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LCS Gillespie Report, all the hoppla.....

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LCS Gillespie Report, all the hoppla..... Empty LCS Gillespie Report, all the hoppla.....

Post by solajijic Sun Mar 16, 2014 2:39 pm

Audit and Advisory Committee Gillespie Fund Interim Audit
March 6, 2014

Audit Justification

No review has been done in the four plus years since the sizeable Gillespie Fund was established.

Scope
Review all expenditure from the Gillespie Fund for the past four plus years.
Review all activity involving the Gillespie Fund from April, 2009 through November 2013.

(A). WHAT ARE THE RESTRICTIONS ON THE GILLESPIE FUND?

FINDINGS OF FACT:

Jane Fullerton Gillespie in a life insurance policy with New York Life Insurance Company designated as secondary beneficiary “The Lake Chapala Society A. C. English Language Library, Book and Equipment Purchase Funds”. The primary beneficiary predeceased her and as a consequence the bequest went to the secondary beneficiary. The New York Life Insurance Company sent a check to The Lake Chapala Society in the amount of $63,378.88 USD in April 2009. Before receiving the check Bonnie Kleffel, an English Language Library volunteer familiar with the situation asked Hugh Fullerton, brother of Jane Gillespie and executor of her estate the following question in an email, “Do you know, does the policy name “Lake Chapala Society” or “Lake Chapala Society Library”. It seems to me that [I] saw that it named the Lake Chapala Society Library.” Fullerton replied to Bonnie by email and answered her question saying in pertain part, “The policy beneficiary actually reads ‘The Lake Chapala Society A.C., English Language Library, Book and Equipment Funds’. That seems pretty specific . . .”

The Society recorded the payment as a restricted fund and named it The Gillespie Fund.

An ad hoc committee, known as The Gillespie Committee, was formed consisting of seven members and two representatives of the Board at that time. The Committee’s purpose was to “develop a new vision for the English Language Library, present guidelines to the Board for the use of the Gillespie donation and develop a preliminary budget”. The committee took guidance from the wording in the insurance policy and conversations with and an email from Hugh Fullerton (brother of Jane Gillespie) in order to come up with recommended guidelines for how the bequest should and should not be spent. The Committee’s report was submitted to the Board on May 13. 2009. The Lake Chapala Society’s Board of Directors voted May 13, 2009 to:

• accept the Gillespie Funds in accordance with the terms of the policy and terms in an email from Hugh Fullerton,
• vowed to be good stewards of the money,
• and to use the money per the recommendations of the Gillespie Committee with one change: that investment interest could not be used for modifications to facilities, remodeling or expansion of the English Language Library.
(The important points of the motion are set forth above. Full text of the motion can be found in Appendix A)

In the minutes of the Board meeting on June 10, 2009 President Nancy Creevan acknowledged that the bequest by Jane Gillespie was to the Lake Chapala Library.

REASONING AND CONCLUSION:

The terms Jane Gillespie used to designate the beneficiary are clear and unambiguous. The beneficiary was the English Language Library at Lake Chapala Society with the restriction that the money be used for purchasing books and equipment for that library. The words Lake Chapala Society A.C. and English Language are words describing the library that is to receive the bequest. The Lake Chapala Society had several libraries at the time. The Lake Chapala Society operates the English Language Library and therefore received the bequest as trustee for the beneficial use of the beneficiary, the English Language Library.

The bequest comes to the designated beneficiary according to the terms in the insurance policy. The language of the bequest cannot be interpreted to provide any discretion for expenditures from the Gillespie Fund for anything other than purchasing books and equipment for the English Language Library. Neither Hugh Fullerton, the Gillespie Committee, nor the Lake Chapala Society Board of Directors has the legal authority to change any of the terms in the insurance policy designation of beneficiary or purpose. Therefore any opinions expressed by Mr. Fullerton, recommendations made by the Gillespie Committee, or decisions of the Board, that seek to establish terms and conditions that are not within the scope of the terms in the policy are gratuitous and of no legal effect.
(B). GILLESPIE FUND INVESTMENT INTEREST USED FOR PURPOSES NOT IN ACCORDANCE WITH THE TERMS OF THE RESTRICTIONS ON THE GILLESPIE FUND.

