Stace is not the only one who is wondering how the audits didn’t catch such obvious corruption;
There have been significant concerns and questions expressed by voters in our district, by other legislators, and even KELO’s Angela Kennecke in a news story, regarding our district Rep. Kyle Schoenfish’s reported involvement in the auditing of certain entities at the center of this scandal. On Jan. 31, I officially forwarded those questions to Rep. Schoenfish. He responded on Feb. 4 stating the questions were “..fairly easy to address.†Despite that statement, to date he has refused to provide answers to those questions asked by Kennecke and others. Additionally, Rep. Schoenfish failed to show up for two of our district’s five cracker barrels (legislative forums), one in Corsica on Feb. 16, and the other in his hometown of Scotland on March 11. He now claims repeatedly in his articles to our local papers that he has been “attacked†by “dishonest politicians and people†and claims to be a victim of “meritless political attacks.â€
Rep. Schoenfish is being “attacked†by his own record and the ugly appearance that comes from avoiding answering questions that the public has a right to have answered. In regards to his missing or avoiding cracker barrels, if I as a husband, daddy, grandfather, small Sioux Falls business manager, hobby farmer and busted-up old Marine can make time to meet my obligations and drive several hours to attend the voters’ cracker barrels to be answerable to you, I expect a young, single man living at home and working for his father to make time for the responsibilities he knowingly signed on to (and got paid for), or to resign if he is unwilling to do so.
Hey Stace, it’s hard work covering up lies.
Spot on, Stace.
Marty Guindon promised in 2015 that his review would be a MCEC review, not a GEAR UP review. He would be looking at other federal programs administered by MCEC on behalf of the state, and he would look at entities that received funds from MCEC, like the PAST Foundation as well as AIII and OSEC. My hope is that the comprehensiveness of his investigation is what has caused it to take a year longer than his original estimate of six months.
Also, I think the focus on Schoenfish is misplaced. His 2014 audit pointed out problems and noted that MCEC’s board had been told for eight years that problems existed. Most of the criticism of Schoenfish is coming from people who don’t know the role and limits of audits, or the difference between a financial audit and a forensic audit.
For more on my perspective on this, see:
“This Cooperative’s Defense: ‘Blame the Auditors, Not the Board!’â€
https://nonprofitquarterly.org/2017/03/02/cooperatives-defense-blame-auditors-not-board/
“Also, I think the focus on Schoenfish is misplaced. His 2014 audit pointed out problems and noted that MCEC’s board had been told for eight years that problems existed. Most of the criticism of Schoenfish is coming from people who don’t know the role and limits of audits, or the difference between a financial audit and a forensic audit.”
MW, while I agree with you to some extent, I think this situation is very different. 1) Kyle is doing an audit of TAXPAYER’s money, whether that is Federal or State, makes not difference AND 2) which I think is even more important, as an elected representative of the state legislature, he really has a duty to report corruption or inaccuracies. And if the governer’s office doesn’t want to listen, he can go to the FEDs. The audit’s are not where Kyle messed up, his lack of reporting them to the proper authorities is what is in question here.
MW – I agree that the audit is only as good as the data…and auditors usually do not have a crystal ball handy for the unknown nor do they have a magic mirror to tell them of any mischief of a non-profit. BUT please answer me this: I have heard that SD non-profits have NO oversight by the SOS’s office nor the AG’s office like other states do. We have an “honor” system in SD…unfortunately as in the rest of the world, there is no honor among thieves. What do other states do to make sure their non-profits are regulated by a process OTHER than the “honor system?
My frustration with all this is that SD figured out how to screw the Federal government by applying for every grant offered…having cronies set up non-profits to receive the $ (BTW non-profits were removed from the SOS website) ….charging up to 50% of the grant for “managing” the non-profit…having other non-profits set up just to be a “manager” for another non-profit and all of this is cranked out of the GOED.
Do board members of non-profits understand liability falls on THEIR shoulders because of our stupid “honor system”?
Im also thinking any transaction looks legal if the GOED says so or hides pertinent information….but who is overseeing the GOED?
“MW – I agree that the audit is only as good as the data”
Lora:
Apologies for the LONG post!
That’s true, but I didn’t make that point in my blog post. Financial audits rely on the representations of management. A financial audit is *not* designed to uncover fraud or theft, though it may do so incidentally. The purpose of a financial audit is to determine whether the client’s financial records are kept in accordance with generally accepted accounting principles (GAAP). [NOTE: GAAP is being replaced by a different international standard, but the concept is the same. See: https://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles_(United_States)%5D
There are several nonprofits involved in the GEAR UP scanda, but MidCentral Educational Cooperative isn’t one of them because MidCentral isn’t a nonprofit corporation. It’s a unique animal, recognized by the state of South Dakota as an educational agency established by a group of school districts (local education agencies, or LEAs).
