Audit letters raise early red flags to Columbus Zoo board. But were they heeded?

Longtime Columbus Zoo and Aquarium CFO Greg Bell had answers for auditors who raised questions about questionable spending two years after former CEO Tom Stalf was hired to lead the zoo in 2013.

At the time, some zoo employees were receiving travel advances with no follow-up to reconcile those advances with actual expenses and receipts, a clear violation of the zoo's employee handbook and generally accepted management and accounting practices, according to a management letter from John Gerlach and Company, the zoo's auditor since at least 2001.

Bell's response to Gerlach? The zoo would require staff to submit receipts to justify their expenses and return any unused money. Who would oversee this new policy? Greg Bell, who last month was one of three former zoo executives indicted by the Ohio Attorney General for a scheme to defraud the Powell-based zoo of more than $2.2 million for personal gain, including family vacations, luxury boxes for sports and entertainment and spending sprees for jewelry, country clubs and a recreational vehicle.

Bell is facing 14 felony counts including conspiracy, theft and multiple charges of tampering with records. Tom Stalf, former CEO, faces 36 similar charges. And Peter Fingerhut, the zoo's former marketing director, is charged with 63 counts including bribery, conspiracy, extortion and money laundering.

The indictments have raised questions about who should have been watching over zoo operations. And how effective a watchdog might have been if top officials were covering for each other in a scheme to defraud the zoo of public and private funds for lavish personal gain.

Audited financial statements from 2013 to 2020, when Stalf was president and CEO, reveal a prosperous and growing nonprofit organization.

But "management letters" to the zoo from John Gerlach and Company indicate several warnings that, if heeded by the zoo's oversight board, might have prevented the trio of executives from stealing money, as the indictment alleges, meant for zoo operations including conservation and animal care. The losses are equivalent to about 16,000 annual zoo memberships. The loss of goodwill and reputation has yet to be determined.

Along with the travel advances, the management letters found other problems.

Barter accounts

In 2015, two years after Stalf was hired, Gerlach auditors warned that the zoo had two accounts where zoo purchases were made by selling tickets to the zoo, The Wilds and Zoombezi Bay, essentially trading something of value with a vendor. These barter accounts, while permissible as tools of fair trade also may include the transfer of animals between zoos. But they must be recorded as either expenses or liabilities and be checked for accuracy.

CFO Bell "reviews and approves all purchases made from these accounts" and prepares the journal entries to have another finance department employee record in the general ledger. "However the CFO also has authorization to make purchases ... that would not go through another level of approval," according to the management letter.

The zoo's response? Again from Bell: Have the second level of approval be from CEO Stalf, who faces felony charges, including bribery, theft and conspiracy to commit fraud, among others.

The barter system ended in 2021 when Jerry Borin took over as interim CEO when Stalf resigned.

Check signing and segregation of duties

The zoo's director of finance processed checks written by The Wilds and Zoombezi Bay, also under the control of the Columbus Zoo and Aquarium. Gerlach auditors recommended in the years after Stalf was hired that the finance director's "authority to process checks be removed as a preventative control over cash disbursements."

Management responded that "based on the limited size of the finance department, management does not feel that it is practical to remove check processing authority because the finance director "could be needed to utilize this system function in an emergency situation, which would be a rare and unlikely occurrence."

Gerlach suggested other ways to improve accountability by segregating duties involving cash and money transfers.

Zoo management responded that "While the staff will make every effort to improve internal controls by returning signed checks to an employee that does not process checks, due to the small size of the finance department staff, it cannot be guaranteed that this will be an uninterrupted process."

According to the indictment, the trio manipulated credit-card and check authorization forms; expensed goods but also bartered, bribed and extorted zoo vendors for goods and services; and failed to report income on the federal tax returns.

A 2021 forensic audit by Plante Moran noted of the zoo warnings: "Despite a 2018 recommendation by the zoo’s financial statement auditor that receipts and adequate documentation should be provided, supporting information was still not provided by executives."

