Its chief financial officer falsified and misrepresented information, its president failed to find out what was happening, and Rainbows United began a slow spiral into bankruptcy, the organization's board chairman said Thursday.
But it might have avoided that fate if internal policies already in place had been followed, he said.
"It's tragic," Steve Cox said. "It didn't have to get as bad as it did.
"But we do think we understand what happened, and we know what we have to do to fix it."
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Cox and Hale Ritchie, a retired Wichita businessman who is leading the nonprofit's restructuring efforts, gave the first detailed account of what led Rainbows United to file for Chapter 11 bankruptcy reorganization on July 30. Rainbows serves about 2,000 children with special needs and their families.
They also announced new plans to consolidate services and staff at two buildings as a way to trim some of its debt.
Rainbows has $6.6 million in debts, including $2.3 million in federal withholding taxes, $2.4 million in unpaid bank loans and other bills.
The debt will be reduced to $5.6 million today when the sale closes on its downtown building at 340 S. Broadway to an anonymous group of local investors for $1 million, Cox said.
Rainbows has 290 creditors. Ritchie said some of them have been paid and thought the current debt is closer to $5.2 million.
Rainbows is planning a 100 percent repayment plan to its creditors over eight years.
Its reorganization plan is due to U.S. Bankruptcy Court Judge Bob Nugent by the end of the year.
The problems surfaced right after the unexpected resignation of chief financial officer Scott Richards on July 6.
Rainbows president Lorraine Dold, Richards' supervisor, was placed on paid administrative leave and eventually fired Aug. 21
Cox said the problems began about 2 1/2 years ago when funding sources started to tighten as federal, state and county budgets decreased.
Dold continued to service the organization's programs at the same levels and tried to grow some programs as well, he said.
"The cost of the programs was just outpacing our revenues," Cox said.
To make it all work, Cox said, Richards started shifting funds within accounts to pay the bills.
The situation continued to deteriorate until ultimately the only thing Richards could do to keep paying the bills was to stop paying payroll taxes, Cox said.
When that money was no longer enough, and the organization could not make payroll, Richards resigned, Cox said.
During that period, the financial records were falsified and the board of directors was informed that the organization was in sound financial shape, he said.
"All the financial information that was presented to the board was totally false," Cox said.
Cox said Richards not only misrepresented the financial information, he was not even making entries into the general ledger in the accounting system for more than six months.
Asked Thursday to respond, Richards said, "I really don't have any comment."
Internal policies could have prevented the financial problems, Cox said. For example, checkbook reconciliation wasn't supposed to be done by Richards, but that policy was ignored.
He also wasn't supposed to open his own mail so that someone else saw the checks and the bills, providing some accountability. But Richards opened his own mail, Cox said.
Richards also managed to segregate the accounting department so that the tasks of the people within that department were so narrowly defined that they could not see what was happening overall, he said.
Audits were delayed, some by Richards.
A 2007 audit was postponed to 2008 when it was recommended that Rainbows change its fiscal year to coincide with the school year.
When the board started asking for the status of the audit, Richards said he had postponed it because he wasn't ready for it. Later he said the auditing firm was having trouble working Rainbows into its schedule, he said.
"In reality, the auditing firm could have come in at any time, it's just that the financial records were in such disarray they were not capable of being audited," Cox said.
As CEO, Dold should have known about the problems, but failed to find out, Cox said.
"We can't really say what she did and didn't do," Cox said, "but she definitely did not provide adequate oversight to that area."
Dold's attorney, Randy Rathbun, said his client has been treated unfairly.
"She's just been made a scapegoat for this whole thing by the finance committee that went to sleep at the wheel, and by the board," he said.
Auditors are expected to complete an audit up to June 2008 by the end of the year. Then they will conduct an audit through June 2009.
Consolidation of programs
After Richards resigned, the organization hired outside accountants to reconstruct two years worth of financial data to find out where Rainbows stood. Rainbows officials said they finally got some numbers they could believe about two weeks ago.
That's what drove its new consolidation plans, Cox said.
Rainbows, which has laid off about 90 employees and already reduced services for "typically developing" children, said it would consolidate programs at its two remaining buildings, Kids' Cove at 2258 N. Lakeway Circle, and Kids' Point at 3223 N. Oliver.
The programs at Rainbows Connection, 2901 W. Taft, will move to Kids' Cove. They include family support services, respite care, targeted case management services, foster care, Camp Woodchuck and the Latch Key Program.
Services for children ages 3 to 5 will be provided at Kids' Point. Administrative staff is expected to move to Kids' Point, while infant/toddler services staff will relocate to Kids' Point and Kids' Cove.
All children will continue to receive their current services, with some now delivered at a different location, Cox said. Transportation for children with special needs will continue to be provided.
The board has approved a contract for the sale of the Ritchie Family Center at 251 S. Whittier, which will close within 60 days.
Changes in reporting
To ensure the problems don't happen again, the board has changed reporting requirements so that the financial officer reports directly to the board instead of going through the CEO, Cox said.
The board also recently approved a whistleblower policy that will allow employees to report suspicions of wrongdoing without fear of repercussion.
Rainbows and its auditor, George Bowerman, are making lists of additional improvements and will combine those lists.
It has hired a new chief financial officer, Kere Noel. Deb Voth is chief operating officer.
Beyond that, Cox said, "We're trying to change the culture at Rainbows so that it is a much more open culture and there is much more communication between management and employees."
It's also trying to be more open with the community.
Ritchie said organizations like Rainbows United need to be run more efficiently as government budgets continue to be cut.
"We're trying to get more efficient at what we do so we can get to a point where we're financially viable going forward," he said.