To: Board of Directors
From: John Smith, Chief Financial Officer
Re: Financial Update for Board Meeting
Members of the Board,
It has recently come to my attention that Gateway Homes has been using donor funds inappropriately.
While preparing for the upcoming audit, I have been made aware that certain contributions to Gateway Homes have been incorrectly categorized as unrestricted funds. The funds in question were raised through various appeal letters that contained specific language on what donor contributions would be used for. I have been made aware that it has been common practice for the organization to use specific programs in the organizations appeal letters in order to generate additional funds from our donors. However, this creates a situation in which our donors are giving money under the pretense that those funds will be used for that program directly. These funds have instead been used where the organization sees fit as unrestricted gifts.
For example, an appeal letter went to our donors in order to generate funds to support the victims of the Rose Creek fire. I’m sure everyone on the board is aware of this appeal letter which contained the following language: “Yes, I support the victims of the Rose Creek fire with my gift to the Rose Creek Rebuilding Fund.” That specific language tells our donors what the money will be used for, and unfortunately Rose Creek was never rebuilt but instead scheduled for demolition. The contributions were instead used to fund other programs. This has potentially wide-ranging negative consequences not only for the financial statements of the organization, but also in the trust that our donors place in us.
As the Board is aware, last year’s audit of the organizations finances were scathing and the need to ensure sound financial management systems for the organization could not be greater. Should this come up during an audit, the organization could face severe fines that significantly impact our ability to fulfill the organization’s mission and could potentially lead to legal ramifications. It is mandated by the IRS that any restrictions on gifts be honored by the nonprofit and to have an adequate system of record keeping in place. Not only is there a serious cause of concern that the organization would be damaged financially through fines by the IRS but should word of this reach our donors it could cause irreparable damage to our reputation and the trust our donors have in Gateway Homes. This in turn could lead to major donors pulling funds from the organization, refusing to fulfill pledges, and negative publicity that would make it significantly more difficult to court new donors. The additional revenue that the organization is generating through its current appeal practices does not out-way the risk it possesses to the overall health and mission of the Gateway Homes.
Recommendations:
It is my suggestion that we immediately reclassify any funds generated through our appeal letters into the appropriate categories of restricted funds. Furthermore, this practice should stop immediately and our strategy for writing appeal letters should be revisited. This will create short term issues regarding program funding in several of our locations, however, the risk of continuing this practice is simply too great. Additionally, I suggest that moving forward more than one individual should approve and sign off on any appeal letters before they are sent.
Board Members should also be made aware of the financial statements of the organization, including how much money was fundraised through our appeals, details regarding how those funds were used, and information regarding our annual audit. The Board should exercise additional oversight in regard to the finances of the organization, as it is all of our responsibility to safeguard the health, mission, and vision of Gateway Homes. Finally, I recommend the creation of an audit committee that can help prepare the organization for its annual audit and provide a more in-depth analysis of the organizations finances to the Board on a more regular basis. By taking these steps, the organization can help ensure that it is in compliance with IRS rules and regulations moving forward.
John Smith
Chief Financial Officer
Gateway Homes
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