Luallen calls for transparency by Dismas
Charities on use of state and federal dollars

Dismas declined to provide requested information, leaving auditors
unable to fully determine the organization’s use of public funds



See the audit report for Full Details

Crit Luallen
Auditor of Public Accounts
209 St. Clair St.
Frankfort, KY 40601

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(Frankfort - April 5, 2011) State Auditor Crit Luallen today released a special exam of Dismas Charities of Louisville, calling for transparency by the organization that provides transitional housing for Kentucky criminal offenders.

Dismas received a total of $23 million over the last three years from the Department of Corrections for operation of its seven Kentucky halfway houses but declined to provide auditors full financial details on how that money was spent.

In 2009, Dismas received more than $27 million in federal funds. It operates 28 halfway houses in 11 states and is 97 percent funded by public dollars.

“Dismas Charities must ensure that the public money it receives is used in a responsible and transparent manner that serves the interests of both the recipients of its services and the taxpayers who ultimately fund the service,” Luallen said. “Because the detailed information we requested wasn’t provided to our office, we could not determine if state and federal funds were spent appropriately and the extent of other excessive or unusual expenditures.”

Dismas came under fire last year for expending significant funds for purchases that had questionable benefit to the organization, including spending more than $155,000 for suites at the KFC Yum! Center and at Papa John’s Cardinal Stadium, and spending $15,000 to $20,000 annually for a hospitality train car for University of Louisville football games.

Besides these high-profile expenditures, the exam questions the benefit of other activities by the organization, including financially sponsoring Bellarmine University’s basketball team, and hosting various social events including an annual derby gala, an annual holiday open house and golf outings.

The exam questions “whether the expenditures for the galas, open houses and golf outings were fundraisers or simply extravagant social events.”

While Dismas was found generally to have adequate policies in place, the exam offers numerous recommendations to strengthen oversight by the Dismas board to safeguard these public funds in the future, Luallen said.

The exam makes 10 findings ranging from the board’s oversight and its need to strengthen policies and procedures to the need for stronger language regarding transparency in the Dismas contract with Corrections.

The exam notes the current state contract for transitional services does not contain standard language authorizing the Auditor’s Office or another Kentucky state agency to review records of Dismas.

The Exam

Luallen’s office met with Dismas representatives in September and agreed to conduct an exam into selected activities and transactions involving the organization.

The exam did not look at the quality of service provided to Corrections by Dismas.

Dismas operates five halfway houses in Louisville, one in Lexington and one in Owensboro. Except for a period from 1977-1980, Corrections has contracted with Dismas since 1973 for transitional services for inmates being released into the community from prison.

Corrections also has contracted with Dismas to provide outpatient substance abuse treatment programs.

Dismas is governed by a 12-member board and has an executive staff that conducts its daily business.

Salaries

The exam found its executive staff receives significant compensation through salaries, bonuses and other provided benefits. In 2009, its president’s total compensation was $602,000 and its executive vice president’s total compensation was $469,955.

The exam notes Dismas hired a consultant to conduct a compensation study for its president and executive vice president, concluding in June 2009 that a base salary of $496,000 and $393,000, respectively, was not unreasonable for 2008.

The compensation for these two positions averaged nationally above the 90th percentile compared to all transitional care organizations, according to the exam.

The exam notes these salaries may be considered excessive and disproportionate, and perhaps not a proper use of public funds.

“In light of Dismas Charities’ mission to help offenders develop a pathway back to society, it is questionable whether Dismas has made the best and appropriate use of funds in the compensation of its executive staff,” according to the exam.

Limited records

During the exam, Dismas declined to provide auditors corporate financial information, leaving auditors unable to review expenditures made by corporate headquarters, including those discretionary expenditures made to the University of Louisville and other entities related to sporting events.

Auditors requested multiple records that Dismas declined to provide. Auditors specifically asked for expenses related to public relations, administration, gifts and entertainment, lobbyist fees, and financial statements of Kentucky’s halfway houses, as well as the organization’s 2008-2010 budgets.

Dismas also declined to provide auditors information regarding the income or source of funds used for expenditures made by corporate headquarters.

Without this information, auditors were unable to determine how state monies paid to Dismas were ultimately used, and whether such expenditures were reasonable and in keeping with the mission of Dismas.

At the start of the exam, after an initial overview meeting with an auditor, Dismas took a position of not allowing auditors to have any individual contact with staff, other than with or through its outside attorney.

“The many questions, therefore, that auditors had, the majority of which were never answered, had to be funneled through a third party,” according to the exam.

Findings

Auditors, however, were able to review selective documentation provided by Dismas, such as meetings minutes, by-laws, manuals and handbooks, certain Kentucky halfway house travel reimbursements and copies of IRS Form 990.

From this review, auditors found:

  • the board’s lack of review and approval weakens control and oversight necessary for accountability;
  • several policies at the organization need to be strengthened to achieve greater accountability;
  • ethical policies for board members, executive staff and employees do not cover all areas of standards;
  • whistleblower policy does not provide an avenue for employee concerns to be brought directly to the board; and
  • board members receive no formal orientation regarding their legal and fiduciary responsibilities.

The exam makes strong recommendations to correct these findings.

According to the IRS Form 990, Dismas expended more than $40 million in 2009; however, since auditors did not have access to financial records or staff, they were unable to perform a comprehensive review of these expenditures.

Corrections

Auditors did review Corrections’ oversight and monitoring of its contract with Dismas and found procedures in place for oversight by the department.

The exam notes, however, that certain contract requirements were not reviewed for compliance by Corrections. The exam also notes that a cost analysis was not performed by Corrections to determine the cost effectiveness of services by Dismas.

In its response to the exam, Corrections said it will improve these two areas.

Auditors also found that Corrections’ contract with Dismas does not allow for the inspection of Dismas records by the Auditor’s Office.

Corrections asserted that such language was not required because the contract was a no-bid contract; however, the Finance and Administration Cabinet notes that there should be standard language to inspect records in all state contracts.

According to a Finance and Administration official, “it is clear that it was an inadvertent mistake that the standard language allowing or authorizing the Auditor of Public Accounts to have access to records, books, and other evidence pertinent to the contract was not included.”

According to its response in the exam, Corrections will revise its contract with Dismas by April 30 and include language to allow access to records.

The complete responses by Corrections and Dismas to the exam are included in the report, which can be found at www.auditor.ky.gov

 

Crit Luallen
Auditor of Public Accounts
209 St. Clair St.
Frankfort, KY 40601
WEB:
www.auditor.ky.gov/