Nonprofit Finance Disasters. Why did FEGS close down?

NONPROFIT FINANCE DISASTERS
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1 Why did FEGS close down?
The primary reason FEGS shut down was because the organization's accounting firm realized that FEGS was $19.4 million dollars short in its operating budget. It cold also not sustain continue sustaining its operations especially after losing two of its main contracts. The $19.4 million was a cumulative effect of the poor financial planning and cumulated debt obligations that ultimately made the organization to have very little cash on hand, which gave it little ability to maneuver if it encountered unexpected setbacks.
The issues that finally brought the organization down had cropped up earlier but the management had kept them in wraps. It was revealed that the company had been injecting operating capital into nonperforming subsidiaries which were supposed to be for-profit entities. It was also revealed that the CEO had been earning six times the industry standards and the company had been keeping assets which it no longer needed or used. For example, it had rented out space which it was not needing and or using.
Other issues that could have complicated chances of acquisition or merging with another organization it was the way it was running its operations. First, it was doing a consolidated audit which shadowed its nonperforming entities which were burdening the organization with financial woes. One of the organizations, All Sector signed financing agreements with at least five different creditors, dating back to 2009, using the company’s equipment as collateral CITATION Lau15 \l 1033 (Nahmias, Goldberg, & Prakash, 2015). All along, FEGS was borrowing to cover up its losses until the debt became insurmountable.
1 What specific financial issues were there?
1 FEGS was compensating its executives higher than industry standards. The CEO Gail Magaliff who resigned few months before the organization closed down was earning six ties the average rates of other ceos heading not-for-profit organizations.
2 According to CITATION Jam152 \l 1033 (Ford, 2015), the organization was paying for real estate property it was not using and it does not need.
3 The organization was also writing-off accrued program revenue. Writing off revenue is not a good accounting standard and the terms ought to have been revisited to ensure the organization does not lose revenue.
4 Investments in unsuccessful mission-related ventures – the parent organization kept bailing out undeforming subsidiaries a strategy that deepened its financial woes
5 Poor performance of some contracts such that they did not yield expected revenue.
3) Should its executives receive the compensation that they did?
No. If the average salary of executives in other non-profit organizations do not as much, then it is wrong to compensate them that much. In the spirit of maintaining the administrative cost of the organization below 25%, then the executives should have been earning lower salaries. The CEO salaries is six times that of his/her peers and that burdens the organization with a huge payroll. In the case of FEGS, if the CEO earned the average salary as with other non-profit organizations, she would have saved the organization at least $6.12 million per year. In her tenure which ended in 2014 from 2007, Gail Magaliff would have saved the company at least $42 million. It is likely that the other executives earned high salaries which deepened the financial woes of the non-performing not-for- profit organization. The organization was eventually too deep to continue operating CITATION The151 \l 1033 (Agovino, 2015).
4) Should there have been greater financial oversight?
There should have been a greater financial oversight to ensure the nonprofit organizations thrive CITATION Cov94 \l 1033 (Covington, 1994). FEGS was funded by state and federal funds and other grants by well-wishers. Since it was receiving state and federal funds to operate, there must have been a greater oversight. States and the federal government use are accountable for the public’s money and thus giving grants and or donation to the organization without oversight to ensure it is used wisely, the government was not acting in the best interest of the people. It should have formed an oversight authority to ensure the resources it pumps into he non-profit are utilized maximumly and on feasible projects.
5) How could this scenario been avoided to begin with?
Capping the earning and perks paid to executives
If the executives can freely increase their earnings, they can run the organization to the ground because they do not have oversight authorityCITATION Dru12 \l 1033 (Drury, 2012). The assumption for any non-profit organization is that it acts in the best interest of the people it serves. However, it does not specify or institute measures to ensure that this privilege is not abused. In the case of FEGS, it seems the executives continued increasing their earnings and perks over the years. At the time of FEGS bankruptcy, its CEO was earning six times what other CEOS in other organization earns. It is likely that either the executives can adjust their salaries and there is no balance of power to counter them. One way to avoid bankrolling greedy executives and senior management is creating a system with checks and balances of power and engraining it in the constitution.
Publishing the entire information on the media
Secondly, this issue was catastrophic because it was incubated for a long time. The problems which ailed the organi...