Friday, May 2, 2008

Failure of Scottish Charity Tied to Poor Board Oversight and Resulting Bad Financial Decisions

Third Sector reports that the Office of the Scottish Charity Regulator (OSCR) has concluded that an 11 million pounds per year Scottish charity went under financially in January 2007 in large measure because of failed oversight by its board.  The OSCR report on the 20-year old One Plus: One Parent Families charity found that the organization tried to take a holistic approach to providing services for single parents, including through a wholly owned for-profit subsidiary that operated nursing facilities (that itself went into liquidation in December 2006).  OSCR traced the failure of the charity to over 2 million pounds of debt, which OSCR's investigation found arose because of both poor governance and a failed response to changes in the funding environment.

With respect to poor governance, OSCR found several issues.  First, it found that the charity's Board did not adequately access or fill the range of skills needed among the Board members, particularly the need for business and financial-related abilities.  Second, the Board regularly did not receive financial information in advance of Board meetings, that information was routinely at least several months out-of-date, and Board members did not know the scale or appreciate the severity of the charity's cash flow problems.  The lack of a complete and adequately resourced finance team at the charity during much of 2006 appears to have compounded this problem.  Third, the Board also lacked an audit committee, did not apparently receive the outside auditors' final management letters, had little contact with the outside auditors generally, relied too heavily on a long-time Chief Executive who served from 1989 to July 2006 as opposed to seeking independent third party advice from the outside auditors or other professionals, and did not hold either the Chief Executive or his management team to account.   Fourth, both the Board and the management team failed to address the charity's financial problems when they came to light.  These governance problems apparently led to the Board's inability to identify aspects of the charity's revenue and expense streams that placed it at significant financial risk, including receiving a substantial proportion of funding in arrears and continuing to operate loss making activities without sufficient other revenue sources to cover those losses.

LHM

http://lawprofessors.typepad.com/nonprofit/2008/05/third-sector-re.html

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