FINDINGS OF FACT:

LCS received the check from New York Life in April 2009. An email discussion followed concerning how many names should be on the account that would hold the money and what the name should be on the “endowment account”. Terry cautioned that all be clear on whether the entire gift was to go into an endowment fund with interest accumulating or into a restricted fund and available for use immediately. He addressed how investment interest would be handled when the funds were in a restricted fund. He stated, “In general, in non-profits, endowments are set aside as restricted funds, where the principle is invested, and the interest income is either rolled over, or budgeted for (in this case the LCS library) support. . . .”
Gillespie Fund money was co-mingled with other funds held by the Lake Chapala Society and invested with Actinver. The Board’s decision dated May 13, 2009 directed that Gillespie Fund investment interest would be used as follows:

• “Primary Purpose: Reading material including books, magazines, and newspapers
• Furniture and equipment: computer equipment for library use, tables and chairs, electronic reading devices such as E Readers, shelving.”
In the spring of 2013 the Audit and Advisory Committee determined that the interest on Gillespie Fund money had never been and was not currently being applied to the Gillespie Fund as required. The Board took steps to credit interest from investing Gillespie Fund money from April 2009 through June 2013. However they did not accurately determine the amount due. It was reported that because of the way Actinver reports returns on invested funds, including Gillespie Fund money, it is difficult to determine the correct amount of interest earned by Gillespie Fund money after the fact but that does not relieve the Lake Chapala Society of the responsibility and obligation to do it properly. The amount credited did not include interest on the interest had it been properly applied all along. Accounting for investment interest on Gillespie Fund money would be easier if the Gillespie Fund money were held in a separate account and not co-mingled with other Lake Chapala Society funds restricted or otherwise.

The Board in a decision made July 11, 2013 voted to rescind the part of the 2009 Board decision regarding how interest earned on the Gillespie Fund money would be used. Thereafter investment interest earned on Gillespie Fund money was applied to a newly named “non-restricted investment” account and available for any use at Lake Chapala Society. At the same meeting the Board adopted Policy F-9 Interest Earned on Restricted Funds. (See Appendix B) The policy stated as follows:
“It is the policy of LCS that all interest earned on restricted funds be assigned to non-restricted investments. All donors of restricted funds will be strongly encouraged to assign all interest earned on restricted funds to go to non-restricted investments.”
Later in 2013 the Board adopted three financial policies relating to acceptance of donations. None of those policies purported to modify or rescind any policy in effect at the time.

REASONING AND CONCLUSION:

There can be no doubt that the bequest was to the English Language Library. The bequest was not specific as to the interest but it was very specific as to who the beneficiary was. It then follows that because the bequest was to the English Language Library, it was not to the Lake Chapala Society. The Society is the trustee. As trustee it has no claim on any of the money that was bequeathed or any yield from investment of said money. The terms of the bequest did not provide for any fees for the trustee so none can be paid. The Executive Director Terry Vidal acknowledged that investment interest on the restricted Gillespie bequest belongs to the program it was given to, the English Language Library.

The Board in May of 2009 accepted the proceeds of the Gillespie insurance policy and voted to use the interest earned on investing the money solely for the English Language Library and for a purpose within the Gillespie Fund restrictions. This provision was not implemented until July of 2013 when the Board voted to implement the prior decision retroactively only. That decision did not require compliance with the spending restriction going forward in time. To rescind that decision and use the interest for purposes not within Gillespie Fund restrictions is improper and a breach of the Board’s fiduciary duty owed to the beneficiary, the English Language Library.

