AG’s Office Sues Accounting Firm for Enabling Charity Fraud
Last month, the Office of the Attorney General of New York (AG) filed a lawsuit naming an accounting firm as a defendant in a charity fraud case. The lawsuit serves as a warning shot that regulators may look beyond officers, directors, and trustees when exercising their authority to oversee charitable organizations.
In The People of the State of New York v. McEnerney, Brady and Company, LLC and Edmond Brady, Index No. 450796/2018, filed May 7, 2018, the AG alleged the defendants were instrumental “in perpetuating the existence of a sham charity,” the Breast Cancer Survivor Foundation, a not-for-profit corporation established in 2010, by:
- falsifying the charity’s financial statements in an effort to inflate the value of its charitable services;
- failing to report significant internal control failures; and
- issuing audit reports that falsely gave the charity an “unqualified audit opinion,” the clean bill of health necessary to solicit charitable contributions in New York.
Central to the complaint, which alleged fraud and false filings under New York law, is the allegation that the defendants had full knowledge that the charity was run by, and for the benefit of an external fundraiser, who was known to the defendants as not only a client of the accounting firm, but a source of referrals. According to the complaint, the accounting firm had provided accounting services to at least nine companies controlled by the external fundraiser, most either in, or associated with, the fundraising business. Indeed, it was the external fundraiser who selected the accounting firm to prepare the IRS forms and perform audits for the charity. The AG alleged that the accountants were presented with “blatant red flags” such as:
- the Board of Directors of the charity never met (it was also noted in the complaint – and in the preliminary investigation report – that the only permanent Board members were the founder and his wife);
- the charity had no physical office or medical facility, yet reported donating substantial medical services; and
- all communication with the audit team was by and through the external fundraiser, not a director or officer, and there was no documentation authorizing his management.
Yet, as the AG asserted, even when faced with such indicators of potential fraud and failures of internal control, the auditors failed to either make a report to the charity’s Board of Directors or to “conduct the appropriate procedures and obtain audit documentation . . . relating to these indicators.” Instead, the complaint avers that the principal accountant signed off on IRS forms that he knew contained false statements and authorized inaccurate audit reports, knowing the reports would be incorporated into state filings. Concluding that such inaccurate reporting “deprives New Yorkers of access to reliable information,” the AG reasons that the defendant accounting firm “played an integral role in helping [the charity] to defraud New York donors.” The complaint seeks restitution and damages, as well as civil penalties for the defendants in connection with the amount sourced from New York donors. A total of $18 million was solicited from 2010 to 2016; only $1 million was contributed from New York donors. We will be on the watch to see whether other states will also seek restitution in this manner.
See Something Say Something
This complaint delivers high praise and healthy affirmation for the members of accounting and auditing teams who speak up. According to the complaint, junior members of the audit team alerted senior auditors, in writing, about a number of concerns, warning that the external fundraiser “appears to be running the Organization . . .” According to the complaint, those junior members were removed from the audit team by the defendants who “willfully ignored . . . professional standards” despite warnings from those who exercised professional judgment and skepticism.
Fiduciary Duty is not Delegable
This complaint is yet another reminder that officers, directors and trustees must exercise due diligence at all times and refrain from relinquishing oversight responsibility related to essential fiduciary functions. That would include taking responsibility for not only selecting an accounting firm, but overseeing and understanding the compliance implications of its work product.