You’re correct about South Dakota’s relatively lax regulation and oversight of nonprofit activity. The state’s roughly 10,000 IRS-registered nonprofits must file an annual form with the Secretary of State identifying their continued operation, registered agent, contact information. A nominal fee is required to accompany this annual registration. South Dakota does not require nonprofits to file annual financial disclosures (about 40 states require nonprofits to file the IRS Form 990/990-EZ with the state as well). It does not require third-party fundraising firms to register and/or disclose the financial terms of their contractual relationships.
Each state’s attorney general is the “trustee of last resort” for their state’s nonprofit organizations. Generally, this responsibility is interpreted as one of consumer protection from unscrupulous telemarketers. Occasionally, AGs intervene in nonprofit financial transactions that carry risk that a nonprofit’s assets may leave the state’s borders. South Dakota’s intervention in transactions involving Banner Health in the 1980s (I think) were a key example in our state.
Would stronger state nonprofit regulation have discovered AIII and OSEC (the primary nonprofits involved in GEAR UP)? Probably not, for a number of reasons. Oversight requires governmental resources, and South Dakota’s government is not resource-rich. The IRS Form 990, upon which much financial oversight is based, is a leaky document. Not only are key parts of its instructions open to legitimate interpretation, but most nonprofits either make mistakes about or omit required information. State investigation would also likely require a complaining party, and both AIII and OSEC were/are very insular nonprofits with few key players (who weren’t also insiders) who would sufficiently aggrieved to lodge a formal complaint. Even if someone did, we’re back to the issue of state resources to pursue an investigation. Finally, you also have the issue of investigating nonprofits using federal dollars, subcontracted by school districts under state government authority, to do Native American programming. Is this the investigation a (presumably) cash-strapped state agency is likely to take on? The politics and “optics” make it unlikely. In this hypothetical world of stronger SD state nonprofit regulation, I could easily see a complaint over AIII and/or OSEC handling of GEAR UP funds being referred to the Dept. of Education as an opportunity to exercise its direct contractual oversight responsibility.
Finally, here’s the SD Secretary of State’s portal for nonprofit corporations: https://sdsos.gov/business-services/corporations/corporate-forms/nonprofit-corporations.aspx. If someone wishes to search for a nonprofit, that is done using the “search for a business” feature. Nonprofits are corporations, so the database includes both for-profit and nonprofit corporate entries.
Michael, I going to read this a couple of times….great info….thanks.
MW, Please let me know if I have this correct: You are saying we don’t have the resources to effectively handle the 10,000 nonprofits currently registered at the SOS office. My question would be “why”? Since it is obvious corruption is easy via non-profits why is there one nonprofit for every 80 people in SD? Either make darn sure every non-profit is legit or make it harder to become one. This is about as bad as allowing a daycare provider to care for 200 kids….something is going to go wrong (as it did). From the outside looking in, its looks like running a non-profit is legalized theft of taxpayer money. Tons of foundation and Federal grants just waiting for a non-profit (or even worse, a non-profit mixed with a public/private/partnership) to apply for and then spread it around into other “non-profits or “animals”, as you described MidCentral is. I’m guessing one reason for setting up so may non-profits is to keep the total monetary flow of each to under $750,000 (or what ever the amount is) so there is no Federal requirement for an audit.
So what do you think needs to be done to stop these non-profits from abusing their entity requirements?
Corruption is “easy” for both for-profits and nonprofits. Very few corporations, whether for-profit or nonprofit, are corrupt. For that matter, most government employees and officials are honest. Most people are honest and law-abiding.
Governments legislate and regulate to control the harm caused by the exceptions to the rule. This involves a balancing act – catching the malefactors without making it unreasonably difficult for the rest of us to do our work legally and legitimately. This balancing act is analogous to the balance between our society’s desire, expressed through government, for order and the individual’s right to privacy and to be left alone.
The nonprofit sector nationally, and in South Dakota, is disjointed. The potential for collusion that you imply (spreading federal funds out in such a way as to avoid federal audit requirements) is functionally impossible. Besides, as I’ve said before, audits don’t do much of anything to discover fraud and abuse – that’s not their design and that’s not their purpose.
The best defense against malfeasance by nonprofit organizations is engaged and informed nonprofit board members and nonprofit executives. These directors and officers are legally liable – individually – for the bad acts of their colleagues and the organizations they govern. It’s rare that a nonprofit organization’s leaders achieve the required collusion to commit crimes or torts.
It’s perfectly valid to argue that nonprofits in SD should be more heavily regulated by the state. Some financial misdeeds by nonprofit boards and executives might be uncovered as a result of additional state oversight. Most other states, however, operate nonprofit oversight with the same limits on budget and personnel I presume would be the case in our low taxes, low services state were we to follow their example.