By Gary Krupa, CPA
(January 15, 2013)
Kala Pearson is a resident of McGuireville, Arizona. On December 20, 2012, she was arrested for the theft of $33,000 from the Beaver Creek Village Property Owners Association (BCVPOA), and charged with extortion. Reportedly, she admitted to the theft.* Kala had been the organization’s Secretary.
She withdrew money from BCVPOA’s bank account for personal use that had been pledged to pay for the building of a bridge over Beaver Creek. The purpose of the bridge proposal was to enable McGuireville residents to drive across the creek after it flooded. Moreover, she used the organization’s ATM card to purchase food at local markets for her own needs.
The news of Kala’s arrest came as a complete surprise to me, a resident of Rimrock in Beaver Creek, as I’m sure it was for many other Beaver Creek residents.
What can organizations, especially non-profit organizations, learn from this crime? How likely is it that something like this will happen again? What can be done to prevent similar occurrences? The answers to these questions may be instructive in helping financially distressed communities like mine avoid a similar fate.
I first met Kala in 2009 when I was inducted as a member of the Beaver Creek Kiwanis Club. Kala and her husband Frank Greene were also members. She and Frank own a bed-and-breakfast in McGuireville.
Kala came across to me as a local activist for community improvement. She was Chairman of the Beaver Creek Regional Council, a local planning organization. She organized the Ranch House Coalition (RHC) which purchased and restored the Ranch House Restaurant and Golf Course, two Beaver Creek landmarks, after the restaurant had fallen into disrepair. The Coalition’s major objective was to help the district’s economy. She helped organize and was President of the Beaver Creek Community Development Corporation (BCCDC), a private non-profit organization formed to develop and manage economic development projects for the sustainability of the Beaver Creek Community. RHC is one of those projects.
She led the effort to build the above-mentioned bridge over Beaver Creek in 2009, the year BCVPOA was incorporated. The road crossing the creek is the easiest means of access for residents wishing to enter and leave McGuireville. BCVPOA raised funds for the bridge construction and had the responsibility for maintaining McGuireville’s roads. A separate fund was established and maintained for that purpose.
What is remarkable about Kala’s story, in my opinion, is that she, as a person of color, has had so much influence over the Beaver Creek, AZ community, which is mostly white. She clearly represents how far the Black race has come in this country since the era of slavery. Yet Kala isn’t just an ordinary black person who has been accepted as an equal by our community. Kala has achieved near-celebrity status here in a manner similar to the way Frederick Douglass became a celebrity in England during the mid-1840s, albeit on a smaller scale. Douglass was a former slave who gained his freedom, wrote a best-selling autobiography, and published abolitionist newspapers. Kala, like Frederick Douglass, has the gift of oratory and has used it as a powerful weapon to persuade people to join her causes. Or you could say that she has a talent for monopolizing a discussion and controlling it to her advantage. She has a keen political sense.
From what Kala told me about her bed-and-breakfast, I was under the impression that it was doing well and that she was financially solvent. Thus I couldn’t understand why she stole the money from her own Property Owners Association. I decided to speak with Ellen Dal Cerro, the President of BCVPOA and a resident of Rimrock, to learn more about why it happened.
Although we hadn’t met before, Ellen was helpful about providing the information I was seeking. She said that despite the Coalition’s success at raising more than $300,000 to purchase the Ranch House and golf course, it was still short of funds needed to meet expenses. The restoration of the Ranch House was an enormous undertaking. It was a bigger project than Kala and other members of the Coalition anticipated.
Kala and her husband Frank weren’t doing as well financially as I thought. Frank lost his job as a computer technician. Ellen said that she learned that their bed-and-breakfast was struggling when she read that they applied for a zoning permit or variance for it, and their application was denied.
One of the first signs that there was wrongdoing on Kala’s part was when Ellen found out that Kala somehow came up with the money in August 2012 to pay the Restaurant’s payroll and other expenses. It turned out that Kala wrote a check for $20,000 from the BCVPOA and deposited it into the Ranch House Coalition account. Kala wasn’t authorized by the BCVPOA Board of Directors to take that action, according to Tom Shoemake, BCVPOA’s Treasurer.
Kala was given access to BCVPOA’s bank account, even though she was only the organization’s secretary. I asked Tom about it. Apparently Kala intimidated him into giving her access. He said Kala and his nephew, who lived in McGuireville, had a dispute over a large rock owned by Kala that was partly on his nephew’s property. Tom’s nephew asked Kala to move the rock. She wouldn’t budge, and neither would the rock. Kala then harassed him. Tom knew that she plays hardball, i.e. that she’s vindictive so for his nephew’s sake he relinquished access to the organization’s funds to her. Tom didn’t try to challenge Kala. He didn’t want the hassle.
Kala then managed to obtain a debit card in the POA’s name from Chase Bank, in which the POA’s funds were deposited, without any authorization from the other BCVPOA Officers or Directors. Chase Bank simply accepted Kala’s authorization as an officer of BCVPOA without question.
