Mismangement and Poor Leadership Lead To $19 Million Charity Loss and Closure

by Gary Snyder

Update: The latest edition of Nonprofit Imperative we wrote about the accounting firm of Loeb & Troper suddenly closing its door after it had uncovered a $19 million agency deficit. This was surprising in that It has performed the most recent audits for 28 of the big Jewish nonprofits in the city—a very big market share for a relatively modest firm. The problem is that two of their clients, FEGS and the New York Legal Assistance Group, have recently turned up with what could be called serious financial irregularities. FEGS quite suddenly announced that and would be forced to close.

The impact is striking. At FEGS’ peak, the nonprofit had about 350 locations and about 4,000 employees, 2,217 of which were defined as "highly skilled professionals,” according to the filing. FEGS cares for 135,000 individuals annually.

Now Crain's-NewYork uncovered the reasons why there were the sudden closures. Federation Employment and Guidance Services, an 81-year-old Manhattan social-services agency, filed for bankruptcy after an ambitious expansion of services, locations and for-profit subsidiaries left the organization with exorbitant costs and shrinking revenue.

In January, the nonprofit, which has a budget of $250 million, announced it would shut down after recording a $19.4 million loss last year.

Mismanagement and lack of financial oversight and prudence loom large in the narrative that describes the circumstances that led to the bankruptcy. But in the end, FEGS was doomed by expenses that outpaced revenue. Between 2013 and 2014 alone, salaries and benefits rose 7% while revenue fell.

Leadership instability and an outdated financial-management system took a toll. The nonprofit had three chief financial officers leave within a two-year span, and its financial-management system resulted in inefficient billing collections and “compromised management’s ability to make responsive business decisions in a timely manner.

And then there were the ill-fated for-profit subsidiaries. FEGS threw capital into the units—AllSector, HRD and Single Point—in the hopes of generating income. But the entities didn’t succeed in becoming standalone profit centers, and instead primarily provided services to FEGS, leaving the nonprofit on the hook for their losses. The AllSector Technology Group, for example, derived 65% of its revenue from FEGS.

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Charity Navigator, Vermont Public Radio, Miami Herald, National Public Radio (NPR), Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), “Betrayal”, (a movie), NBC (on Charity Fraud…TBD), FOX2, ABC Spotlight on the News, WWJ Radio, Marie Claire, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, Charity Navigator, The Chronicle of Philanthropy, St. Petersburg Times, Board Room Insider, USA Today Topics, Accountants News, Newsweek.com, Responsive Philanthropy Magazine, New York Times, Portfolio Magazine, The Virgin Islands Daily News, NANKAI (China) BUSINESS REVIEW, National Religious Broadcasters newsletter, The Charity Governance Blog, American Chronicle, Palm Beach Post, Detroit Free Press, Oakland Press, Nonprofit World, Socially Responsible Business Forum, PNNOnline, Ohio Nonprofit Resources, Nonprofit Good Practice Guide, Nonprofit Startup Guide, Nonprofit Blog, National Coalition of Homeless Newsletter, Finance and Administration Roundtable Newsletter, MichiganNonprofit.com, CORP! Magazine, Crain’s Michigan Nonprofit, ncrp.org, PhilanTopic, Nashville Free Press, Nonprofit Law Blog, Seniors World Chronicle, Carnegie Reporter, Assoc. of Certified Fraud Examiners Examiner, msnbc.com, Worchester (MA) Telegram and Gazette, Carnegie Corporation of America, EO Tax Journal, Wikipedia: Non-profit Organizations; Parent: Wise Austin, Accountants News, Veterans Today, Answers.com, Far-roundtable, #Nonprofit Report, nonprofithelpnews, nonprofit news; National Enquirer, Northwest Herald, The HelpWise Daily, The #Nonprofit Report, Wikipedia (Nonprofit Organization), Answers.com, Nonprofits: On the Brink (2006) Silence: The Impending Threat to the Charitable Sector (2011)