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Friday, 13 October 2017 15:56

GRAM lawsuit highlights need for nonprofit transparency

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GRAND RAPIDS — In the wake of a whistleblower lawsuit filed last month by its now-fired chief operating officer, the Grand Rapids Art Museum (GRAM) has to confront allegations that members of its executive leadership misused donor-restricted funds to cover gaps in its operational budget.

The allegations raise ethical questions, several sources said, and could move into questions of legality if D. Neal Bremer — the former COO who claims he was fired for trying to bring his concerns to the GRAM’s board of directors — can prove that the organization’s executives willfully used restricted funds for reasons other than the explicit intent of the donors. 

But to some in the world of nonprofit finance, the questions and allegations are far from black and white, and that’s particularly true given the bookkeeping complexities and real-world issues associated with the sector. 

“Practically with (all) nonprofits, their accounting is atrocious,” said Bill Morgan, president of Morgan & Morgan CPAs PC, a Grand Rapids-based accounting firm.

Given the number of different programs that nonprofit institutions like the GRAM operate and the myriad ways donors can give gifts, they can find it difficult to consistently separate the different pools of money they receive, Morgan said. 

The problem can often be exacerbated by the fact that many nonprofits use volunteers and board members to help with bookkeeping, he said. Employee turnover is another issue that can result in a lack of continuity for bookkeeping practices.  

“There’s people coming in and out of those organizations on quite a regular basis,” Morgan said. “The auditors are trying to cobble stuff together to just try to make it work. There’s a ton of gray area in this stuff.”

While that may be true for smaller nonprofits, others say that large institutions such as the GRAM should have more accounting infrastructure in place.

“For a museum of that size, it shouldn’t happen at that level,” said Duane Tarnacki, a member of law firm Clark Hill PLC’s Detroit office who focuses on representing tax-exempt organizations.

Bremer claims that museum executives regularly misused donor-restricted funds on other expenses, “including general operations expenses,” according to the lawsuit filed on Sept. 22 in the 17th Circuit Court for Kent County. Donor-restricted funds are earmarked to a nonprofit for purposes specified by the donor.

In the court documents, Bremer alleges that shortly after beginning his employment, it became “obvious” that funds were being misused and that the museum “was essentially borrowing excessive amounts from temporarily restricted funds to pay for unrestricted expenses.” Bremer claims that even after informing GRAM CEO Dana Friis-Hansen and Human Resources Director Maria Davis about the issues, they took no “corrective action.”

For their part, officials with the GRAM say they have engaged in no wrongdoing, but declined further comment, citing the pending litigation. 

“We can say, however that we fully reject the accusations cited in the complaint and have strong documentation to refute the complaint. The allegations have no merit whatsoever and GRAM’s actions have at all times been entirely lawful and appropriate,” according to a statement GRAM’s spokesperson emailed to MiBiz.

Lawyers for the GRAM had not filed a motion to dismiss the suit at the time this report went to press.

A MATTER OF TRUST

The lawsuit has certainly drawn the attention of many in Grand Rapids’ financial and nonprofit administration sectors, who note that at the very least, the heightened scrutiny of the institution’s finances creates negative optics for the museum. 

“This (lawsuit) is going to play out in the public eye, and it’s going to raise a lot of questions about (how) the GRAM handled its finances and how they’re handling them now,” said a senior financial executive who reviewed the lawsuit and asked not to be named.

But whether the allegations turn into more than bad optics is largely up to the GRAM, sources said, adding that the museum needs to begin sharing information as soon as possible if it hopes to regain the trust of the region’s donor community and the public at large. 

“The thing that will turn it into a much larger story is if we don’t have that transparency,” said Michelle Wooddell, an assistant professor at Grand Valley State University’s School of Public, Nonprofit and Health Administration. 

The story may blow up, she said, “if we find there’s more to it than presented here. Nonprofits operate because of a public trust. It’s incumbent on leadership to make sure they don’t waste that public trust. I don’t know whether that occurred here or not, but it’s important that we do everything in our power from the nonprofit side to make sure we have complete transparency.”

Bremer’s attorney is clear that the allegations of misused funds are only stating that the GRAM’s executive leadership simply spent too much money on general operations and that there’s no belief executives absconded with the funds. 

In Bremer’s tenure at the organization, he claims he spent much of his time trying to rein in that alleged excessive spending, and when he tried to take his concerns to the GRAM’s board of directors, he was fired, according to William Howard, a partner with Grand Rapids-based Howard Law Group, which is representing Bremer in the lawsuit.

“You can’t borrow from Peter to pay Paul,” Howard said. “It’s just not a good economic practice for any business and the statutes in the legislature have said that nonprofits aren’t allowed to do that. This is just a basic ‘how do you run a business’ problem.”

Howard said he expected a six-month discovery period to begin in November or December, with the case then moving to a settlement or a trial.  

MIXED SIGNALS

Given the “he said, she said” nature of the complaint, GVSU’s Wooddell said it’s hard to tell which party may be in the right. 

Additionally, she noted that Bremer’s complaint doesn’t fully document how individual and philanthropic gifts were used, making it difficult to tell whether the GRAM’s financial reporting would fall within Generally Accepted Accounting Principles (GAAP) for nonprofits. 

However, Bremer’s signature is on the organization’s 2014 IRS tax form filed in August 2016. 

Requiring the signature of a nonprofit executive is a practice that stems from the Sarbanes-Oxley Act of 2002, which was passed in the wake of multiple corporate financial scandals. 

Several sources said that by signing the tax form, Bremer would be responsible for all the information provided within the documents. 

When Howard was asked about Bremer’s signature and his client’s responsibility, the attorney said: “It’s a fact I don’t know about so I can’t reasonably discuss issues that I don’t know anything about.”

Jennifer Woolf, a principal with Kalamazoo-based Jansen Valk Thompson Reahm PC who prepared the organization’s 2014 Form 990, declined to comment for this report, citing professional standards. 

While questions remain about the past, the GRAM’s audited financial statements for 2014 and 2015, the most recent year available, earned a so-called “clean opinion” from its accounting firm, Jansen Valk. That means, in the accounting firm’s opinion, the financial statements fairly presented the museum’s financial position at the end of its fiscal year and that the changes in assets and cash flow for the year were in accordance with GAAP standards.  

But to Tarnacki, the Clark Hill attorney, the opinion from the GRAM’s auditing firm is a reassuring sign. 

“That’s a pretty good indication that there’s nothing amiss,” Tarnacki said. “That’s something that auditors would look at. If I were a board member that would make me feel better.” 

Read 2109 times Last modified on Sunday, 15 October 2017 23:12
Nick Manes

Staff writer

nmanes@mibiz.com

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