Stalf and Bell resigned from the zoo in March 2021 after an internal investigation prompted by original reporting from The Dispatch. Fingerhut left his job earlier, partially as a result of COVID-19 pandemic.

Management letters, unlike audit reports, don't include financial information. And they're not uncommon. In August, the zoo's new auditor Clark Schaefer Hacket issued a concern about an interest rate swap (an exchange of one set of future interest payments for another) which changed a zoo liability into an asset during the year and was not detected by management, resulting in "a material audit adjustment," according to the letter. The zoo corrected the error.

Watchdog or lapdog?

When the indictment was released, Ohio Attorney General Dave Yost didn't explicitly call out the zoo's board of directors when he said, "The bank hired the robbers to work security." But it was strongly implied.

While top executives run an organization's daily operations, they do so at the pleasure and oversight of the board, which has ultimate responsibility for hiring the leadership and monitoring it.

The job is critical considering that the Ohio Auditor's office has said it does not regularly audit the zoo's finances like it would cities, villages or townships, in part because the zoo only receives a portion of its revenue (about 20%) from a Franklin County property tax.

Philip Hackney, a law professor at the University of Pittsburgh School of Law and expert on charitable law, wonders if the state auditor might reconsider doing so.

"You would expect a little bit more from the state," Hackney said.

Board members are often attracted to popular charities like the Columbus Zoo for the wrong reasons "because it's got panache, and they might not take the role seriously, and that's a recipe for a disaster," he said.

"Whenever you join a board, you are potentially bearing the legal liability if something goes wrong," Hackney said, describing the board's duty of loyalty and duty of care, which require attendance at meetings, reading documents before making decisions and questioning leadership. Liability, he said, "can be substantial."

Boards can do only so much

In a 2021 interview with The Dispatch, zoo board member Stephanie Hightower said that she hadn't been aware of zoo executives using resources for personal and family use, and called it "alarming information."

"This is not a good look for a nonprofit entity," said Hightower, who has been on the zoo's board of directors since 2015 and is the CEO of the Columbus Urban League, also a nonprofit.

Management letters should have been clear signals that something was wrong at the zoo and the zoo board should have dug for answers, said Rick Cohen, operations officer and spokesman for the Washington D.C.-based National Council of Nonprofits.

"The buck really stops with the board of directors," said Cohen. "The board is there as the representative of the community that gave the organization the right to exist. They have to sign the tax forms that say that everything is OK."

"They can't say they weren't told. It's the job of the board to step in."

Hightower, who notes that the Urban League has had clean audits for 12 consecutive years, on Tuesday said that the zoo board, which she's served on for about eight years, can do only so much.

"The board has to have a level of trust and belief in the integrity of who they hire. It's unfortunate if you have leadership that might have all the controls in place and still doesn't follow the controls," she said. "The board cannot be managing the day-to-day operations."

Overseeing leaders with large personalities can be especially challenging, said Hackney.

"The charismatic individual gets an operation going and thinks it's theirs," he said. "The real question is 'what kind of culture does that create and can it balloon out of control?'"

The 2021 Plante Moran audit indicates that Bell, the zoo's long-time chief financial officer had the credentials to know better.

"As the zoo’s CFO for the last 30 years and a certified public accountant, Bell knew, or should have known, that failing to provide proper supporting documentation can jeopardize the organization’s tax status with the IRS."

Greg Lawson, a research fellow at the conservative Buckeye Institute which has expertise in state and local government, taxes and budgeting, said the task of an oversight board should not be taken lightly.

"It can be very, very hard," especially when there is criticism. "And it does reinforce the importance of a robust board."

"You hope that the lessons learned here can be applied. How do we prevent this from happening again?"

dnarciso@dispatch.com

This article originally appeared on The Columbus Dispatch: Columbus Zoo audit letters foreshadowed fiscal misconduct, fraud