The college admissions cheating scandal is all over the news, and rightfully so. This story involves the rich and famous, some of the most elite universities and colleges in the nation, and a nonprofit organization that allegedly engineered more than 800 bribes and other initiatives to benefit the children of its wealthy “donors.” The scandal involved everything from cheating on college admission tests to bribing athletic departments to giving students sports scholarships that they did not deserve.
Most of the articles in the media are focused on the ethical implications of what happened and how the Key Worldwide Foundation (KWF) orchestrated numerous cases of fraud and deception. Although these stories are interesting, there is another important aspect to the story—how did the safeguards put in place by the IRS to detect abuse by tax-exempt organizations fail?
Obvious Red Flags
The IRS requires most tax-exempt organizations to file an informational tax return, which is commonly known as Form 990 (Return of Organization Exempt from Income Tax). A tax-exempt organization’s Form 990 is a public document that anyone can access and inspect. All one has to do is look at KWF’s Form 990 to see that something was wrong or at least worthy of an investigation. A review of the information presented on KWF’s 2016 Form 990 (the most recent one filed with the IRS) identified several issues:
KWF’s financial statements were not audited by a certified public accountant. KWF claimed to have raised more than $7 million since its founding and had more than $2 million in assets. Organizations of this size are typically audited.
Its Form 990 was reviewed by only one person—KWF’s president and CEO William “Rick” Singer. A board of directors and/or a finance committee should have had oversight of KWF’s finances and activities.
KWF did not make its governing documents, conflict of interest policy, or financial statements available to the public, which indicates a lack of transparency.
There is no whistleblower or document retention policy on file, as suggested by the IRS.
The functional expense allocation is not in alignment with what is typical for an organization of its size.
Donations were made to other organizations, with no records substantiating the organizations’ eligibility or the selection criteria. There was no monitoring of the use of the donated funds, leaving the door wide open for the reported misuse of these funds. Instead of helping low-income students, these donations allegedly served the wealthy.
The last bullet point is the most blatant that something was wrong. As stated on KWF’s Form 990: “The Key Worldwide Foundation endeavors to provide education that would normally be unattainable to underprivileged students, not only attainable but realistic. With programs that are designed to assist young people in everyday situations, and educational situations, we hope to open new avenues of educational access to students that would normally have no access to these programs. Our contributions to major athletic university programs, may help to provide placement to students that may not have access under normal channels.” At issue is the fact that programs solely devoted to helping underprivileged students received very little of KWF’s funding. Instead, the lion’s share of the money went to elite universities, with apparently no monitoring of how those funds were used.
Information on Form 990
The purpose of Form 990 is to provide the IRS and the public with detailed financial information about a nonprofit organization, as well as an overview of the organization’s activities and governance policies.
Form 990 is also used by the IRS to prevent organizations from abusing their tax-exempt status. There is a section for the organization to outline its accomplishments in the previous year in order to justify keeping its tax-exempt status. Information is required on how the organization is governed. The names of its board members, directors, highly compensated employees, and employees with management responsibilities must be disclosed, as well as the amount they are paid. Compensating management at a rate that is higher than similar positions at other nonprofits could put the organization’s tax-exempt status at risk.
The IRS intended Form 990 to provide a level of transparency and governance to ensure that nonprofit organizations are doing what they are supposed to do. Form 990 includes numerous disclosures to encourage nonprofit boards to adopt governance policies and procedures to monitor their activities and report on how the money entrusted with them is spent.
Although the college admissions scandal revealed a terrible abuse of power and money, as well as a crime, KWF did file the appropriate information with the IRS. The problem was that no one paid close enough attention to realize that there were irregularities.
KWF had no independent directors to hold Singer accountable. Although the IRS warns organizations and the public that non-independent directors could have a conflict of interest, nothing was done to enforce proper oversight.
The bottom line is that the IRS does not typically go after organizations like KWF unless someone alerts them to the fact that something is wrong. That is what eventually happened in this case.
It is easy to look back on what happened and identify issues that are clearly stated on KWF’s Form 990. This form is intended to communicate an organization’s: tax status, mission statement, revenue (amount received and sources), expenses (program, management & general, and fundraising), net assets, investments, identity and salaries of board members and key employees, programs and related expenses, significant changes in financial position, conflicts of interest among professionals and staff members, governance policies, and lobbying activities. In this case, no one was listening closely enough.
Michelle S. Martin, CPA, is a manager with Klatzkin & Company LLP. She has more than 15 years of experience preparing information returns for a variety of organizations in the nonprofit sector. She specializes in the preparation of Form 990 and related compliance issues. Michelle serves as team leader of Klatzkin’s nonprofit group. In this role, she helps the firm deliver services of the highest quality to clients. Michelle can be contacted at 609-890-9189 or email@example.com.