzlement and tax 

evasion 

• Family members of the people who had donated their 

bodies to the program have sued UCLA 



Cadaver Trade as a Big Business – Lessons 

Learned 

• Heightened awareness to both public and academic 

perception of the way in which willed body programs are 

structured 

• Huge reputational risk for UCLA – remember they were a 

pioneer. 

• Regulation in this area is light. 


<strong>Case</strong> Study Two -1999 to 2010 Children's Hospital 

of Philadelphia (CHOP) General Counsel 

Embezzlement $1.7 million 

• On Nov. 16, a United States district judge sentenced 

Roosevelt Hairston — the former general counsel to and 

executive vice president of the Children’s Hospital of 

Philadelphia — to 48 months in prison on charges of mail 

fraud, money laundering and filing a false tax return 

• Hairston began his crime spree in 1999, when he was 

responsible for coordinating CHOP’s defense against 

medical malpractice claims. He took advantage of his 

position by creating fraudulent invoices for non-existent 

expert medical witnesses and other supposed work done 

for the hospital, such as consulting services and economic 

impact studies 


<strong>Case</strong> Study Two -1999 to 2010(CHOP) General 

Counsel Embezzlement $1.7 million -continued 

• The former general counsel reportedly prepared 126 

invoices to obtain checks from the hospital to send to 

fake entities he set up. According to court documents, 

the fake entities included LBS Partners, Legal & 

Business Services Enterprises, L&S Data Services, The 

Children’s Research Alliance and Orion Development 

Group. He also filed false tax returns that failed to report 

the extra income he earned from his schemes. 



Counsel Embezzlement $1.7 million -continued 

• In total he took $1.7 million from CHOP and made 

between $500,000 and $700,000 a year as general 

counsel for CHOP. According to The Philadelphia 

Inquirer, he used this money to maintain a lavish 

lifestyle, including a yacht with a captain. Hairston will be 

paying $1.7 million in restitution to CHOP, as well as $1 

million in back-taxes. 



Counsel Embezzlement $1.7 million –lessons 

learned 

• Reputational risk is great- Brand is your DNA 

• Good system of internal control is necessary 

• Checks and balances must be implemented 


<strong>Case</strong> Study Three - 2008 West Virginia University 

(WVU) Fake MBA 

• Heather Bresch, Chief Operating Officer of Mylan Pharmaceuticals, 

Inc. was falsely awarded an MBA from WVU 

• Let's check the relationships…. 

– Heather is the daughter of the West Virginia governor, Joe Manchin 

– Joe Manchin is a long time friend of the WVU President Michael 

Garrison 

– Milan Puskar founded Mylan Pharmaceuticals 

– Mr. Puskar was largest benefactor to WVU in excess of $20 million 


<strong>Case</strong> Study Three 

-2008 West Virginia University (WVU) Fake MBA - 

continued 

The Result: 

• Heather found guilty of lying about MBA 

• Business School Dean and Provost resigned 

• Board of Mylan stood behind their COO and did nothing 

. 


<strong>Case</strong> Study Four – Seattle Rotary Foundation 

Embezzlement: 

• The bookkeeper for the Seattle Rotary Service Foundation 

(SRSF) embezzled more than $350,000 from the 

organization from June 2003 to December 2008 

• Seattle police detectives said Susan Kinney wrote checks 

payable to herself totaling more than $330,000 without prior 

approval from the foundation. Another $25,850 in checks 

were written out to people that the organization does not 

know and also appear to be for Kinney’s benefit 



Embezzlement- continued 

• Investigators discovered the amounts Kinney paid to herself 

typically matched amounts that had been approved by the 

SRSF board for disbursement to charitable causes 

• Because all inquiries and complaints about the charity 

donations were forwarded to Kinney, she was able to curtail 

any complaints. 

• Co-workers started to investigate Kinney after another 

bookkeeper assigned to assist Kinney noticed 

discrepancies in the records. That bookkeeper started to 

request documents to clarify the transactions, but Kinney 

always delayed giving them to her. 



Embezzlement- lessons learned 

• Segregation of duties must exist within organization 

• Must be oversight on even top management of an 

organization 

• Employees must feel that they can speak up if they think 

something inappropriate is happening 


<strong>Case</strong> Study Five – 2010 USAID Suspends AED from 

Receiving Government Contracts 

• Academy for Educational Development 

–Nonprofit in Washington DC 

–Relies heavily on government contracts as a funding 

source 

• In 2009 and 2010, USAID investigated AED's projects in 

Pakistan and Afghanistan. 




