ELLEN F. ROSENBLUM Attorney General FREDERICK M. BOSS Deputy Attorney General DEPARTMENT OF JUSTICE CIVIL ENFORCEMENT DIVISION August 2, 2016 PUBLIC AUDIT REPORT Emmanuel Community General Services, Inc. DOJ File No. Dear Board of Directors: This letter constitutes the ?nal report of our investigation into Emmanuel Community General Services, Inc. (ECS) as a nonpro?t charitable organization governed by ORS Chapters 65 and 128. Despite serious concerns about the operation and future of ECS, the Oregon Department of Justice (the Department) is not pursuing any enforcement actions at this time. Based on the ?ndings and conclusions below, however, the Department recommends substantial changes to governance and oversight, including disassociating from its former executive director, improving grant management administratibn and reconciling past unallowable costs, developing an active and engaged board of directors, adopting internal controls, and exercising greater ?nancial oversight. ECS should also ?le its 2013 and 2014 annual ?nancial reports with this of?ce. Failing to ?le those reports may result in legal action. The Department also requests that ECS inform the Department if it receives grants or contracts in excess of $50,000 so that this of?ce can verify that ECS has developed the infrastructure necessary to responsibly manage such assets. This report is based on records provided by ROS and its bookkeeping service, interviews with Pastor Franklin Alvey, Bishop CT Wells, former Executive Director Clayborn Gellins, and accountant Lind Mizar of Genius Accountant, as well as the Department?s own research. This report is the public record of our investigation and should be shared with all board directors for the organization. I. INTRODUCTION The Attorney General is responsible for supervising charitable organizations holding or soliciting assets in Oregon. See ORS and (6), ORS 128.610 3: 5651., and ORS Chapter 65. This responsibility includes the power and duty to investigate whether charitable organizations . are carrying out their charitable mission or breaching any ?duciary duties arising under statutory or common law. ORS 128.680. The Charitable Activities Section of the Department performs those duties on behalf of the Attorney General. Emmanuel Community General Services, Inc. Page 2 01?10 This report is intended to help the board of ECS understand the Department?s concerns about past operation and governance with the goal of helping the board avoid similar problems in the future. 11. FINDINGS AND RECOMMENDATIONS A. Factual Background broadly stated mission is to provide services to the needy. ECS was formed by the men?s group at Emmanuel Church in 1984 as a response to gang violence in North Portland. The - organization initially provided support to those attempting to escape gang life, but over the past several decades the type and duration of its programs has ?uctuated based on the availability of funding. Since its inception, ECS has received grants and contracts to provide a variety of services related to gang violence, prisoner reentry, transitional housing, domestic violence, and parenting. The only current programs provided by ECS are: (1) atransiticnal housing program for families; (2) a contract to provide feeder-service family mentoring; and (3) a contract to provide fee~for?service facilitation of meetings between Oregon Department of Human Services (DHS) caseworkers and clients. The transitional housing program is self~funded through rent payments by residents of the facility and/or third~party social service agencies. Around 2004, Bishop AA Wells, the former head of Emmanuel Church, asked Clayborn Collins to assist the church in negotiating the sale of a lease contract. As a result of the project, Mr. Collins became more heavily involved in Emmanuel Church, and he was asked to serve as Executive Director of ECS sometime in 2006. He served for three years without compensation from ECS, although Mr. Collins told the Department that he was simultaneously employed with Emmanuel Church at a rate of $500 per month. In 2008-09, after additional funding became available, Mr. Collins was compensated by ECS. On September 4, 2014, The Oregonian reported that Mr. Collins had distorted his academic background and criminal history in connection with grant applications for government funds of more than $1.2 million. On September 11, 2014, The Oregonian reported that Mr. Collins had taken a leave of absence from In connection with those reports, in October 2014, the Department issued an Order to Appear and Produce Documents. Over the course of the next year, the Department had some dif?culty obtaining documents from ECS and ECS requested multiple'extensions of time to respond. Eventually, the Department obtained suf?cient documents from ECS and from its bookkeeper to inform the ?ndings and conclusions set forth in this report. The Department also obtained relevant documents related to grants from government agencies. The Department also interviewed bookkeeper, Mr. Collins, Pastor Alvey, and Bishop Wells. The Department?s audit revealed several issues with governance and operations, addressed in more detail below. DM 750910? Emmanuel Community General Services, Inc. Page 3 of 10 B. Recordkeeping ORS 65.771 requires nonpro?t organizations to ?keep as permanent records minutes of all meetings of its members and board of directors, a record of all corporate action taken by the members or directors without a meeting, and a record of all actions taken by committees of the board of directors in place of the board of directors on behalf of the corporation.? ORS 65.77 Corporations must also maintain appropriate accounting records, as well as bylaws, a list of the names and addresses of its current directors and of?cers, the last three financial statements, and