The reasons given for rescinding the 2009 decision regarding Gillespie Fund investment interest and for Policy F-9 Interest Earned on Restricted Funds were that all other restricted funds given to the Lake Chapala Society did not have the interest restricted, that the Lake Chapala Society wanted all restricted fund interest to be handled in the same way, and that the Lake Chapala Society needed the money to offset the cost of administering restricted funds such as the Gillespie Fund. None of these reasons can justify not adhering to the Gillespie Fund restrictions

The restrictions on the Gillespie Fund money and investment interest can not be changed modified, or eliminated by Board action, including adopting policies that require that Gillespie Fund money and/or investment interest be used or handled contrary to Gillespie Fund restrictions.
General principals governing the fiduciary duty of trustees require the trustee keep trust property separate from other property. To comply with such a duty LCS would need to hold all the Gillespie Fund principal and interest in a separate account.

As stated above the Board is constrained from using Gillespie Fund investment interest according to the terms in the bequest itself. When the Board received the Gillespie bequest it accepted it with several important self-imposed restrictions, in particular, that the investment interest would be used solely for the English Language Library. When the Board some four years later rescinded the part of the motion dealing with investment interest they changed one of the material terms of acceptance. Doing so was arguably unethical. Also prospective donors could view this act as a reason not to donate money to LCS because no matter what the Board might agree to at the time they accept the donation; they have demonstrated they will not be bound by that agreement tomorrow if the Board feels their needs have changed.

RECOMMENDATIONS:

1. The Board vacate the decision made July 11, 2013 that stated as follows “Rescinding 2009 Board decision regarding interest earned on the Gillespie Fund”, and apply investment interest earned from Gillespie Fund money in accordance with the decision of the Board dated May 13, 2009, and continue to do so in perpetuity.
2. The Board direct the Treasurer of the Lake Chapala Society to take immediate steps to credit all interest that would have been earned from investing Gillespie Fund money to the Gillespie Fund that has not already been credited, as if it had been done all along, including interest on interest earned.
3. Direct the Treasurer to put in place accounting procedures to ensure that all interest from investing Gillespie Fund money in the future are identifiable and accurate and credited solely to the Gillespie Fund.
4. The Lake Chapala Society hold Gillespie Fund Money, including earned interest, in an appropriate account separate from any other accounts maintained by the Lake Chapala Society now and in the future.
5. The Board clarify the applicability of Policy F-9 Interest Earned on Restricted Funds as it applies to the required treatment of investment interest from Gillespie Fund money, and other funds with restrictions on investment interest, and revise as necessary.


(C). EXPENDITURES OF GILLESPIE FUND MONEY WERE MADE FOR PURPOSES THAT WERE NOT WITHIN THE TERMS OF THE RESTRICTIONS ON THE USE OF GILLESPIE FUND MONEY.

FINDINGS OF FACT:

The Committee analyzed all expenditures for the English Language Library from April 2009 through June 2013. There were a significant number of expenditures from the Fund that were for purposes that are not within the Fund restrictions. There were also several that were for purposes that the Board explicitly stated the Fund money was not to be used for. . Gillespie funds not to be used for: “D. Operating expenses such as salaries, office and book supplies, utilities, facilities maintenance and repair, cleaning.” Many of the amounts shown can by paid using Gillespie Fund money. Where purpose is unknown the assumption is that due to a lack of documentation showing it is for a purpose within the Fund restriction it is NOT for said purpose. (See Appendix C)
The AAC investigators found incomplete and missing information in the records for expenditures from the Gillespie Fund in 2009. The Executive Director did not respond to their request for the missing information. The records as a whole for accounting for the use of Gillespie fund money are a mess. Documentation is missing or incomplete. Checks are missing. The state or the recordkeeping shows a marked disregard for the standard of documenting all transactions required by the Constitution of LCS. In the comments to the first draft of this report the President and the Executive Directory claimed that all the records are complete and that all requests for information were responded to but the AAC investigators did not find that to be the case. Furthermore the AAC investigators requested a meeting with the Executive Director to resolve the discrepancies between what the Board claims are the facts and what the AAC found to be the facts. The AAC investigators were rebuffed.

With regard to the listings in Addendix C: Column B are the items that, when presented with the draft of the report, the President of the Board listed them as “Perhaps questionable” (13.5% of the total in question). Columns C are items that are still in question but could be verifiable. (5%) Columns A are items that have not been verified with questions unanswered because the Executive Director referred the questions to the Finance Coordinator (80.03%). The Executive Director is the one who has ultimate responsibility for all of the data input and the person who is responsible for personally responding to the AAC investigator. Since he has not deemed it necessary to respond this report will be issued without the possible benefit of the information he might have been able to provide.