• In 2010, USAID suspended AED from receiving new 

government funding. 

–Noncompliance with regulations concerning 

•Competition in procurement 

•Adherence to contract specifications 

•Supervision of subcontractors 

–Serious corporate misconduct, mismanagement, and a 

lack of internal controls, and raise serious concerns of 

corporate integrity 




• Outcome 

–President and CFO departures 

–March 2011 – announced that they would sell their 

assets and dissolve 

–June 2011 - $5 million settlement with US government 

–June/July 2011 – AED's assets were transferred to 

another USAID contractor 


<strong>Case</strong> Study Six - LaSalle University 2010 Fictitious 

Vendor Embezzlement: 

• A longtime La Salle University employee was fired this 

month after officials said they discovered several million 

dollars missing in an alleged fraud scheme dating back at 

least 20 years. He was the director of auxiliary services 

• He is accused of setting up a fictitious food company 

through which he authorized payments from La Salle. 

Scheme dated back to 1990. 

• University officials discovered the fictitious company 

through an enhanced invoice-control system put in place in 

recent years. 


<strong>Case</strong> Study Six - LaSalle University 2010 Fictitious 

Vendor Embezzlement - Continued 

• He has officially been charged with theft, theft by deception, 

forgery, tampering or falsification of records, and other 

related charges. It’s alleged that he stole more than $5 and 

a half million from La Salle University. 


<strong>Case</strong> Study Seven– 2005 American University 

President is Ousted due to Misspending 

• American University 

–University in Washington DC 

–Benjamin Ladner 

•President – 1994 – 2005 

–Spring 2005 

•Board received an anonymous letter complaining of 

Ladner's lavish spending 


<strong>Case</strong> Study Seven – 2005 American University 


• August 2005 – Board suspended Ladner pending an 

investigation. 

–Items revealed from investigation 

•Travel expenses 

•$6,000 in club dues 

•$54,000 in drivers' costs 

•$220,000 in chef services 

•$100,000 in social secretary services 

•$44,000 in alcohol 


<strong>Case</strong> Study Seven – 2005 American University 


• In October 2010, the Board voted to oust Ladner. 

–Gave him a $3.75 million severance package 

–Ladner to reimburse AU $134,000 

–Ladner to report $398,000 in additional income 

–Ladner to pay AU for related taxes 

• Reputation of AU is impacted because of the spending 


<strong>Case</strong> Study Eight - Bellevue Arts Museum 2007: 

• The former chief financial officer of the Bellevue Arts 

Museum, Ellinger, was charged with 38 counts of theft for 

allegedly embezzling $300,000 from the museum. 

• Prosecutors say Ellinger took most of the money by writing 

checks to herself and then covering them up with fake 

entries in the museum's financial ledger. She also used her 

corporate credit card for personal expenses and funneled 

money through checks made out to her college-age son, 

who was not involved in the embezzlement, according to 

charging documents. 


<strong>Case</strong> Study Eight - Bellevue Arts Museum 2007 - 

continued 

• She told police that she spent the stolen money on privateschool 

tuition for her son, vacations, wood floors and 

cabinets for her home, credit-card bills, mortgage payments 

and clothes. 


<strong>Case</strong> Study Nine - Penn State University 2011 

• The Penn State child sex abuse scandal was a scandal 

that broke in 2011 at Pennsylvania State University, as a 

result of longtime former university assistant coach Jerry 

Sandusky's sexual assault of at least eight underage boys 

on or near university property, and alleged actions by some 

university officials to cover up the incidents or to enable 

more. 

• Based on an extensive grand jury investigation, Sandusky 

was indicted in 2011 on 52 counts of child molestation 

dating from 1994 to 2009, though the abuse may have 

dated as far back as the 1970s. 


<strong>Case</strong> Study Nine - Penn State University 2011 

• Per the findings of the grand jury, several high-level school 

officials were charged with perjury, suspended, or 

dismissed for covering up the incidents or failing to notify 

authorities. 