the most recent corporate ?ling with the Secretary of State. ORS ORS incomplete and disorganized production of documents indicates that the organization has not been regularly maintaining the documents required to be maintained by ORS 65.771. For example, the Department requested production of the organization?s minutes on three separate occasions. Different documents were produced in response to each request, including correspondence to board members requesting that they provide copies of meeting minutes in the board members? possession, custody, and control to ECS. While this demonstrates a proper effort to fully respond to the Department?s order, it also shows that ECS does not regularly maintain a complete set of meeting minutes. ORS 65.771 also requires nonprofit corporations to maintain a board roster. Despite having requested a list of board members, the Department has still not received a true and accurate listing of ECS board member names, contact information, and dates of board service. We understand from interviews that the current board consists of Bishop CT Wells, Pastor Alvey, and Maurice Fain. It also appears that ECS has not maintained appropriate accounting r.ecords ECS had dif?culty producing complete sets of bank statements for the accounts under its control 1n response to the Department?s requests. Similarly, despite the fact that the meeting minutes and agendas the Department received referenced periodic ??nancial reports,? none were produced by ECS. When we requested accounting information, ECS representatives were unable to produce it and directed the Department to contact its bookkeeper, who was in turn directed by Mr. Collins not to cooperate with the Department?s inquiry, resulting in additional delays and expense in obtaining the accounting records that should have been readily available in accordance with ORS 65 .771. Similarly, failure to produce documents related to government grants the organization had received necessitated the Department contacting the grantors for the information. In addition to the accounting records being unnecessarily dif?cult to obtain, the accounting records contained numerous errors that appeared to be the result of inexperienced staff performing QuiokBooks data entry without proper training or experience. That resulted in improper prior period modi?cations, misclassi?cation of revenues and expenses, neglect and/or misuse of balance sheet accounts, delayed or absent account reconciliations, and haphazard ?nanciai reporting. In August 2014, a bookkeeper was engaged to help maintain ECS ?nancial accounts, prepare reports, and prepare regulatory filings. At the time the bookkeeper was hired, ECS bank accounts had not been reconciled in more than six months, no balance sheet accounts were being maintained, required tax ?lings were two years in arrears, and the ?nancial data was DM 75 09 107 Emmanuel Community General Services, Inc. Page 4 of 10 so riddled with errors that the bookkeeper had to re?build QuickBooks ?les, manually entering three years? of transactions. The bookkeeper then attempted to sustain accurate bookkeeping for ECS going forward, but was unable to maintain the integrity of the ?nancial data due to inability to provide timely or accurate supporting documentation and the delayed or incorrect data entries made by untrained ECS staff. It is the Department?s understanding that the relationship between ECS and its bookkeeper ended in December 2015. It is unclear how ECS plans to maintain proper accounting records going forward to ensure compliance with ORS 65.771. The Department recommends that ECS adopt policies and protocols to ensure that accounting transactions are and accurately recorded and that appropriate accounting records are regularly maintained. Such policies and plotocols ale necessary not only to comply with ORS 65771 but also to enable the directors and of?cers to meaningfully evaluate ?nances and programs The Department further recommends that ECS adopt and follow document retention policies requiring the maintenance of a regularly updated board roster and board meeting minute notebook to ensure that ECS fully complies with ORS 65.771 in the future. As previously noted, ECS is delinquent in ?ling its 2013 and 2014 (ET-12 reports as required by the Charitable Trust and Corporation Act. Failure to remedy those delinquencies may result in the Department initiating administrative proceedings to impose monetary penalties, to prohibit ECS from soliciting funds until ECS files the delinquent reports, or other appropriate relief. See OAR 137 010 005 61.989}. C. Lack of Board Involvement and Personnel Oversight Oregon law requires that ?[a]11 corporate powers shall be exercised by or under the authority of, and the affairs of the corporation managed under thedirection of, the board of directors,? unless the articles of incorporation authorize a person or persons to exercise. some or all of those powers which would otherwise be exelcised by the board ORS 65. 301. BOald members must shoulder the responsibility to manage the affairs of a nonpro?t corpmation in compliance with statutory and common law ?duciary duties. See e. g, ORS 65.357. Those ?duciary duties include the duty of care, which requires directors to act with the care an ordinarily prudent person in like position would exercise under similar circumstances. ORS To ful?ll that duty, directors must actively participate in the management of the organization, to include attending periodic meetings of the board, evaluating reports, reading minutes, and reviewing the performance of the executive director. Directors must also request and receive suf?cient information to carry out their responsibilities, such as by inquiring into the facts and circumstances surrounding a problem or investigating warnings or reports of of?cer or empIOyee theft or mismanagement. 