SSA in Crisis: Can It Heal Itself? [LONG]

(with apologies to non-U.S. readers)

Most of the postings on this subject follow a predictable pattern:
"what a bunch of stupid/unethical/indifferent (pick one) idiots we have
at SSA; why don't they just [fill in the blank with your favorite
brilliant solution]" A few (including mine) urge patience, support, and
a chance to let the process work.

Reluctantly I'm now changing my position from "be patient" to "do
something." For the specifics, skip to the ACTION ITEM at the end. The
rest of this is just a long-winded description of a discouraging
journey the past few weeks.

My new stance may seem like heresy given my past support of SSA. But
after more than three weeks of working with and communicating with SSA
directors, including the Executive Committee (ExComm), I confess I no
longer have complete confidence that the current organization can deal
properly with this crisis.

Like most, I learned about SSA's tax filing/remittance problems from
Dianne Black-Nixon's letter 3 1/2 weeks ago. While publicly urging
patience, I also offered help to directors I know, including ExComm
members. I agreed with most of their decisions but nevertheless had
concerns. Soon I found myself working behind the scenes with several
directors who shared these concerns, which were centered around
maintaining the confidence and trust of SSA members during a time when
their faith in SSA would be tested.

Disclosures by ExComm implied that certain SSA funds were
misappropriated by SSA's Chief Financial & Administrative Officer
(CFAO), who has since been fired. But even if the CFAO were guilty,
others may share responsibility for allowing this to happen. And as
ExComm continued their investigation, the primary reason for our
concern was conflict of interest.

In the corporate (and non-profit) world, a conflict of interest exists
whenever there is an incentive for people in positions of power and
trust to take actions contrary to the best interests of those who have
placed their trust in these individuals. It does not matter whether
said individuals are trustworthy or competent or even whether they
yield to these temptations. If there's an incentive for them to do the
wrong thing, they are said to be conflicted and those conflicts must be
properly addressed.

The conflicts of interest with SSA's crisis relate to the fact that
those working to resolve it--i.e., ExComm, the Budget and Finance
Committee (FinComm), and SSA's accounting firm--potentially share
responsibility for allowing it to occur. I would include SSA Executive
Director Dennis Wright (ED) in this group but ExComm has been careful
to give the impression that they are managing this situation, not the
ED.

Much outcry on this forum has focused on the decision to forgo annual
audits. In my opinion, this misses the mark. To the best of my
recollection as a former director (for nine years in the mid 1990s
through early 2002, including service on ExComm), previous FinComms
elected to have annual reviews performed by Johnson, Miller, SSA's
public accounting firm (CPA) because they were much less expensive than
a full audit (if I recall correctly, on the order of $20,000 less) yet
provided some assurance that material problems would be uncovered.

For those of you without financial backgrounds, there are three levels
of involvement by a CPA with a client. For a "compilation," the CPA
simply cranks out standard-format statements using the client's books
and records. If the numbers add up, the CPA doesn't do much checking;
they just make it look pretty. For a "review," (which is what I believe
SSA had in prior years), the CPA goes a step further and attempts to
uncover material problems. They offer no guarantees but at least the
accountants look under the hood, so to speak. An "audit" (called for by
the By-Laws) involves many more tests and checks based on which the CPA
expresses an opinion as to whether the results conform to generally
accepted accounting principles. An audit provides the highest level of
assurance but, of course, costs the most, because of the extra work
involved and also the liability assumed when expressing an opinion.

In the past, the annual review plus the close relationship between the
CPA and FinComm--who played a very active role in the SSA's finances at
that time--plus performing an occasional full audit made the question
one of economics as well as the By-Laws. In effect, FinComm made the
decision to self insure, judging that an occasional loss, though
unlikely, would still be less than the accumulated added cost of doing
an audit every year. I suspect that may still turn out to be true
despite the magnitude of the potential loss. I recall that the Board
was made aware of this policy (but not asked to approve it, per se) on
at least one occasion while I was a director but I cannot be certain.

In my opinion, then, the critical question is whether FinComm retained
Johnson, Miller to continue preparing SSA's annual financial
statements, and more specifically to do annual reviews. ExComm's
disclosures indicate they did not.

