MEMORANDUM
Date: August 16, 2006
To: Concerned Pennsylvania Episcopalians
From: Alan J. Segal, LLC
Alan J. Segal, CPA, MST, CSMC
Re: Executive Summary CBIZ
Years of Budget Deficits
Management Letters
Unrestricted Net Asset Accounting
Wapiti Funding and Option to Purchase
What follows is an “Executive Summary” of the CBIZ report, dated May 31, 2006 and is not meant to represent the entirety of that report. There is no substitute for reading the full report since only the full report will give the full details and findings.
The reader should be aware of the date of the CBIZ report and note that some changes in the internal structure of the Diocese may have occurred between that date and the date of this report. For instance: Between those dates the CFO has given her resignation and a consulting firm, which she is now affiliated has been hired, at what has been reported as an increase in cost over her salary.
I strongly suggest that CPE give this executive summary the widest possible circulation so that the entire community of the Episcopal Diocese be made aware of the financial matters and operations of the Diocese as reported by CBIZ and other reporting firms.
This summary and conclusions stated are also based on reports and internal memorandum other than the CBIZ report.
Scope and intent of the CBIZ report:
“CBIZ Accounting, Tax & Advisory, LLC (CBIZ) was engaged to perform consulting services on behalf of the Episcopal Diocese of Pennsylvania related to the Wapiti Project and the classification of Net Assets. CBIZ services included consulting and financial analyses of the books, records and other data provided to us by the finance department of the Diocese, representatives of the Church Foundation and the Diocese’s independent auditors”.
- The audit was limited by the hours of the engagement (no more than 140 man hours) and years (2003, 2004, and 2005).
- CBIZ was “able to research and report on the Wapiti Project and report on the accounting of nineteen funds currently accounted by the Diocese as being Unrestricted Net Assets”
- The Special Audit Committee provided CBIZ with 12 suggested funds and the remaining seven were picked at random by CBIZ based on 12/31/05 stated values.
- CBIZ, in addition to examining the books and records for that period conducted a walkthrough of the Wapiti site, noted the accounting policies and procedures and then prepared schedules summarizing their findings.
- The procedures resulted in a summary of 19 of the 98 funds and accounted for 80% of the value of all those funds.
- Please note that at no time was this project charged with finding fraud.
- During the preparation and research for their engagement CBIZ was able to gain insight into the financial policies and procedures used by the Church House and the Wapiti project and the report did include some recommendations with reference to those financial policies and procedures.
There are times when the conclusions need to be stated first with the facts following, to help the reader understand why the conclusions were reached. This is such a case. The conclusions and recommendations of the CBIZ report are as follows:
- “The Finance Department at Church House is small which does not allow for the proper segregation of duties and does not allow for the time and effort to handle the burdensome recordkeeping
- …recommends the Diocese consider hiring additional staff and review procedures to facilitate proper segregation of duties
- recommends the development of policies and procedures to streamline financial operations
- …a management letter from the independent auditors issued with their audit of the December 31,2004 consolidated financial statements of the Diocese..
- we recommend management revisit the issues raised by the management letter”
- CBIZ was “unable to obtain information regarding Board designations or monitoring of certain funds
- We recommend….the Diocese revisit their governance requirements and institute policies and procedures…to insure compliance and guidance…in the future”
- CBIZ recommended consolidation of the Board Designated Unrestricted Net Assets into fewer funds and that the Standing Committee revisit the designations of all the funds whether or not consolidation is undertaken
- CBIZ also noted that the budget preparation process does not include budgeting for general and administrative expenses and suggested that the budget be all inclusive.
- The Wapiti suggestions and concerns can be found in the section below for that entity.
