Leadership

Who’s Auditing The Auditors?

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Credit where it is due, Peter Hansen of NJPAC posted a link on the Performing Arts Administrator’s group on LinkedIn about the £2.3 million judgment entered against former London Philharmonic Orchestra (LPO) General Manager Cameron Poole for financially defrauding that organization.

Even though it was supposed to take 4 people to issue a check, Poole was able to take advantage of operational distractions to perform all the required functions himself, included forging countersignatures. The executive director, Tim Walker, admits some negligence on his part, but is amazed that not only did he and the board not catch it, but the auditors from Deloitte missed it on three separate audits. LPO is currently pursuing a negligence suit against Deloitte.

It raises the question of whether you can really be certain you have proper controls and diligence in place. Deloitte missed, or at least didn’t comment on something that became apparent to Poole’s successor in a couple weeks. Four of the biggest accounting firms in the country never made a sound about the suspicious nature manner in which Bernie Madoff financial reports were generated. (An entirely separate issue from the strangely superior returns his fund was generating.)

One would think that after Arthur Andersen’s accounting arm lost credibility following the Enron scandal, reducing the Big Five accounting firms to the Big Four, greater attention would be paid. But I think people may attribute more competence and honesty to organizations of great size and prestige than is warranted. Even on the non-profit front, I was aware of a number of scandals in the United Way, but I had no idea that there has been large scale mismanagement and embezzlement at four or five locations and alleged smaller scale fraud at over 20 others. One of the Spanish members of the LinkedIn group cited a case similar to LPO’s at Barcelona’s Orfeó-Palau de la Musica Catalana where the general manager embezzled millions of euros (some stories I have seen claim 23 million in over 30 years).

The piece I linked to above about the United Way claims “The nonprofit world has accepted that multi-million embezzlements are a cost of doing business.” As much as I am dismayed by the idea that making great efforts at due diligence may not guarantee security, I would hope no one hiring me would do so assuming there was a good chance I will make off with some of the money.

There is a price for lack of scrutiny when people begin to lose faith in you. About a year ago, there was a piece in the Washington Post about 21 Washington DC area non-profits withdrawing from the local United Way, which had been the subject of one of the larger scandals, in favor of another emerging charitable organization.

I am encouraged by the news that it didn’t take long for Poole’s replacement at the LPO to notice something was strange. It means that misappropriations can be spotted with a little healthy scrutiny that makes no personal judgments about the individual holding the books when you ask to see the raw data rather than the summary reports.

Still, most of us don’t have three weeks to pour over ledgers sorting through it all. So the real question becomes, how do you know you can trust your auditor to be meticulous enough on your behalf? I am sure I could find editorials about how the big firms are so big and so motivated to process as many audits in a year as possible, companies aren’t getting the competence and effort they deserve. I am also pretty sure that laziness and incompetence afflicts the small operations as well as the big ones.

There was an argument back during the Enron scandal that rotating accounting firms would help avoid the conflicts of interest that develop over a long term relationship and cause auditors to look the other way. That was countered by the idea that is wastes a lot of time and money when you have to get a new auditor up to speed about the way your business runs.

I am pretty much on the side of rotating. I don’t think most arts organizations and non-profits in general are so big that it will take too much longer to explain their operations to a new group every few years. That way you avoid any conflicts of interest and lack of rigor.

Leadership By Eyebrow

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Apropos my Inside the Arts co-denizen Bill Eddins post about what it takes to be a good conductor, is the TED video with Itay Talgam talking about the conducting styles of six great 20th century conductors.

Talgam approaches the leadership styles of different conductors from the apparently stifling style of Riccardo Muti to the comparatively free flowing style of Herbert von Karajan. According to Talgam, Muti was asked to resign from his position at La Scala because he wasn’t allowing the musicians any room in the performance. Karajan was apparently quoted as saying the worst thing he can do is give his musicians specific direction. Both approaches put a lot of pressure on the musicians to perform well.

Talgam contrasts that with the way Carlos Kleiber (in some very humorous clips) and Leonard Bernstein (conducting only with his head) balance exerting control with loosing the reins and giving the musicians their head, providing only minimal feedback.

Obviously, there is a lesson in all this about balance in organizational leadership. It would be the great arts administrator indeed who could run his/her organization just by wiggling their eyebrows like Bernstein.

Arts Administrator Residencies-Is There A Need?