Here's where the potential conflicts arise. Good governance calls for
FinComm to retain the CPA, who would report directly to them (not to
the CFAO or the ED or ExComm or Board), to prepare the annual financial
statements (with a review or, under the By-Laws, an audit). ExComm
meeting minutes note that Johnson, Miller appears not to have been
retained to do any such work after 2002. If FinComm did retain them, in
writing or orally, then Johnson, Miller may (and I emphasize the word
"may") have some culpability and there is an inherent conflict with
their continuing to work on the SSA account. In that case, it gets
messier: ExComm meeting minutes indicate that Johnson, Miller selected
the lawyer in Hobbs that SSA engaged. This attorney quickly recommended
that SSA give Johnson, Miller "carte blanche to do what they needed
with the SSA financial records."

On the other hand, if FinComm did not retain Johnson, Miller, then
FinComm itself may (again, "may") have some culpability, perhaps shared
by ExComm and the Board (although directors could argue they acted in
reliance on FinComm) and there is an inherent conflict with their
playing a key role in this investigation.

It's very important to reiterate that competence and trustworthiness
are irrelevant to this discussion. It doesn't matter whether the CPA or
FinComm or ExComm did anything wrong, intentionally or otherwise. And
I'm not suggesting they did. On the contrary, I've been generally
impressed with the work done by ExComm so far. What matters is that
people who may have legal liability and therefore a vested interest in
the outcome are deeply involved in this investigation. That's a classic
conflict of interest. And it's a recipe for losing the confidence of
SSA members at a time when we need it most.

One remedy for conflict of interest is disclosure. Depending on your
point of view, disclosure to date has been adequate but sometimes
reluctant.

Another remedy is bringing in new people to do the investigative and
remediation work. This is risky. Those who know the most about SSA and
are in the best position to help are probably already involved. It's
difficult enough to get competent volunteers, much less to work for
free in Hobbs going through accounting records and meeting with
attorneys, bankers, the IRS, etc.

A third and, I believe, best remedy is an independent group to monitor
the actions of ExComm, the accountants, the attorney(s), staff, and
others involved. This is where the discussions with the concerned
directors quickly arrived. Ultimately this resulted in a formal
proposal for an Oversight Task Force (OTF). Four SSA members were
prevailed upon by these directors to serve on the OTF: myself and three
other individuals--a highly experienced accountant, an attorney, and a
successful businessman. Because of my prior Board service, I initially
declined to serve on the OTF but was persuaded by the two concerned
directors because of my knowledge of SSA, my business background, and
the fact that my tenure ended in early 2002, prior to the Larry
Sanderson affair.

The OTF proposal was made to the full Board by one of these concerned
directors approximately two weeks ago with, unfortunately, a generally
negative reaction.

How could this happen? Well, some directors had genuine questions about
certain provisions in the OTF proposal but I believe the negative
reaction was due in great part to misunderstanding the OTF's purpose.
Instead of oversight (i.e., monitoring, not decision making), some saw
this as an attempt to usurp power from the Board or ExComm. Some feared
it could interfere with and/or delay the investigation or reveal
confidential information. Others viewed it as a no-confidence vote. In
frustration, I "recused" myself from participation on the OTF and made
a direct appeal to the Board explaining OTF's purpose in more detail
and arguing that it was the Board's fiduciary duty to take action to
oversee the activities of ExComm, FinComm, and others who were
conflicted.

With this clarification, responses to our proposal were gratifyingly
more favorable. In fact, ExComm subsequently expressed their support
for the OTF. To be fair, at least some ExComm members (including Dianne
Black-Nixon) had voiced support all along.

That was nearly two weeks ago. Since then, nothing much has happened.
ExComm continues to manage the investigation and to make decisions. My
sense is that there may be debate even within ExComm on how to proceed.
More than a week ago, one ExComm member emailed me to say it would be
not be practical to hold a tele-conference special Board meeting for
all 26 directors and suggested delaying action on the OTF until the
scheduled Board meeting at the end of this month. My response was that
with every passing day, decisions were being made that could be
criticized by SSA members and should be overseen by an independent
body. I often participate in conference calls with at least that many
people dispersed over the U.S. and India and do not think a properly
managed special meeting--with one agenda item--would be terribly
difficult. Rightly or wrongly, I interpreted this as foot dragging. If
ExComm had supported the OTF with the same admirable alacrity with
which they jumped on the initial disclosure of the tax problems, the
OTF would already be at work and I would not be writing what some will
doubtless interpret as a disloyal or disruptive public posting.

