Every fall, before the American Cancer Society's annual casino fund-raiser in New York City, a curious thing used to happen: An armored car pulled up outside the Hotel Pierre in Manhattan.
Charities don't need armored cars to remove proceeds from fund-raising events because donors routinely contribute in advance, by check, so they'll have a record to substantiate their income-tax deduction.
And besides, the armored car wasn't there to take money away after the event. It came to deliver cash.
The American Cancer Society says it never questioned Miriam Gruber, chief fund-raiser for its Bernice Leavitt-Joseph Toonkel branch--by far the largest of 13 New York City branches--about this unusual practice, which began nearly two decades ago.
Then, one day last fall, a new fund-raising employee blew the whistle.
The new employee charged that Gruber and a select group of volunteers gathered in a Hotel Pierre suite before the fund-raising event to stuff cash into envelopes. Then major donors dropped by, getting cash kickbacks of up to 90% of the donations they had made earlier by check.
U.S. Atty. Rudolph W. Giuliani of Manhattan called the case "the most substantial tax-fraud scheme involving a charity ever criminally charged."
A federal grand jury indicted Gruber and eight wealthy Manhattan businessmen, charging $4 million in fraudulent income-tax deductions. The indictments covered only the largest donors and only the last six years.
Seven of the eight indicted donors earlier this year pleaded guilty to felony tax evasion and the eighth has announced his intention to enter such a plea, federal prosecutor Shirah Nieman said.
Gruber, who apparently did not pocket any of the money, pleaded not guilty. Her trial is scheduled to begin April 1.
The American Cancer Society, which brought the matter to Giuliani's attention, was not indicted.
That a branch of the nation's largest health charity could be the focus of a massive criminaL tax fraud over a period of nearly 20 years illustrates the state of financial accounting and cash controls at many of the nation's estimated 325,000 charitable organizations.
Over the years, countless scandals involving charity finances have been exposed by government officials and news organizations. Often the scandals involve little-known organizations with modest revenues whose principals diverted contributions to themselves.
But as the nonprofit sector of the American economy has grown into a $200 billion-per-year enterprise employing one of every 18 workers, the issue of charity financial and accounting practices has taken on growing importance.
A Call for Standards
"There is a need for a single comprehensive set of accounting standards for private nonprofit organizations," said Richard Larkin, a Price Waterhouse senior manager who is one of the accounting firm's top experts on charity finances.
"Publicly held corporations," Larkin noted, "are required by the Securities and Exchange Commission to have an audit by a CPA (certified public accountant) and it must be publicly disclosed, but in the nonprofit sector there is no similar overriding requirement that CPAs be involved in any way, except in certain states. California is not one of them."
Charity regulators in many states told The Times that they view most charities' financial reporting with skepticism, including reports filed by some of the largest and best-known charities.
"Everything we do begins with the assumption that what the charities report to us is true, correct and complete," observed Larry W. Campbell, California Registrar of Charitable Trusts. "But when you get into the subject, you learn they are not reliable reports. . . .
'A Lot of Games'
"There is a serious problem with those charitable organizations that have such skill that they manipulate the figures to the point that they are unreliable . . . and it results from general accounting rules that are designed to fit a variety of situations, but also permit a lot of games to be played in how costs are allocated."
Outright frauds can be prosecuted in every state. The problem occurs in putting into law "the fine line between fraud and exorbitant administrative costs," said Elizabeth Weiner, who recently surveyed state charity fraud laws for the National Committee for Responsive Philanthropy in Washington. "The problem is writing an enforceable law that handles both situations, and the various attorneys general are pretty much stymied."
Both major national charity watchdog groups--the National Charities Information Bureau in New York City and the Philanthropic Advisory Service of the Council of Better Business Bureaus in Arlington, Va.--say they are concerned over the reliability of charity financial statements.
These experts emphasize that fraud is only one aspect of a many-sided problem involving the reliability of cHarity financial accounting.