WAPITI:
The sources of funding for the Wapiti project from inception to December 31, 2005 are:
Episcopal Diocese $ 4,259,661
Denbigh Fund 3,219,133
Wapiti Revenues 200,960
Miscellaneous Receipts 12,156
Total $ 7,697,510
The result of the procedures by CBIZ with respect to Wapiti resulted in the following Comments and Recommendations:
“The staff at Wapiti currently lacks strong accounting expertise, policies and procedures and an adequate chart of accounts….We recommend the accounting for the Wapiti project be take over the Church House finance department or be closely monitored by the finance department until the Wapiti personnel can be…..trained and supervised and policies and procedures ….established and executed.
……Diocese management must make a decision on the option to either secure the investment...or stop the spending accept the losses to date. (editors note: the Diocese has an option to purchase the Wapiti property)
……The option on the property includes a clause that…acreage will cede to the Diocese should it not proceed to acquire the property….management should seek legal counsel to determine what land they are entitled to and if the capital improvements to date are included on that land”.
Board Designated Funds:
CBIZ noted that the Diocese has “attempted” to account for board designated funds separately and “record receivables or payables to those funds for monies not used for their designated purpose” Corrections were suggested to bring those funds into agreement with their stated purpose, showing the correct due to and from each account.
ADDITIONAL INFORMATION: NOT WITHIN THE SCOPE OF THE CBIZ AUDIT
Budget Deficits:
The chart below sets forth the history of budget deficits (i.e. use of Unrestricted Net Assets). The information was gleaned from the from Proposed 2006 Program Budget as Adopted by Diocesan Council on September 15th, 2005 and the Financial Statements of the Diocese for the year 2002.
Year Budget Deficit
- 257,838
- 961,781
- 1,417,518
- 1,813,406
- 1,279,839 proposed,
- 550,000 adopted
Deficit causes:
This writing is not meant to dissect and reason all the causes for the budget deficits. Depending on your point of view, the budget deficits can be attributed to many causes, chief amongst them are the investment in real estate at 3719 Chestnut and the Wapiti Camp and Conference center. Of those two, the Wapiti venture has had the largest negative impact on the use of the Diocesan funds. The total amount, through March of 2006 that has been invested at Wapiti for both purchase and operations is $8,060,623 (per CBIZ Consulting report 7,697,510 plus an additional 363,113 after the report date limitations).
This amount does not include the opportunity cost of the use of those funds. Assuming that the initial cost of $ 3,000,000 was invested at the beginning of 2003 and that the remainder of the funds was invested equally over the next three years the lost investment income (6% compounded) that opportunity cost is now in excess of $ 1,136,000 (+/-).
The budget deficits for the years 2002 through 2005 total $ 4,453,543 with the total loss to the diocese (considering the opportunity costs of just Wapiti) of $ 5,586,543.
The economic cost of Wapiti at this juncture is $ 9,200,000 (+/-). That amount is the sum of the purchase cost and operations plus the opportunity cost ($ 8,060,510 + $ 1,136,000).
Management Letters
The management letters and other information concerning certain management questions that I have in my possession include the following:
Year ended Auditor
- Parente, Randolph, Orlando, Carey & Associates
- Parente, Randolph, Orlando, Carey & Associates
1999 Briggs Bunting & Dougherty, LLP
2002 Briggs Bunting & Dougherty, LLP
2003 Briggs Bunting & Dougherty, LLP
2004 Briggs Bunting & Dougherty, LLP
Notes of the Audit Committee dated 08/13/2002
Memorandum to F & P dated 10/4/2004
Independent Accounts’ Report On Applying Agreed-Upon Procedures (re: activity of specific funds) dated 8/8/2000.
Draft of CBIZ dated May 31, 2006
CONCLUSIONS RE: MANAGEMENT
A common thread runs throughout the reports listed above. Generally speaking, there is a lack of internal control, financial reporting is inadequate, processes are not in place to insure that the Diocese operations are consistent from year to year, and certainly the internal accounting treatment for the use of funds donated to the Diocese has been in “transition” for many years with no clear governance in place concerning the balances of the various funds.