REASONING AND CONCLUSION

To comply with the Board’s 2009 decision regarding the Gillespie Fund, none of the amounts designated with an asterisk should have been paid using Gillespie Fund money.

None of the other amounts can be paid using Gillespie Fund money because they are not expenditures for books or equipment for the English Language Library. Books in Spanish by definition can not be paid for using Gillespie Fund money.

Where no Gillespie Fund purposes were recorded in the accounting vouchers the assumption must be that the expenditure was not appropriately debited to the Gillespie Fund.

Where the expenditure involves a system where part is used by the Lake Chapala Society for purposes other than for the English Language Library (highlighted in blue) only that portion for the English Language Library use can be debited to the Gillespie Fund.

RECOMMENDATIONS:

1. That the Board direct the Treasurer to determine the percentage of shared items paid for with Gillespie Fund money that were used for non-English Language Library purposes and credit the Gillespie Fund with a proportionate amount of the purchase price for that use.

2. That the Board direct the Treasurer to credit to the Gillespie Fund all amounts that were improperly debited to the Gillespie Fund as shown in the findings above.

3. Direct the Treasurer to adopt procedures to insure that Gillespie Fund money is used solely for purposes within Gillespie Fund restriction and to furnish a report monthly to the Audit and Advisory Committee until directed by the Audit and Advisory Committee to do otherwise giving details for all expenditures using Gillespie Fund money.

(D). THE LAKE CHAPALA SOCIETY HAS REPRESENTED THAT IT CAN USE GILLESPIE FUND MONEY FOR CAPITAL IMPROVEMENTS.

FINDINGS OF FACT:

The President of the Lake Chapala Society announced at the September 2013 Board meeting that the Lake Chapala Society had 10 % of the 1.5 million U S dollars needed for a proposed capital campaign. At the time of the President’s announcement the total of 150,000 USD could only be arrived at by using the unused balance of the Gillespie Fund, other discrete Lake Chapala Society funds, and unspent general revenue on hand at the time.
REASONING AND CONCLUSION

The Lake Chapala Society cannot use Gillespie Fund money for capital improvements and representing that it can is false and misleading. The law governing insurance contracts allows
for an insurance contract to provide for forfeiture of a bequest if restrictions on the bequest are not adhered to.
RECOMMENDATIONS:

1. The Lake Chapala Society cease representing Gillespie Fund money can be used to fund capital improvements, including renovations to or construction of library buildings.

2. The President of the Lake Chapala Society immediately notify the Board in an open meeting, with it so stated in the Board minutes, that his announcement about including Gillespie Fund money for capital projects was incorrect; that Gillespie Fund money cannot and will not be used for capital improvements because those uses are not within the Gillespie Fund restrictions.
(E). THE BOARD IS OBLIGATED TO IMPLEMENT THE RECOMMENDATIONS OF THE GILLESPIE COMMITTEE

FINDINGS OF FACT:

When the Board voted May 13, 2009 to accept the Gillespie bequest in the same motion they voted to accept substantially all of the recommendations of the Gillespie Committee. Those recommendations were summarized in the Board minutes for the meeting and attached to those minutes.

The 2009 Board voted on a course of action for the English Language Library that was to be funded by the Gillespie bequest. Only uses within the Gillespie Fund restrictions can be funded by Gillespie Fund money. There has been no Board action since that makes any change in that decision, except for the one concerning Gillespie Fund investment interest in July, 2013. Neither the President nor the Executive Director has the authority to choose not to implement a decision made by the Board of Directors.

