2023-24 Internal Audit Report

FY 24 Chapter 8 
Fiscal Audit Committee Report to Members
Prepared on June 19, 2024

Committee Members: Kathy Rhodes and Bonnie Klein
Pursuant to the Chapter 8 Standing Rules, because of a change in Treasurer in the current fiscal year, an internal audit of Chapter 8’s financial records must be completed by July 1, 2024 and then published on the Chapter 8 website.

Introduction
This internal audit report aims to provide insight into the finances and operations of Escapees Chapter 8 during the previous fiscal year and offers recommendations for the future.

Background
At the conclusion of the 2024 rally in Guaymas-San Carlos, new officer elections were held. Seven officers were elected including that of Treasurer. Subsequently, a series of resignations occurred:
• Several board members resigned prior to Guaymas-San Carlos rally for reasons undisclosed, and President Carter did not attend the rally.
• Acting President and Webmaster Robert Pimentel concluded his duties at the end of the rally.
• Outgoing Treasurer, Richard Devore, resigned on March 7, 2024.
• Outgoing President Warren Carter, while entitled to remain on the Board as "Prior Year President," resigned on March 17th.

While Sonya Enlow was elected Treasurer for the FY25 term, she resigned in late March 2024. Subsequently, Carol Javes, the newly re-elected Secretary, volunteered as Interim Treasurer, and was appointed as Secretary-Treasurer by unanimous approval from the Board. Javes assumed her new duties after gaining access to both old and new checking accounts from the respective financial institutions.

Current Board Composition

The FY25 Board comprises six elected volunteers. Bob Pauls serves a dual role of President and (as an interim, non-voting position) Communications Officer. Each member has only one vote during deliberations and votes.

Challenges Faced

Transitioning duties and responsibilities from the outgoing Board to the new Board posed significant challenges for the new Board during this new fiscal year due to numerous factors:

1. Structural Flaws in Bylaws: The Bylaws stipulate that the Board is elected "for one year" with terms ending on April 30th, and upon conclusion of each year's rally, typically held in the January-March timeframe in Mexico. However, it appears that most past officers ceased performing their duties at the conclusion of the rally, but the Treasurer stayed in the role until the main checking account was transferred.  Historically, this inconsistent timing of the transition of roles has presented numerous managerial, accounting, and fiscal management problems, highlighting the need for correction to ensure smooth continuity of operations in the future.

2. Delayed Access to Essential Accounts: At the commencement of the FY25 term, the new Board encountered delays and difficulties accessing crucial online vendor accounts, as well as the checking accounts of two banks and the credit/debit card processor (PayPal). Several user credentials provided by outgoing officers were incorrect or obsolete, exacerbating the challenge. Furthermore, other essential credentials and documentation, including receipts, bank statements, budget reports, and IRS 990 reports, were not made available for well over 30 days, hindering effective fiscal management.

3. Frozen PayPal Account: The PayPal account(s) under control of the previous officers had been frozen by PayPal for more than six months due to improper actions taken by officers to transfer funds to a different account, coupled with PayPal’s belief that an unusual increase in sales activity warranted retaining increased reserves. The problem of these frozen funds was left to the new Board to resolve. 

President Pauls ascertained that PayPal had frozen over $32,395 of Chapter 8 money. Moreover, as the account was technically "owned" by the outgoing Treasurer, PayPal refuses to transfer account ownership to a new officer, further complicating administration for the new Board. Consequently, the new Board selected a new credit/debit card processor to facilitate smoother financial transactions in the future. The new card processor system is now in use.

4. Non-compliant Checking Account: The outgoing Treasurer, at the direction of his Board, opened a new checking account at Bank of America (BOA) to facilitate rally operations during FY24. However, contrary to fiduciary standards, he opened it as a personal account, effectively personally owning the assets, rather than as an association account under the ultimate control of the Chapter 8 organization. This departure from established protocol raised concerns about accountability and adherence to financial regulations. The new Board has opened a new association checking account with the Treasurer and President as signatories. The BOA account will be closed in June of 2024.

5. IRS Recognition Issues: Chapter 8 has operated as a 501c7 non-profit, tax-exempt social organization for decades. However, the process of filing the annual IRS 990 reports has been inconsistent over the years, and the organization's stated name on the form has lacked consistency. Starting in 2017 the Chapter 8 Board took on the responsibility of filing the IRS 990 form instead of having Escapees Inc. file it on behalf of Chapter 8. This act has led to conflicting interpretation of the relationship and responsibilities of both Chapter 8 and Escapees, Inc. to each other. Also, despite the outgoing Treasurer’s assertion that the IRS 990 report had been filed for FY2024, the IRS has no record of its receipt. Compounding the issue, in May 2024, the IRS sent Chapter 8 a form letter asserting the organization was not a recognized entity despite Chapter 8 providing back to the IRS their own documents showing Chapter 8 as a recognized 501c7.  Efforts are underway to resolve this discrepancy with the cooperation of Escapees Inc., with the aim of reinstating Chapter 8's recognition as a 501c7 organization by the end of 2024. The new Board has agreed to have Escapees, Inc. file the requisite IRS 990 form and include Chapter 8 as a member of the Escapees Social Network, Inc.

