In 1887, several of Denver’s community and religious leaders established the Charity Organization Society. During its first year of operation, that organization raised a little more than \($20,000,\) which it then distributed to several local charities. The charity of charities fundraising concept spread across the United States over the following decades. After several name changes, the original Denver-based organization adopted the name United Way in 1963.

United Way grew rapidly during the latter decades of the twentieth century, eventually becoming the nation’s largest charitable organization. In 2006, United Way raised four billion dollars, more than double the charitable donations received that year by the Salvation Army, the nation’s second largest charitable organization. Each year, approximately 40,000 charities across the United States receive cash distributions from United Way.

For more than two decades beginning in the early 1970s, William Aramony served as the president of United Way of America. The Virginia-based United Way of America serves as the umbrella organization for the almost 1,400 local United Way chapters scattered across the United States. An alliance that Aramony negotiated with the National Football League (NFL) resulted in huge nationwide exposure for the United Way during every Sunday afternoon and Monday night NFL game. That exposure was largely responsible for the explosive growth that United Way realized during Aramony’s tenure as president.  

In recent years, United Way has faced two major challenges that threaten its leadership position in the charitable sector. Over the past several decades, the number of charitable and other not-for-profit organizations in the United States has skyrocketed. Currently, there are nearly two million registered tax-exempt organizations in the United States, the large majority of which are charities. Collectively, these organizations employ one of every ten working Americans. Registered charities alone raise more than \($300\) billion each year in donations from the public and private sector.

The intense and growing competition for Americans’ charitable donations has made it increasingly difficult for United Way to sustain the impressive growth that it realized under William Aramony’s leadership. The second major challenge facing United Way is a loss of credibility suffered by the organization due to a series of embarrassing and highly publicized embezzlement schemes. In the early 1990s, federal prosecutors indicted William Aramony for allegedly embezzling and otherwise misusing millions of dollars of United Way funds. In 1995, a federal jury found Aramony guilty of more than two dozen of the individual fraud charges that had been fi led against him. Aramony was later sentenced to serve seven years in federal prison. Testimony during Aramony’s trial revealed that he had squandered United Way funds on lavish trips to Las Vegas, Europe, Africa, and other destinations. The sixty-eight-year-old Aramony reportedly used United Way funds to finance multiple romantic relationships as well.

Shortly before Aramony went to trial, another United Way executive in Westchester, New York admitted to embezzling several hundred thousand dollars of her chapter’s funds. This individual, Evol Sealy, who oversaw the Westchester chapter’s accounting and finance functions, was later sentenced to a three-year prison term. In 2003, Jacquelyn Allen-MacGregor, the former vice president of finance of a United Way chapter in East Lansing, Michigan, pleaded guilty to stealing \($1.9\) million from the organization. Allen-MacGregor revealed that she had used the stolen funds to support her hobby, namely, horses—over the course of her embezzlement scheme she purchased more than seventy quarter horses. In June 2004, Allen-MacGregor was sentenced to four years in prison to be followed by three years of supervised probation. 

In 2004, Aramony’s friend and former associate, Oral Suer, who served for almost three decades as the president of a large United Way chapter in Washington, D.C., pleaded guilty to embezzling \($1.5\) million of United Way funds. The evidence collected by federal prosecutors against Suer included testimony documenting that Suer and Aramony had spent time together at a local racetrack. That evidence also documented that Suer used cash taken from his chapter to make good on the generous and well-publicized personal contribution pledges that he made during annual United Way fundraising campaigns. At his sentencing hearing, a contrite Suer told the presiding judge, “This is a very sad day for me, for the community and for the United Way. What I feel is embarrassment, shame, and guilt.”1 The judge then handed Suer a three-year prison sentence, the maximum permissible under federal sentencing guidelines. 

United Way’s reported theft losses have had a chilling effect on the organization’s fundraising efforts nationwide in recent years. Not surprisingly, individual chapters impacted directly by the embezzlement losses have experienced dramatic declines in their annual receipts. For example, adverse publicity resulting from the embezzlement loss at the United Way chapter in the Washington, D.C., area caused that chapter’s annual donations to plummet from \($45\) million to \($18\) million.

In recent years, many large charities in addition to United Way have suffered large losses due to embezzlements and other fraudulent activities perpetrated by organizational insiders. In 1989, former television evangelist Jim Bakker was sentenced to eighteen years in federal prison. Bakker was convicted of diverting millions of dollars for his personal use from the PTL Club, a religious broadcasting network that he and his wife, Tammy Faye, founded in the 1970s. The Bakkers had used passionate and persistent televised fundraising campaigns to convince the faithful and mostly shallow-pocketed viewers of their network to send them donations. In 1997, John G. Bennett, the founder of the New Era Philanthropy Foundation, was sentenced to twelve years in prison after embezzling an estimated \($8\) million from that charitable organization. In California, seven employees of Goodwill Industries, all of whom were related, operated a large-scale “fencing” operation from the early 1970s through 1998 in which they sold furniture, clothing, and other goods donated to that charity. Law enforcement authorities estimate that the seven relatives stole more than \($25\) million from that organization over the course of the fraudulent scheme. 

To date, the largest fraud impacting a charity was a Ponzi scheme that involved the Baptist Foundation of Arizona. In 2006, William Crotts, the chief executive of that charitable religious organization, received an eight-year prison sentence for defrauding an estimated 10,000 individuals of nearly \($160\) million. Making matters worse, most of the victims of Crotts’ fraud were elderly individuals, many of whom lost a sizable portion of their retirement nest eggs as a result of the fraud.......

Questions 

1. Identify and briefl y describe fundamental and cost-effective internal controls that charitable organizations could implement to reduce their exposure to theft losses.

2. Do CPA fi rms have a responsibility to perform audits of charitable organizations for reduced or lower than normal audit fees? Defend your answer. Other than audit fees, what other benefi ts do accounting fi rms accrue by auditing a charity?

3. Identify unique or uncommon audit risk factors posed by a charity. How should accounting fi rms modify their audits to address these risk factors?