ExComm believes it would be inappropriate for them to charter the OTF
without full Board approval. They have a point, but this reasoning
leads inexorably to the conclusion that, absent oversight, ExComm
should not be making major decisions about the investigation or
corrective action, either.

Ironically, with one troubling exception (see below), I'm less
concerned with what ExComm is actually doing in Hobbs than with how SSA
members may come to perceive or question their actions. To date, ExComm
has moved decisively to manage a tough problem and it's difficult to
quarrel with their actions.

But many members still have a sense that a previous ExComm attempted to
cover up the Larry Sanderson expense account scandal three years ago.
We cannot afford the same cynicism, or worse, now. While most members
understand that some things must remain confidential for legal reasons,
they are uncomfortable or angry if they suspect they are not getting
the real story. And on that score, ExComm's inaction is troubling.

I mentioned an exception, and it's a big one: how responsibility for
this problem is being assigned. ExComm's communications have emphasized
the ED's failure to inform the Board of the non-filing of tax
information returns. At the same time, however, ExComm has minimized
the "errors of omission" of the ExComm/FinComm/Board in not retaining
the CPA to examine the SSA's annual financial statements.

In fact, both lapses are errors of omission. Yet my impression is that
the ED is being positioned as the one most responsible for allowing
this crisis while FinComm's failure to act is being dismissed. For that
matter, ExComm admits that the CFAO reported directly to the Board, not
the ED, until mid 2005 so there is ample reason to share responsibility
for this. While I do not have the facts available to ExComm, the
questions raised are precisely the reason that independent oversight is
needed over those who find themselves in conflicted positions, for
their sake as well as the members'. And it is needed immediately, not
next week or the week after that or after the next major staff or
organizational decision is made.

If this were a public corporation, plaintiffs' attorneys would already
be circling like vultures with the prospect that directors could be
sued and found guilty of breach of their fiduciary duty, in particular
those on FinComm and, likely, ExComm. But there's not enough money here
to interest them. Nor do I believe we should necessarily seek to punish
whomever may have contributed to this debacle. This was a failure,
albeit a predictable one, of a flawed system. Yet I don't think we
ought to sweep anything under the rug, either. I believe most SSA
members would readily forgive the unwitting errors of volunteer
directors so long as they believe they are being dealt with
forthrightly.

I apologize to those I know and respect on the Board and ExComm who are
dedicated, well intentioned, and working hard in thankless positions.
But I fear that some of them do not fully understand the danger that
their inaction will increase the cynicism and apathy already evident in
many SSA members. The lack of urgency and reluctance to initiate
oversight by ExComm and the directors alike suggest that some of them
still don't "get it."

Despite protestations to the contrary, there is a tendency in times
like this for ExComm and the Board to "circle the wagons." It's a
natural human response to threats, both from the original problem and
from outraged SSA members who want someone, anyone, to pay in blood. It
is a tendency against which we must fight hard if we are to maintain
the trust of our members.

Sadly, at this point individuals who generously agreed to serve on the
OTF weeks ago are growing cynical about the willingness of SSA to
address its problems. Clearly I am, too.

On a positive note, I see this unfortunate crisis as a wonderful
opportunity to make major changes to SSA to improve its financial
position and increase its effectiveness. The current Board structure is
indeed cumbersome and ineffective. It also makes sense to examine which
functions the SSA should perform and whether some of these should be
outsourced. And I agree with those who believe we should explore
locations other than Hobbs. We have a chance to "start over" with a
clean sheet of paper...without losing those elements of SSA that are
critical. Yet what I have seen in the past 3+ weeks leaves me worried
that we will squander this opportunity.

ACTION ITEM: Please contact your directors and, while offering your
continuing support and trust, urge them to demand the Oversight Task
Force or something like it be put in place immediately. All of
us--members, directors, ExComm, and staff alike--need the clarity and
assurance that only an independent observer can provide.

In the meantime, please maintain the degree of civility on this forum
that I hope you would if the discussion were taking place in person.
Ironically, the offensive and irresponsible behavior of some
participants on rec.aviation.soaring alienates most SSA members and
encourages our leadership, with some justification, to dismiss these
critics as just a bunch of loudmouth idiots. Those who insist on
popping off indiscriminately with wild allegations, accusations, and
statements of opinion-as-fact serve no one but their own egos. Their
actions--presuming they actually care about the future of SSA and the
great things it has and can still do for soaring pilots in this
country--are counterproductive.

Chip Bearden
SSA Member since 1965