Year after year, the Diocese strains to find the answer to the vexing questions of how much do we have, how did we spend it, and what restrictions if any are there on these funds. It seems to me that after eight years of concern and warning by various accounting firms via their management letters that direct and relevant action would have been taken to not only answer their admonitions, but to insure that the proper and adequate safeguards were put in place to correctly report the funds under the control of the Diocese. Stewardship of the highest order is what is demanded and that is not what the result has been.
There appears to be a failure of leadership in meeting the demands of the business operations of the Diocese. For instance; in the current round of cost cutting severe cuts were made in the accounting department, despite repeated warnings from various accounting firms concerning such items management of the various processes in operations, internal controls, and reporting to the various committees and the general convention (i.e. the community at large). It appears that this action culminated in the CFO giving notice, for reasons that where her own. There is no one on staff that I know of that has the credentials to take over that position. All thoughts of internal control were lost in this latest round of cost cutting.
For example:
Segregation of Duties:
The latest report (CBIZ) state “The Finance department at the Church House is small which does not allow for proper segregation of duties and does not allow for the time and effort to handle the burdensome recordkeeping required by having the multitude of board designated unrestricted net asset funds” The recommendation is to consider the hiring of additional staff and review procedures to facilitate proper segregation of duties.
The same issue was a reportable condition in the management letter for 1996
The issue was revisited in 1997 with the statement that “Certain functions of the Diocese and its accounting system are the responsibility of a limited number of employees (this under Planning Employee Succession and Back Up).
The segregation of duties question was again mentioned in the management letter for 2002 (item 8, a reportable condition)
Maintenance of Various Fund Balances:
Of all the questions posed year after year it appears that more time and energy has been expended on the fund transactions than any other.
The only consistency from year to year has been the repeated statements concerning this issue. Different decisions have been made (again year to year) resulting in a hodge-podge of thinking and reporting to the general community.
A short history of this subject via management reports and special reports:
The management report of 1997 comments on the failure of the Diocese to update its “book” that summarizes donor restrictions on endowment assets. “Failing to update this book not only hampers management’s ability to comply with financial reporting requirements but also impedes management from ensuring that funds are used for their intended purpose”.
Again, in 1999 the Management Report commented on the Net Asset Classification stating that “The Standing Committee engaged an attorney to conduct a review of the documents and history of certain donated funds. This review disclosed that certain net assets were incorrectly classified…..These net assets were restated in the 1999 financial statements.
A report issued by Parente Randolph, dated 08/2000 was done at the behest of the Standing Committee with reference to auditing certain funds of the Diocese, again with the goal of understanding the use of and the expenditures from various funds.
In 2002 the accounting firm of Briggs, Bunting & Doughtery, LLP stated that “the Diocese should review the documentation related to its various funds to determine that the funds are classified correctly”.
An internal memorandum, dated 8/13/02 states that “The breakdown of fund balance ….is a morass of non-intuitive technical accounting definition and classification….However one resolves the PA ambiguities, I am not sure that our current presentation fits any interpretation of the accounting principles….The components of the $ 12,000,000 unrestricted fund balance should be researched immediately because this classification is extremely meaningful right now….there should be additional disclosure explaining why it is not immediately available to meet the substantial resource needs of the Diocese.”
In 2004, “The Diocese’s general ledger included a suspense account with a balance of approximately $ 4.9 million. This activity….resulted primarily from a) withdrawals from the Consolidated Fund and b) unidentified differences on the bank reconciliations...”
And lastly the report of May 31, 2006 by CBIZ Accounting, Tax & Advisory, LLC which audited certain of the Unrestricted Net Assets and certain other transactions. Their conclusion relative to the UNA’s was the “consolidation of some, if not all, of the Board Designated Unrestricted Net Assets into few fund” and further recommends that “Standing Committee revisit the designations…to insure income is not designated for obsolete programs or needs of the Diocese have changed”.
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