Strategic goals established for the English language Library in the years following the Gillespie bequest called for implementing many of the provisions in the Gillespie Committee recommendations in 2009 but they were also not acted upon even though the English Language Library had Gillespie Fund money available to fund many of the goals that were within the Gillespie Fund restrictions. (See Appendix D)

The Executive Director repeatedly stated that the Lake Chapala Society could use the Gillespie Fund money any way it wanted. English language Library volunteers were instructed not to use the Gillespie money because it was being saved to build a building. English Language Library volunteers were told they needed the Executive Director’s permission to spend Gillespie Fund money. (See related English Language Library Operation interim audit findings)

REASONING AND CONCLUSION

The Board cannot support taking a position that it could chose to spend the Gillespie money or not as it saw fit. The Gillespie Committee was making a recommendation, which is all they had the authority to do. When the Board accepted the bequest and then voted to accept the recommendations of the Gillespie Committee it obligated the Board to a course of action and implementation became an imperative. The Board has not met this obligation. Gillespie Fund money was not spent in compliance with the Board’s decision when they subsequently set short term and long term goals for the English Language English language Library in the years since 2009.


RECOMMENDATION:

1. The Executive Director be required by the Board to take immediate action to retroactively implement the recommendations of the Gillespie Committee as voted on by the Board of Directors on May 13, 2009 and the Board’s short term and long term goals for the English Language Library using Gillespie Fund money to the extent that the use is for purposes within the restrictions on the Gillespie Fund, such as joining a service that will recommend books and reading material to be purchased by the English Language Library based on the demographic of the Lake Chapala Society membership.
2. The Board of Directors budget and commit to spending Gillespie Fund money more effectively in 2014 for the benefit of the Lake Chapala Society members by enhancing the reading services provided by the English Language Library.
3. The Board of Directors publicize the commitment to using the Gillespie bequest as a part of a plan to reverse the declining usage of the English Language Library by members.
4. The Board direct the English Language Library Committee to acquire e-readers for the English Language Library to test and evaluate for members to be able to borrow.
5. The Board direct the English Language Library Committee to align the English Language Library with e-content providers so that this technology can be tested and evaluated for use on English Language Library e-readers and member owned e-readers.
6. Implement the guidelines from the “Library Vision Plan” dated June 16th. 2009.
(F). THE DUTY OF THE EXECUTIVE DIRECTOR AND SUPERVISION OF THE EXECUTIVE DIRECTOR

FINDINGS OF FACT:

At the Board meeting on May 13, 2009 the Board decided that Gillespie Fund investment income was to be applied to the Gillespie Fund and used for specific purposes, that Fund money would not be used for specific purposes, and that the Board would adopt the recommendations of the Gillespie Committee for the English Language Library. This decision was not fully implemented in the ensuing four plus years. The job description of the Executive Director makes it his responsibility to implement the decisions of the Board of Directors and he has not satisfied that responsibility in relation to the Gillespie Fund investment interest, proper uses for Gillespie Fund money, or the plan for the use of Gillespie Fund money to fund the implementation of the recommendations for the English Language Library.

An example of a recommendation that was not acted upon was the recommendation that the English Language Library “test and evaluate” the use of e-readers for use by the member clients. Looking into getting e-readers and not getting them because of concerns about the cost or how to keep track of the e-readers does not constitute “testing and evaluating” required to comply with the Board’s decision.

Supervision of the work performance of the Executive Director is the responsibility of the President acting for the Executive Committee.

REASONING AND CONCLUSION

Whether the failure to fully comply with the specifics of how Gillespie Fund investment interest and how Gillespie Fund money was not to be used or to implement the specific recommendations for the English Language Library to be funded by Gillespie Fund money was intentional or an oversight it occurred due to failure of both the President and the Executive Director to properly meet their respective responsibilities.

RECOMMENDATIONS:

The Board review the performance of the Executive Director regarding his failure to implement the May 13, 2009 Board decision regarding the Gillespie Fund investment interest and the prohibited uses of Gillespie Fund money, and the recommendations of the Gillespie Committee adopted by the Board on May 13, 2009 for the English Language Library, and the President failure acting for the Executive Committee to adequately supervise the Executive Director, and take appropriate corrective action.

It is requested that if the Board wishes to comment on this report that it be done in writing within 90 days.


Submitted for review March 6, 2014
Audit and Advisory Committee,
Kenneth Caldwell, Chairman

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