Tuesday, December 18

Second Mile's Financial Statements Don't Add Up - Part 1

A Comparison Between The Second Mile's 2006 Annual Report and its IRS 990 Shows That The Organization May Have Understated Revenues  -- Deceived Donors 

Many in the public have questioned why no one at The Second Mile (TSM) was charged with failure to report child abuse in the Sandusky case.  TSM's Executive Director, Dr. Jack Raykovitz,  was informed that Sandusky showered with a child, yet the Pennsylvania Office of Attorney General did not see fit to charge Dr. Raykovitz.  Deadspin.com and others pointed to donations by TSM's Board to Tom Corbett's 2010 gubernatiorial campaign as a possible reason for the favorable treatment.

Along the same lines, many have questioned why the Penn State Board of Trustees (BOT) have barely, if at all, mentioned TSM during the course of the Sandusky Scandal.  As a result of the Board's avoidance of any discussion of PSU's relationship to the charity,  many have wondered  if there is something worse than the current scandal between the BOT and TSM. And is that "something" the impetus behind the BOT's "moving forward" effort?

With any scandal, the rule of thumb is "follow the money" -- and it appears that Second Mile may have had quite a bit of money on its hands that the IRS and its donors didn't know about.  Frankly, the IRS 990s and the Annual Reports prepared for donors just don't add up.  In fact, getting anything to add up on the TSM's reports is a maddening experience.

While we know there have been investigations of TSM by the U.S. Postal Inspectors and various others, it is not known if any investigative agency has done a thorough examination of the organization's finances. TSM's IRS 990 forms were completed by the accounting firm Richey, Cox, Hollis, Mock and Klein, PC of State College, but tax accounting firms generally assume that the client is being honest about the information provided on their returns. 

It is important to note that the analyses that follow have not been conducted using the rigor required by an audit, but provide examples of differences between the various statements about the financials of TSM using publicly available documentation.  

Annual Reports (the typically glossy publications sent to shareholders) are composed of two parts.  The first part - or the Management Discussion and Analysis - is the company putting its best foot forward and telling about all the great things it's done.  The second part is typically composed of the company's annual financial statements -- balance sheet, statements of cash flows, income statements, and notes pages.  The financial statements will differ between for profits, not for profits, and government.  All statements should follow generally accepted accounting principles.
TSM's 2006 Annual Report did not use a "two-part" format and only included selected financial data -- limited to its statements of revenues and expenses.  Most annual reports include audited statements; TSM's Annual Report did not.  This is an important distinction because people who routinely read annual reports may have assumed that TSM's financial information was from their audited report.  It clearly was not because all of the numbers between the two statements are different.

In terms of information about the financial health of the charity, the data the annual report provides was very limited.  However, one of the more revealing details in TSM report was its Angel Donor list, which included the names/company of each donor and the range of donation (see chart at left).  Companies and persons on the 2006 Angel Donor list with ties to the November 2011 Board of Trustees included:
-- United States Steel (John Surma),
-- Merck (Kenneth Frazier),
-- PNC Bank (Ted Junker*),
-- Lloyd Huck*, and
-- James Broadhurst
*indicates Emeritus Trustee

Angel Donors vs. IRS 990 Forms

The Angel Donor list was unlikely to be accurate because some donors named may not have followed through on their promised donation and/or they could have been categorized in the wrong category, however, one would expect that the total donations computed from the donor list would be within a reasonable range of the donor revenues on the IRS Form 990.  Our analysis determined that the Angel Donors contributed a minimum of approximately $1.8M in donations in 2006 and an approximate maximum of $3.8M.   Comparing the Angel Donor list to the revenues on the 2005 IRS 990 (approximately $1.3M), there was a difference in TSM 2006 donations between $498K and $2.5M.   The real number was likely somewhere in between, but here's how the figures looked based on the computations (note that the donations in the "$50,000 and more" category are capped at that amount and the Under $500 donations are based on figures based on the 1998 IRS990):



IRS 990 Form vs. Annual Report Donor Revenue

TSM's Annual Report contained selected financial information, including general statements of revenues and expenses.  For 2006, the Annual Report stated $1,395,108 in donations (see table at right), while the IRS 990 claimed $1,329,465 -- a discrepancy of $65,643.  This difference can be reconciled, however, because the IRS report contains restricted assets and the Annual Report includes in-kind donations.  When each variable is subtracted the IRS990 matches the Annual Report -- but the Angel Donor considerably larger than either figure.

What is the real number for donor revenues?

That would depend on how honestly and accurately the TSM recorded their donations upon receipt and whether those records would be available for examination by an auditor or forensic accountant.

But revenues are just one part of the financial equation at TSM.  We found the accounting of expenses to have similar discrepancies and accuracy problems.


Part 2:  Expenses at TSM to be released Thursday.



9 comments:

  1. The Second Mile: Providing children with help and hope

    Historical ratings are not posted for this charity because a Donor Advisory is in place and, as stated in our methodology, it is our policy that Donor Advisories supersede all ratings. However, you can access the charity’s historical Forms 990 using the Foundation Center’s widget located here.

    http://www.charitynavigator.org

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  5. You can find missing reports in these files. http://www.eri-nonprofit-salaries.com/index.cfm?FuseAction=NPO.Form990&EIN=232061185&Year=2011I

    The first one has the 1999 Second Mile Annual Report on page 33.

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    1. Thanks, but those are the IRS 990s, not the Annual Reports.

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  6. Interesting how Waste Management was a major contributor shortly after Corbett's departure from the outfit. I'd be willing to bet anything that donation started a few years earlier!

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  7. SM using publicly available documentation.

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