• In the wake of the scandal, school president Graham 

Spanier was forced to resign, and head football coach Joe 

Paterno was fired late in the 2011–12 season, while 

Sandusky maintained his innocence 


<strong>Case</strong> Study Nine - Penn State University 2011 - 

Continued 

• On June 22, 2012, Sandusky was found guilty on 45 of 48 

counts of sexual abuse. Sandusky faces a minimum 

sentence of 60 years — effectively a life sentence at his 

age. 


<strong>Case</strong> Study Nine - Penn State University 2011 - 

Continued 

• On July 23, 2012 the NCAA imposed sweeping penalties 

on Penn State—among the most severe ever imposed on 

an NCAA member school—including a fine of $60 million, a 

four-year postseason ban and vacating of all victories from 

1998–2011 


<strong>Case</strong> Study 10 – 2007 Smithsonian President 

Resigned due to Lavish Spending 

• Smithsonian Institution 

–Lawrence Small 

•President – 2000 – 2007 

–$846,000 spent in office expenses from 

2000 to 2005 

–$1.15 million received in housing 

allowances from 2000 to 2006 

–January 2007 – OIG reviewed Small's expenses 

from 2000 to 2006 


<strong>Case</strong> Study 10– 2007 Smithsonian President 


• OIG review results 

–Office Expense – Allowed under Smithsonian's 

policies but appropriate? 

•$90,000 unauthorized, including charter jet 

travel 

–Housing Allowance – Questionable expenses 

•Inaccurate calculation of allowance amount 

–Also found $28,000 in expenses with insufficient 

or no supporting documentation 


<strong>Case</strong> Study 10– 2007 Smithsonian President 


• March 2007 – Small resigns 

• March 2007 – Senate freezes a proposed $17 million 

funding increase for the Smithsonian 

• Lessons learned 

–Board oversight critical 

•Need to regularly review Executive expense 

reimbursements 

–Authorized doesn't necessarily equate to 

appropriate. 


Conclusions – Top Ten Take-Aways 

1.Hire for both job skills and life skills. 

a. Avoid evaluating and hiring for job skills only 

b. Continuous improvement on both sets of skills. 



2. A promotion focus leads individuals to be more 

likely to act unethically than a prevention focus* 

*Harvard Business School - Bringing ethics into focus: How regulatory focus and risk 

preferences influence (Un)ethical behavior – by Francesca Gino ⇑, Joshua D. Margolis 



3. Culture is "Key" 



4. Pay attention to defining moments 



5. Think about how your reward and recognize 

performance. 



6. Must link strategy, culture and ethics together. 



7. Everyone must be held accountable 



8. Leadership is not power derived from status or 

position. 



9. The minimum requirement is not enough. 



10. Do not equate the delay of consequences with 

the absence of them 


What should the senior officers and audit committee 

do to protect the integrity and reputation of the 

institution? 

• Place non-financial information high on the risk profile so 

that it receives attention from senior officers and the audit 

committee 

• Incorporate the reporting of non-financial information into 

the institution’s Code of Ethical Conduct and whistleblower 

procedures. 

• Create an inventory of non-financial information including 

an assessment of each item’s relative importance to the 

institution and the impact on the institution if such 

information is found to be inaccurate or misleading. 


What should the senior officers and audit committee 

do to protect the integrity and reputation of the 

institution? - continued 

• Establish internal controls over the production of nonfinancial 

information ranked high in the inventory. Regularly 

test the effectiveness of the internal controls by random 

internal audits, either by the internal audit department or by 

an out-sourced third party. Report the results of those tests 

annually to the audit committee. 

• Establish a process for handling allegations of inaccurate or 

misleading information that includes the use of outside 

counsel to conduct an independent investigation and also 

includes public disclosure of the allegations and their 

resolution 


Solutions? 

• The solution to our ethical dilemma is to embrace a code of ethics at 

every level of management, particularly those involved in 

leadership and the management accounting process. A code of 

ethics and professional code of conduct is the cornerstone of any 

profession. It mandates a commitment to integrity, objectivity and 

the concern for the honest protection of stakeholders of an 

organization. 


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subject matters covered and may include proposed guidance that is subject to 

change before it is issued in final form. All relevant facts and circumstances, 

including the pertinent authoritative literature, need to be considered to arrive at 

conclusions that comply with matters addressed in this presentation. The views 

and interpretations expressed in the presentation are those of the presenters and 

the presentation is not intended to provide accounting or other advice or guidance 

with respect to the matters covered. 

For additional information on matters covered in this presentation, contact your 

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