Fiscal Deficiencies

The Audit Committee’s review of the financial records and other documents identified the following nine deficiencies.

1. Lack of Standardized Accounting System:
Financial records were not maintained in a standardized commercial accounting package with a structured chart of accounts. Instead, disparate spreadsheets were utilized, leading to inconsistencies and difficulty in tracking financial transactions accurately.

2. Discrepancies in Annual Budget vs. Actual Expenses:
The Annual Budget proposed at the outset of the fiscal year significantly deviated from the actual expenses incurred, suggesting a lack of alignment between projected and realized financial outcomes.

3. Failure to Deliver Promised Amenities:
Certain amenities promised to rally participants in marketing documents were not delivered as advertised, indicating a discrepancy between commitments made and services rendered.

4. Mathematical Errors in Banking Transaction Reports:
Banking transaction reports contained mathematical errors, potentially attributable to the complexity of managing financial data across multiple spreadsheets and accounts.

5. International Currency Conversion Procedures:
Procedures for international currency conversion are deemed inadequate. Specifically, when converting US Dollars to Pesos, records of expenditures were not consistently maintained, raising concerns about transparency and accuracy in financial reporting.

6. Insufficient Documentation of Scouting Trip Expenditures:
Records pertaining to scouting trip expenditures were inadequate, lacking detailed documentation to justify the necessity and appropriateness of these expenditures.

7. Improper Reallocation of Funds Allocated for Charity Donations:
Funds designated for charitable donations were improperly reallocated by the outgoing President to benefit the membership, deviating from the intended purpose of these funds and raising questions about financial stewardship.

8. Dispute Over FY24 Charity Report Completeness and Accuracy:
The FY24 Charity Report remains in dispute between the outgoing President and the Charity/Philanthropy Chair, indicating a lack of clarity and consensus regarding the completeness and accuracy of charitable contribution records.

9. Lack of Follow-up of Grants Provided to Mexican Organizations:
Grants provided to Mexican organizations have not undergone auditing to verify the effective, efficient, and complete delivery of promised benefits, highlighting a potential oversight in ensuring accountability and impact assessment.

Audit Recommendations

The Audit Committee makes the following twelve recommendation to the Chapter 8 Membership and Board:

1. Timely Transfer and Verification of Financial Credentials 
Financial (credit/debit card, loans) and business service account credentials (software, subscriptions, etc.) must be promptly transferred and verified before officers relinquish their duties, ensuring seamless continuity in fiscal management.

2. Provision of Recurring Expenditure Lists:
A comprehensive list of recurring expenditures (e.g., subscriptions, fees, etc.) and other fiscal obligations must be provided to incoming Treasurers before outgoing Treasurers are replaced, facilitating informed decision-making and financial planning.

3. Immediate Provision of Official Banking Records:
Official banking records must be promptly provided to the new Board, enabling transparent and accurate financial reporting and oversight from the outset of the fiscal year.

4. Consideration of External Auditor/Bookkeeper:
Chapter 8 should consider engaging an external auditor and/or bookkeeper to ensure consistency, fairness, and officer fiscal accountability, enhancing the credibility and reliability of financial processes and outcomes.

5. Thorough Documentation of Expenditures:
Receipts for ALL expenditures, refunds, rebates, etc. must be meticulously documented and recorded in the accounting system, promoting transparency, accountability, and auditability in financial transactions.

6. Comprehensive Documentation of Cash Transactions:
ALL cash transactions, including currency conversions, income from auctions, and other donation drives, must be thoroughly documented and recorded in the accounting system, minimizing the risk of errors, discrepancies, or misappropriation of funds.

7. Board Approval of Banking Account Terms:
The opening, closing, and terms of use of all banking accounts must be approved by the Board, ensuring alignment with organizational objectives, policies, and regulatory requirements.

8. Adoption of Consistent Expense Reimbursement Procedure:
The Board should adopt a consistent expense reimbursement procedure and policies, as well as procedures for petty cash distribution, promoting fairness, efficiency, and compliance with established financial protocols.

9. Training of Officers:
To help ensure better governance of the organization the Board should adopt professional development or training strategies so that officers understand their job descriptions and fiduciary responsibilities.

10. Operating Budgets:
The Board should adopt an operating budget for ongoing Chapter management that is separate from the budget for implementation of the annual Chapter’s group travel to Mexico.

11. Chapter Financial Reserves:
The Board shall maintain a reserve fund for Board operations in case of emergencies.

12. Profit & Loss Statement Reviews:
The Board must formally review updated monthly or quarterly Profit & Loss Statements provided to the Board by the Chapter Treasurer.

The Audit Committee is pleased that the current Board is already taking proactive steps to address the deficiencies noted in this report and encourages their further efforts to implement a secure and verifiable fiscal management system.

So attested to by:
Chapter 8 Members: Kathy Rhodes and Bonnie Klein
Date: June 19, 2024

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