tivities, the board must be particularly aware of how the public will perceive it (and how critics may characterize it). Even if
such transactions would be fair
to the charity and further the
charity’s mission, it may be best
to avoid them.
Prevent sweetheart deals
that benefit a charity’s offi-
cials or board members.
A charity must serve a public
interest rather than a private
one, and any financial benefits
provided to an individual must
be incidental compared with
the amount spent to advance a
charity’s tax-exempt purposes.
If a charity’s directors and of-
ficers, as well as other “insiders”
in a position to exercise sub-
stantial influence on the organi-
zation, receive a financial bene-
fit that exceeds the value of the
services or goods they provide to
the charity in return, they may
be subject to a penalty tax for
what the IRS calls an “excess-
benefit transaction.”
It is at best problematic that
Mr. Mortenson earned money
from a sale to the charity of
thousands of copies of his books,
the charity’s advertising of his
books and personal speaking
engagements, and the charity’s
payment of his travel costs in
support of sales of his books and
speaking engagements.
In fiscal year 2009, the Central Asia Institute reported that
it spent more than $1.7-million
in “book-related expenses” and
nearly $1.4-million in travel expenses and did not get any book-or speaking-event-related revenue in return. Mr. Mortenson
certainly benefited financially
from these expenditures in the
form of royalties and speaker’s
fees. Whether he donated some
of this money back to the charity is beside the point from a legal perspective.
The board of the Central Asia
Institute defended its actions
by saying that the institute received a greater financial benefit than it provided—
presumably suggesting that it raised
a lot in private donations from
people who were moved to give
The value of Mr.
Mortenson’s books
may be very different
from their benefit to
the charity.
after reading the book or listening to Mr. Mortenson talk.
However, that is a misreading
of federal law.
The value of Mr. Mortenson’s
books and public speaking may
be very different from their benefit to the charity.
For example, if he charged
speaking fees of $30,000 to
similar organizations, Central Asia Institute’s payment
for the same services of any
more than that $30,000, whether through cash or paying for
his travel to personal speaking engagements, would be
excessive regardless of whether
the charity received donations
and other publicity worth far
more than the $30,000.
Charities should make sure
that board members, top offi-
cials, and others who are in a
position to exercise substantial
influence understand the rules
designed to prevent excess-ben-
efit transactions.
pay a compensated employee a
higher salary than to provide
him or her with this type of
fringe benefit.
Draft an emergency-
response plan long before
any problems arise.
The saying goes that there
are two sides to every story. Unfortunately, anyone searching
for the story from the perspective of the Central Asia Institute, its board, or Mr. Mortenson in the week following the
“60 Minutes” exposé was left
only with a handful of short
statements posted on the institute’s Web site and Mr. Mortenson’s blog and a transcript of an
interview published by Outside
magazine.
Although those statements
were released within two days
of the “60 Minutes” segment
about the scandal, most readers
were probably left feeling unsatisfied with the institute’s defenses, particularly compared with
the widespread and voluminous
criticisms of the charity’s operations. Even as the news media
and public have come knocking
It is impossible
to stop the fast
pace and extended
reach of
information.
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Conduct independent au-
dits regularly to avoid trou-
ble.
A charity’s board is supposed
to ensure that the organization’s
resources are deployed efficiently and are focused on the charitable mission.
For organizations with sufficient resources and substantial financial activities, like
the Central Asia Institute, an
independent audit is strongly
recommended (and may be required by law). The Central
Asia Institute did not have an
audit even in 2008 when its net
assets exceeded $10 million, it
spent more than $5-million, and
it generated a surplus of more
than $8-million.
The board’s decision to forgo an audit until fiscal 2009,
combined with the problem of
the small size of the board and
the financial self-interest of the
charity’s founder and executive
director, raise suspicions that
it failed to exercise appropriate
oversight and might have misused charitable assets.
An independent audit can assure a charity’s board and others that the financial statements
provide an accurate reflection
of the organization’s financial
health and performance.
Self-reported numbers by
staff members are less trustworthy because they may contain errors that might otherwise be corrected by an audit
and can easily be manipulated
to further an individual’s personal interests.
With the public’s increased
scrutiny and skepticism of non-profits, charities, particularly
those with annual revenues of
$2-million or more (the legal
threshold for a required audit
in California), would be wise to
consider the value of an independent audit.
Adopt clear and fair travel
policies.
The Central Asia Institute’s
spending on travel has attracted criticism because it covered
first-class and charter travel as
well as travel for companions.
Even at the institute itself,
people seem to hold different
views about whether it was appropriate for the charity to pay
for these trips.
Mr. Mortenson has said he
has covered his travel costs
since mid-January to avoid po-
tential conflicts of interest; the
institute has explained that it
had covered Mr. Mortenson’s
travel expenses because these
activities are “integral to the
mission and operations.”
Charities must be sensitive to
donor and public expectations
of how charitable assets are
used, especially when it comes
to travel. For an organization
that serves poor people in Af-
ghanistan and Pakistan, first-
class and chartered jet travel
for insiders and their non-work-
related companions can just
look wrong. It may be wiser to
with a loud bang for answers, so
far the institute has responded
with a whimper.
Connecting the nonprofit world with ne ws, jobs, and ideas
Emily Chan and Gene Taka-
gi are lawyers in San Francisco
who specialize in advising non-
profits.