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I am not quite sure what drew my eye to it but Fractured Atlas did an interview with the founders of the Philadelphia Art Hotel this January. I don’t know why, but the project just looks and sounds a like a cool idea.

Personally, if I were a visual artist, I would probably tend toward the residencies in rural settings which is where a lot of them are located. Ready access to the Philadelphia art scene is not to be undervalued though.

I would probably sell my children into slavery to participate in the Arts/Industry program at the John Michael Kohler Arts Center.

It is probably fortunate then that I am not a visual artist. And I don’t have kids either. That is probably better since they have a performing arts program and I would still love to work there for the washrooms alone!

I don’t really talk about artist residencies too much. Perhaps because there aren’t too many for arts administrators. If you check the residency search tool at the Alliance of Artistic Communities website, administration is not even a search option. The only place I am aware of that offers one is The Studios of Key West which I wrote about 18 months ago.

I start to think that people like Michael Kaiser are correct when he talks about how few training opportunities there are to make people good arts administrators. There aren’t many opportunities for them to take a retreat and do research. Though to be fair, residencies for arts managers isn’t really part of the ethos. Arts administrators don’t get granted long periods of time to hone their skills. I don’t know if there is a market for offering residencies to them. How many administrators would ask for the opportunity? Most would say they don’t have the time. Kaiser talks about starting his day at 4 am which pretty much reflects the trend for many arts administrators.

One might say the Kennedy Center’s Art Management Fellowships are a sort of residency for arts managers. It combines practical work experience around the Kennedy Center with classes on relevant topics. And I believe they provide a $20,000 stipend to support yourself which is really pretty decent compared to what I was paid to intern. Though since the fellowships are for mid-career administrators,they would be bringing much more to the table than an intern would.

In any case, I would imagine the days there are just as long and involved as the position the arts manager left to become a fellow. That doesn’t give a lot of time for reflection and thinking about what the future of the arts might be and how one can restructure their organization to move forward to acknowledge these changes.

This summer I waswoolgathering a little about taking advantage of low real estate prices in Detroit to help grow an arts community there. I wonder if I was being too narrow in my vision and should have been thinking of including opportunities for arts managers to cultivate their skills too since there are so few opportunities.

Info You Can Use: Employee or Independent Contractor

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As usual, the folks at the Non-Profit Law Blog provide some useful links. I will quickly point out a short piece about the Senate has recently passing a jobs bill that will provide incentives to hire and keep employees.

The measure would exempt private employers, including nonprofit groups, from paying their share of Social Security taxes for employees they hire through the end of 2010. The new hires must have been out of work for at least 60 days.

They would get an additional $1,000 bonus if they kept the employee on the payroll for a full year

I had heard about this a few weeks ago, but it never occurred to me that this would be a real boon for the non-profit world where a little savings can go a long way. I wish I could remember where I heard it, but I was listening to a radio show where one of the panelists said he wished the money going to public works was directed to non-profits because you could create hundreds of non-profit jobs for every construction job created.

The main of what I wanted to discuss is examining the employment status of people who work for your organization. According to Jessica R. Lubar, a lawyer at Venable LLP, the IRS is undertaking a study of employment tax compliance. They will be focusing on three areas: worker classification, fringe benefits and officer compensation.

What I wanted to point out specifically was the issue of worker classification. I know of a number of organizations that call those who work for them independent contractors so that they don’t have to attend to any of the tax withholding details. However, if the IRS doesn’t call them the same thing you do, there could be a lot of trouble.

“A worker is considered an employee if the employer exercises the requisite amount of control over the employee under common-law principles. Over the years, the courts and the IRS have articulated certain factors that are considered in making that determination. The IRS organized the factors that are considered into three categories: (1) Behavioral Control – whether the business has a right to direct and control how the worker does the task for which the worker is hired; (2) Financial Control – whether the business has a right to control the business aspects of the worker’s job; and (3) Type of Relationship.”

If you have made a mistake in classifying an employee as an independent contractor, there is an opportunity to rectify that situation and obtain relief from the penalties of that mistake. Lubar outlines these in the entry. You would obviously want to consult a lawyer because I am already confused by the first of the three requisite criteria–not treating a person like an employee. That seems to me to imply you have been treating the person like an independent contractor which means you are in the clear.

Perhaps the distinction is in whether you contractually had the right to behavioral and financial control but never enforced it thereby treating someone as if they were an independent contractor when technically they were not.

Guess that is what the lawyers get paid to tell us.