Ellen admitted to me that neither she nor the other BCVPOA Officers and Directors thought that Kala would steal from the organization. They were friendly with Kala and Frank, and they knew about Kala’s involvement in activities that strengthened the community. There didn’t appear to be any need to take precautions. Besides, only five checks were paid from the bridge fund since its inception.
Tom admitted, when I asked him about it, that Kala’s being black had something to do with the fact that the BCVPOA Board members trusted her with the organization’s funds.
When I first spoke with Ellen and Tom, they didn’t think that anything could’ve been done to stop Kala from stealing her organization’s funds. But then they agreed with me when I suggested that no one in a position of trust should be allowed unrestricted access to the organization’s financial assets without having safeguards. I suggested to Ellen that these precautions could’ve been taken to protect even a small organization like BCVPOA from embezzlement or extortion:
1) Delegate the responsibility for check writing and cash transaction processing to no more than three people: the President, Vice President and Treasurer. The Treasurer should write the checks and maintain the accounting records. The President and perhaps the Vice President as well, should sign the checks. This approach results in a proper separation of responsibility which increases accountability and reduces the possibility of theft.
In general, a Secretary shouldn’t be given access to the organization’s bank account. The role of a Secretary doesn’t include management of the organization’s financial assets.
2) Do a background check on individuals in sensitive positions or with considerable responsibility. It should be done not only when they’re considered for a position, but occasionally after they assume responsibility as well. This would alert the organization to financial problems an individual may be having, Kala in this case, that would tempt him or her to take resources from the organization to reduce their financial stress. For example, it might have shed light on Kala’s financial situation to learn about how the organizations she established were doing financially. BCVPOA could also have found out whether Kala received a salary from BCCDC or RHC.
3) Arrange to have risk management bonding coverage for individuals who have direct access to financial assets such as cash, ATM cards, and checks. This would reimburse the organization in the event of embezzlement.
4) Hire an accountant to perform an occasional audit or review of the organization’s financial records. Preferably, the accountant should be a CPA to ensure the highest quality of service.
5) Make sure that your bank doesn’t allow someone to obtain an ATM card or any other form of access to your bank account without a corporate resolution officially approved of by the Board of Directors. For example, when my community’s POA, Montezuma Estates Property Owners Association, wanted to add a signer to its bank account, our bank, National Bank of Arizona, required that we provide a copy of the minutes from a recent Board of Directors meeting showing that the Board voted to approve the additional signer. If your bank doesn’t have at least a similar policy, take your banking business elsewhere.
Here are some other safeguards I didn’t speak with Ellen about:
1) Corporate bylaws and LLC Operating agreements typically state the rights and powers of shareholders, directors and officers. As the provisions of these documents are often ignored or forgotten, it may be sensible for a director, officer or member to be given the responsibility for monitoring compliance with them.
2) Don’t use signature stamps for checks. There’s a potential for misuse, especially if the stamp falls into the wrong hands. It’s safer to sign the checks with a pen instead. Better yet, avoid using checks and make payments online whenever you can. This avoids check-writing fraud, which has become a considerable problem due to the worsened state of the economy.
3) Establish limits for ATM and credit cards, so that individuals may not spend the organization’s money beyond what is necessary for performance of their duties.
4) Require that the Board of Directors approve all significant cash expenditures and new check signers.
5) Checks written for more than a certain amount should be countersigned by a Director or Officer. The identity of the counter-signer should be authorized in advance by the Board of Directors or the President.
6) Document all transactions involving significant cash receipts and disbursements, including the authorization of disbursement transactions. For example, a decision to give an officer check-signing authority could appear in Board meeting minutes.
7) Reconcile your bank statement to your checkbook at least monthly. This should be done by the Treasurer or someone independent of those having access to the funds.
8) Financial statements should be prepared and reviewed by the Board of Directors on a regular basis.
9) Have an accounting policies and procedures manual.
10) Have an organization chart that clearly defines the scope of each individual’s responsibilities.
11) Try to obtain the involvement of as many community members as possible. This would increase the amount of attention being paid to the organization’s activities, and discourage a dishonest Officer or staff member from stealing.
As a professional accountant and auditor, I’ve observed that organizations that had these safeguards were much less likely to be the victims of theft or fraud.
Given the dismal state of the economy in regions like Northern Arizona, the odds are good that other individuals in positions of responsibility will attempt to steal from the organizations they work for. That’s why it’s important to have as many safeguards as possible built into your accounting system.
The rapid manner in which Ellen spoke about what happened with Kala and the BCVPOA was an indication that she may have felt some regret in having to press charges against Kala.
Some people believe that Kala deserves to be excused from punishment due to her contributions to the community’s welfare. See the blog following the Camp Verde Bugle’s article dated December 24, 2012: . Should leniency be shown to Kala? I believe that if she committed a crime she should be punished for it, or at least be required to make restitution to BCVPOA. Ellen agreed with me about that.
The lesson here is that the unpleasantness of embezzlement or extortion can be avoided simply by having fiscal safeguards.
* per the article in Sedona.biz 12/31/12
Gary Krupa, CPA – Premium accounting, auditing, tax and technology services