1 The articles of incorporation for ECS do not contain a relevant exception. DM 7509107 Emmanuel Community General Services, Inc. Page 5 of 10 Based on the Department?s review of the documents and information provided by ECS, board has not exercised adequate oversight over the organization?s ?nances, operations, or personnel. For example, Mr. Collins?s performance as Executive Director of ECS does not appear to have been reviewed at any time between 2011 and 2015. Meanwhile, his compensation was increased during that same period despite repeated reports of budgeting and ?nancial issues faced by ECS. Moreover, when the allegations of Mr. Collins?s misrepresentations in connection with grant applications came to light, it does not appear that the board met to discuss the matter. The Oregonian reported on September 11, 2014, that Mr. Collins had been permanently relieved of any duties in which he would work with the nonpro?t?s programs serving women, children, and domestic abuse victims. The decision to relieve Mr. Collins of these duties appears to have been made by Bishop Wells in order to maintain relationship with the U.S. Department of Justice. Bishop Wells nevertheless arranged for ECS to retain Mr. Collins to provide other services. It does not appear that Bishop Wells shared the US. Department of Justice?s concerns with the board or consulted with the board regarding the proper course of action with respect to Mr. Collins. It is the Department?s understanding that Mr. Collins continues to be employed and paid by ECS for various services, including negotiating the sale of a property. Such property is used by ECS for the purposes of operating a shelter.2 When the Department inquired of Bishop Wells, Pastor Alvey, and Mr. Collins who resides in the shelter, each had a different response. According to Bishop Wells, it currently houses women and children. According to Pastor Alvey, it houses only . single men. According to Mr. Collins, it houses single adults, families and couples. The lack of consistent knowledge and response raises concerns about the disengagement of board directors and the possibility that Mr. Collins continues to be involved 'with programs serving women and children. Both Bishop Wells and Mr. Collins, however, expect Mr. Collins?s involvement with ECS to conclude by the fall of 2016. Based on the evidence available to the Department, it appears that the ECS board met too infrequently, lacked suf?cient information to properly evaluate the organization?s operations and ?nances, and relied too heavily on Mr. Collins without sufficiently overseeing his activities and performance. The Department recommends permanently dismissing Mr. Collins and providing greater oversight in the future over the background and activities of any executive director hired to replace Mr. Collins. The Department further recommends creating and maintaining a board meeting schedule that permits directors to be thoroughly acquainted with the organization?s 2 It remains unclear to the Depaltment exactly why ECS is involved in the sale of its landlord?s property to a third party or what experience Mr. Collins brings to bear on that transaction. Despite the Department?s repeated requests, the lease was not produced by ECS, but the Department obtained a copy of the lease from another source. The lease states that ECS has the option to purchase the property at the conclusion of the lease, but does not provide an option for ECS to broker a sale with a third party. When the Depaltment expressed concern at Mr. Collins?s involvement in a real estate transaction on behalf of ECS given his disciplinary history in connection with brokering real estate transactions, Bishop Wells clari?ed that Mr. Collins is not involved in the transaction as a broker or agent and was simply providing advice and helping ECS to build relationships. DM 7509107 Emmanuel Community General Services, Inc. Page 6 of 10 programs and ?nances, including grant requirements, to ensure that ECS is complying with its obligations to granto'rs, charitable bene?ciaries, and the public. D. Lack of Internal Controls and Financial Oversight One of the board?s responsibilities is to oversee the organization?s financial affairs, including ensuring that the organization has adequate accounting systems and internal controls. The board should be responsible for approving the organization?s budget, and board members should expect the executive director to produce timely and adequate income and expense statements, balance sheets, and budget status reports in advance of board meetings. The Department?s review of ?nances revealed that officers? and directors? failure to adequately monitor corporate ?nances, including its failure to review bank statements, created a permissive environment that increased the risk of loss and misuse of corporate funds. Although Pastor Alvey serves as Treasurer (a new position for ECS which has previously not had a treasurer), he reported that he does not review the organization?s bank statements and appeared generally unfamiliar with the organization?s ?nances. Bishop Wells also reported that he does not review the bank statements and does not know who does. The lack of internal controls and oversight had real and deleterious consequences for ECS that have yet to be addressed. US DOJ froze grant funds due to its failure to maintain adequate records or to ful?ll grant reporting requirements. In addition, we have identified approximately $37,603 in questioned costs, including Collins?s salary for the time period when Collins was barred from working on this grant, which ECS charged to the US DOJ cost-reimbursement grant. Such costs appear to be unallowable under the grant terms. ECS may also have incurred avoidable tax liability as a consequence of permitting