It’s not often that a nonprofit organization provides an object lesson in leadership, financial management, culture, and governance all at once. But the grim, at times horrifying tale of the Healing Arts Initiative is a special case.

HAI is—or, it appears, was—a New York nonprofit that supported the area needy and elderly through arts performances. When a new executive director, D. Alexandra Dyer, joined the organization last July, she quickly recognized it had problems. Money had been embezzled from the organization for years—more than $750,000, according to a legal filing. Dyer called a staff meeting to discuss it; two days later Dyer was attacked with drain cleaner by a man hired by HAI’s bookkeeper, who’s since been charged with the embezzlement.

Basic concepts of oversight, accountability, and responsibility were not exercised by either the professional or volunteer leadership.

In April, after months of hospitalization, Dyer (on behalf of the organization) sued HAI’s board, which she claimed “violated their duties” and was negligent in the face of the embezzlement. The board responded by firing Dyer in early May, and then shutting down the organization two days later.

So, not good.

Ultimately, the courts will sort out the particulars of the stolen money and the responsibility of leadership in the face of the theft. But as dispiriting as it is to read about, the HAI story is a useful reminder of a few important tentpoles of management and leadership:

1. Financial controls are essential, especially at smaller organizations. There were a few red flags at HAI, according to reports: checks bouncing, credit cards declined, duplicated payroll checks produced, and a prior CFO fired by the board for challenging its financial management. A few simple processes for handling finances can help keep things in order—requiring multiple signatures on checks above a certain amount, segregation of financial duties, making the finance staffer go on vacation (to note potential discrepancies in the staffer’s absence). My colleague Joe Rominiecki reported on how some associations have addressed these issues; my 2011 article on financial controls includes a few small-staff tips as well.

2. If the relationship with the board is fraught, get a buffer. The dynamic between the board and staff leader can be hard to read on a good day, so it’s impossible to speculate on how Dyer was relating to HAI’s, especially considering that she was new to the organization. But in any circumstance, it’s important to tread carefully when it comes to discussing an issue like ongoing sustained embezzlement. “No question about what to do here,” says consultant Glenn Tecker. “Consult the organization’s attorney, notify the officers, then notify the board of the course of action you are taking upon advice of counsel.” That may not make the relationship between the board and staff any more comfortable, but having the attorney serving as a third party offers a measure of protection.

3. Culture matters. In a thoughtful assessment of the HAI fiasco in Nonprofit Quarterly last week, nonprofit scholar and consultant Paul Sturm saw a lot of cultural dysfunction in the organization. Unwittingly or not, he writes, HAI developed “a culture where basic concepts of oversight, accountability, and responsibility were not exercised by either the professional or volunteer leadership. Although some elements of culture are in an organization’s DNA, other aspects of culture are developed consciously, and both types have to be reinforced over time.”

That “over time” strikes me as important in this case. Any organization with long-term issues such as embezzlement has created a culture where recklessness and rogue behavior are being fostered; changing that culture is not something that can happen immediately, especially not by just one new leader coming in. Anybody entering that environment wants the bad behavior to stop fast. But it may be just as important to understand what created the environment.

“The deeper issue is what allowed it to happen,” Tecker says. “We always assume [in cases of nonprofit scandals] the board was unengaged. But we’ve also seen scandals where boards have taken an adversarial relationship with staff rather than a consultative partnership.”

There aren’t any easy answers for a situation like this one. But understanding the reasons why organizations go off the rails—and how best to get them on track—can go a long way to keeping your organization’s name out of the papers in a bad way. And it can also help ensure that an organization with an admirable mission doesn’t miss its chance to keep doing good work.

What do you do at your organization to keep an eye on financial controls and nip incipient board dysfunction in the bud? Share your experiences in the comments.

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