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Losing Our Moral and Ethical Compass

Louis Grumet

When I was executive director of the New York State School Boards Association, my assistant and I were invited out to lunch one day by an investment firm and taken to a beautiful, expensive restaurant. As we dined, amid the smartly dressed people and hustle and bustle of New York City, one of the brokers said to us, “I can get you a 26% yield with all of this.” My assistant—a young man in his early 20s—turned to me and said, “If there's a 26% yield out there for a nonprofit organization, please give me 30 days so I can find a respectable job.”

He was correct, of course. There is no such thing as a 26% yield for a not-for-profit organization. But, more importantly, this young man knew right away the inherent problem of recognizing safety versus yield, or, more accurately, the difference between fiscal restraint and avarice when it comes to investing.

When it comes to assigning blame, when do we stop looking elsewhere and start looking in the mirror?

Looking in the Mirror

Although the encounter above took place many years ago, the question it poses is a timeless one: When it comes to assigning blame, when do we stop looking elsewhere and start looking in the mirror? Should all of us shoulder some of the blame for scandals like those involving Enron, the Roslyn School District, and Bernie Madoff?

America has never really been a purely capitalistic country. It's not a socialist country, either, but America has generally preferred a regulated form of capitalism.

In the last 20 or 30 years we've lost our compass. We've forgotten how to regulate or, worse, dismissed the pursuit of safety in the name of ever greater profits.

In a well-regulated schematic, it all worked. What the public perceived as “safe” institutions were regulated, and high-yield sectors were not. It used to be that you strived for yield because of the risk-reward factor. When it worked, you picked up your money. When it didn't, you picked yourself up.

Now everybody is taking risks, from churches to governments to schools and, yes, even nonprofit groups. Nobody ever thought nonprofit groups would do anything other than invest in safe, low-yield, government bonds. What changed in the last 10 years? Who put nonprofits in high-risk, high-yield investments?

Look at pensions. When pensions were created, did anyone ever mean for them to chase high yields? Future retirees expect a nice return on their investments, yes, but nobody should ever guarantee 26%.

The Madoff scandal is a perfect example. Much of that scheme was effected through pensions and feeder funds.

The Roslyn School District scandal provides another example. How does a school board pay just $17,000 for a $75 million audit, and not one person questions why the bid is so low? The old saying is true: You get what you pay for. In this instance the Roslyn School District paid—dearly—for what turned out to be a shocking $11.2 million embezzlement case that went on for eight years before the district superintendent, the assistant superintendent for business and finance, and her niece, the accounts payable clerk, were caught.

In many ways, we have all forsaken our fiduciary responsibilities in the name of greed. We forever seem to be asking the same questions when these problems arise: What did they know, when did they know it, and why didn't somebody catch it?

Good questions, all.

But perhaps more important than the answers to those questions is: When are we going to ask them of ourselves?

Louis Grumet. Publisher. The CPA Journal, Executive Director, NYSSCPA, lgrumet@nysscpa.org.

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