Mr. Collins to draw a housing allowance from ECS but failing to report the allowance as part of Mr. Collins?s compensation, claiming that this allowance qualified for the minister?s housing exclusion. Because Mr. Collins did not serve as clergy or a religious worker in his capacity as Executive Director for ECS, the failure to report his annual housing allowance was in error and should be corrected with the Internal Revenue Service and the Oregon Department of Revenue. The estimated understatement of Collins?s reportable compensation is 539,5 00 in caiendar year 2013 and $20,000 in calendar year 2014. It is likely that similar errors occurred in calendar year 2015, but the Department does not have information for 2015. In addition to addressing some of the speci?c issues noted above, at a minimum ECS should implement the following financial internal controls in order to protect charitable funds entrusted to its care: 1. Controls over bank accounts. Bank statements should be reviewed regularly by a responsible person who is independent of the deposit and disbursement functions, such as a board member. Bank statements should also be reconciled to the general ledger on a regular and timely basis by someone independent of the deposit and disbursement DM 7509107 Emmanuel Community General Services, Inc. Page 7 of 10 functions. Regular review and reconciliation of accounts can deter fraud, detect errors and overdrafts, and allow the organization to take corrective action in a timely manner. 2. Controls over disbursements. Proper segregation of duties should be implemented to prevent a single person from controlling multiple facets of the disbursement function. Authorized check signers should be independent of the person who prepares checks and approves invoices. All payments and expense reimbursements should be supported by appropriate documentation such as invoices and original receipts. Expenses incurred via organizational bank cards should be supported by original receipts which clearly state the business purpose of the expense. Meals, lodging, and entertainment expenses should be supported by original receipts stating the persons in attendance and the business purpose of the expense. Automobile expenses should be supported by mileage reports (for use of personal vehicles) or trip reports (for fueling of an ECS~owned vehicle). The signer and the payee of a check should be independent of each other one should not sign checks payable to oneself, one?s spouse, or one?s close family/associates). Payments for professional services should be supported by an invoice and a description of services from the service provider. ECS claims to have a policy in place requiring dual signatures on all checks. However, We note that this policy is not observed or enforced by ECS. We conducted a review spanning 10 months of cancelled check images and noted that over 70% of total checks written lacked a dual signature. Additionally, there were 30 instances of single-signer checks in which the check signer is the same as (or the spouse of) the payee. An internal control policy is meaningless if it is not properly implemented or enforced, and we recommend instituting more effective controls over the disbursement function as detailed above. 3. Controls ever payroll and related expenses. Employees should submit timesheets which have been reviewed and approved by a supervisor for each pay period. Supervisors should not approve their own timesheets, but should instead seek review and approval from a member of the board or executive team. When an employee?s efforts directly bene?t more than one function or pro gram area, the timesheet should re?ect the specific hours that the employee dedicated to each function or program. When an employee?s efforts indirectly benefit more than one program area, the employee?s payroll should be allocated among the appropriate programs using a method that is reasonable, consistent, documented, and in compliance with any relevant funding agreements or federal requirements. Other employee expenses, such as payroll taxes and employee bene?ts, should be allocated by function and program area in the same manner as payroll. Payroll and related costs represent the organization?s largest expense and are worthy of management? 3 heightened attention and control. Additionally, many grantors, including the federal government, require careful documentation of employee expenses which are charged to the relevant grant. The organization must maintain proper controls over the tracking, allocation, and 1ec01ding of employee expenses in orde1 to satisfy accounting best practices and funders as well as regulatory bodies. DM 7509107 Emmanuel Community General Services, Inc. Page 8 of 10 4. Controls over financial recording and reporting. Financial data should be recorded in the accounting system accurately and in a timely manner. Balance sheet accounts should be maintained and reconciled regularly. Expenses should be recorded by natural classi?cation in a consistent manner. Revenue should be recorded using a consistent and logical method, such that revenue from a speci?c source and fora speci?c purpose can be easily identi?ed. For example, all payments for the Group Parenting pro gram should be recorded to the same consistent revenue account, rather than recorded haphazardly to multiple revenue accounts and intermingled with revenue from other sources and for other purposes. Original accounting entries should never be changed; correction of errors or omissions should only be accomplished via appropriate journal entries so as not to cause improper modification of prior periods or to obscure original data. Those responsible for making entries in the accounting system should possess adequate knowledge and skills. Financial details should be reviewed regularly by?a knowledgeable and responsible . individual, such as an external CPA or a board member with ?nancial training, in order to insure the accuracy of transactions and journal entries made to the accounting system. The organization needs complete, accurate, and timely ?nancial information in order to make appropriate decisions. 5. Controls over contracts and funding agreements. All grants and contracts should be carefully reviewed by a knowledgeable employee or board member. One or more persons must be responsible for ensuring that the terms of each grant or contract are understood, that the organization is in compliance with applicable terms and reporting requirements, and that revenue restrictions and cost allocations are properly tracked and recorded. All documentation relating to each grant or contract should be maintained in the organization?s ?les, including the original application or proposal; the budget, grant agreement or contract, master service agreement, and any addendums or modi?cations; all supporting documentation for relevant eXpenses such as receipts, timesheets, and proof of services provided; and copies of required reports submitted to the funder. We note that US DOJ grant funds were frozen in October of 2014 and again in March of 2015 due to noncompliance. ECS must maintain proper oversight and control of its contracts and funding agreements in order to insure the revenue streams necessary to continue its impact in the community. 6. A con?ict of interest policy. This describes how a con?ict of interest situation on the board is resolved and/or avoided. This written policy should clearly state how only a majority of disinterested board members make decisions and how a con?icted board member would be excluded from any situation that might prevent them from being impartial or from appearing to be impartial. We noted numerous payments to related parties such as board members, executives, or their immediate family members, which must be supported by proper documentation consistent with a con?ict of interest policy, such as approval by a disinterested majority of the board. A written record of how and when this policy is implemented should be recorded in the board minutes. Director con?ict of interest issues are addressed under ORS 65.361. DM 7509107 Emmanuel Community General Services, Inc. Page 9 of 10 These are the minimum internal controls that should be in place in any well administered organization, regardless of size. For a larger organization such an ECS, internal controls to ensure that grant funds are properly spent may include adopting background checks for employees, conducting annual ?nancial audits, and creating a ?nance committee of the board to provide greater oversight. In addition to having an adequate system of internal controls in place, it also important for the board to routinely verify that the controls are being properly observed. Having effective internal controls does not bene?t the organization if they are not being utilized. The Department recommends that ECS develop, adopt, and observe policies that reduce the . likelihood of losing assets by fraud or error, enhance the reliability of ?nancial reporting, and ensure compliance with applicable laws and regulations. The internal controls adopted by ECS should be memorialized in writing and training provided to all individuals with access to the organization?s ?nancial systems. Because it appears that ECS presently lacks the infrastructure to properly manage and account for substantial grant funds or fee?for?service contracts, the Department requests noti?cation should ECS receive grant(s) or contracts in excess of $50,000. Such noti?cations should continue until it can be established that governance, ?nancial management and internal controls are suf?cient to protect the public?s interest in charitable assets and entities. CONCLUSION Since its inception, ECS has provided valuable services to the community, but its policies and procedures have not evolved to ensure effective program delivery and ?nancial stability. Because of those inadequate policies and procedures, ECS is now faced with the challenge of reforming its record-keeping, financial, and governance practices to ensure effective program service delivery in the future and accurate and transparent ?nancial reporting to grantors, bene?ciaries, and the public. To that end, the Department recommends that ECS remedy its violations of the Charitable Trust and Corporation Act by committing to the following actions: I) ?ling complete and accurate 2013 and 2014 reports with the Attorney General; 2) lnformin the Department in the event that ECS receives any grant or contract awards in excess of $50,000 until such time that ECS can establish it has adopted the infrastructure necessary to ensure the responsible management of charitable assets; 3) Disassociating from former executive director Clayborn Collins; 4) Engaging quali?ed individuals to improve grant management and administration; 5) Contacting the US. Department of Justice to reconcile any unallowable costs reimbursed through the grant awarded by the Of?ce on Violence Against Women; 6) Developing an active and engaged board of directors; and 7) Adopting and implementing effective internal controls. ECS has expressed a commitment to improving its operations to ensure greater legal compliance and ?nancial stability, and it is the Department?s hope that ECS ?s efforts are successful so that it may continue to provide valuable services to our community. DM 7509107 Emmanuel Community General Services, Inc. Page 10 of 10 DM 7509107 ELLEN F. ROSENBLUM Attorney General Marita Heather L. Weigler Senior Assistant Attorney General Of Attorneys for the State of Oregon Department of Justice Charitable Activities Section 100 SW Market Street Portland, Oregon 97201 (971) 673-1880