Location: The Couchsurfing Project >> Brainstorm - the original one.... >> Brainstorm ~ Redefined
Login for full access to Couchsurfing Groups. Not a member yet? Join our community!

2010 independent audit of CS finances
Posted August 13th, 2011 - 9:54 pm by from Alexandria, United States (Permalink)
Casey Shultz very kindly sent me a pdf of the independent audit of the 2010 CS finances. Thank you so much Casey!

If anyone would like a copy, please send to me your personal (not CS) email address and I will be happy to pass it along to you on attachment.

I'm working through it right now and will summarize soon; thank you everyone!

Margaret

Posted August 14th, 2011 - 10:24 am by from Paris, France (Permalink)
Thanks Margaret for having been persistent on this and Casey Shultz for providing the data. I have uploaded the pdf file of the audited 2010 finances here:

Disclaimer: I am neither an accountant nor an auditor. Just commenting on things that strike me.

Quick comments:

1. The document is dated June 2nd, 2011. Why did it take more than 2 months to obtain it?

2. No detail is given for donations and verification payments. The total is lumped together under the designation "donations".

3. The website code once estimated as up to several hundred tousand $ in the filing documents and the member database are not listed among the assets, while trademark is ("at cost").

4. Where in the assets is the savings reserve transferred out for "emergencies" in the prior years which should amount to $ 275,000? Is it included in "Cash and cash equivalents" or "Certificate of deposit"?

5. If it is still there,how did they invest the savings reserve to earn only $2,098 = 0.76% in interest?

5. "The Corporation records contribution revenue for certain services received at the fair value of those services, if the services (a) create or enhance nonfinancial assets, or (b) require specialized skills, are provided by individuals possessing those skills, and would be purchased if not donated.
For the year ended December 31, 2010, there were no contributed services that would materially impact the financial statements as presented."

How does that go together with the statements

"Who runs CouchSurfing?

The effort that goes into supporting the CouchSurfing community is done by people all over the world -- many contributing as volunteers from home, along with a smaller long-term staff
."

and

"Volunteer Teams

These teams are staffed by CouchSurfing members from all over the world who volunteer their time virtually. With hundreds of team members, the volunteer teams are a manifestation of the grassroots energy that helps keep CouchSurfing running strong.
"?

Here's a comparison in Excel of 2010 spending with the 2010 budget:

CouchSurfing spend 18.1% more than budgeted on administration and 6.6% less than budgeted on Program Services ("Talent").

And here's a comparison in Excel with 2009 and 2008:

Unfortunately the audited 2010 figures are even less detailed than the unaudited for 2009 and 2008 and a direct comparison isn't always possible with the released data.

1. "verification donation" income as increased by +64% to $ 1,907,274.

2. There a first-time "sublease income" of $ 35,870 which is not explained.

3. Salaries and related expenses are unfortunately not broken down for the moment so that the huge increase from $ 171,571 to $ 649,205 cannot be explained.

4. Same problem with "Professional Services" of $ 681,149 which included significant legal fees in prior years.

5. Rent is down from $ 249,474 to $ 102,743 (no main office or "collective" for most of the year), but utilities are up from $ 6,618 to $ 10,158. Water is expensive in Instanbul.

6. With $ 90,000 travel expenses tripled but the line travel reimbursement has disappeared (may be included in salaries).

7. Total spending increased by +79% from $ 1,101,307 to $ 1,970,890.

8. For the first time CS reports a negative net change in net assets/loss of $ 24,352 and no addition to the savings reserve/emergency fund.

It is nice to see that the finances have been audited for coherence with accounting practices, butiIt would be just as nice to get at least the type of detail which was released for 2007 - 2009 to see not only that the accounting is ok, but also what the money has been spent on.

Posted August 14th, 2011 - 10:54 am by from Vienna, Austria (Permalink)
also clearly stated in the document...

According to the Corporation’s Articles of Agreement of a New Hampshire Non-Profit Corporation:

...
In the event of dissolution, the residual assets of the Corporation will be turned over to one or
more organizations which themselves are exempt as organizations described in §501(c)(3) and
§170(c)(2) of the IRC of 1986 or corresponding sections of any prior or future IRC, or to the
Federal, State, or local government for exclusive public purpose.

you probably know why the legal fees are so high... :)

Posted August 14th, 2011 - 1:05 pm by from Alexandria, United States (Permalink)
thanks guys

Ashwoods, your quote from the from the articles of agreement is boilerplate language that applies to the dissolution of any public charity; it's on the IRS website.
http://www.irs.gov/charities/charitable/article/0,,id=123368,00.html

I agree with you that the legal fees are incredibly high, probably due to non-standard operations from 2003-2009. Explaining-away weird management to the various government overseers is super costly...and remains so.

If y'all look on page 11 of the audit, "Notes to Financial Statements", you'll notice $831,901 in deferred tax assets, state and federal. I'm also no auditor or tax lawyer, so please take what I say with some suspicion, but these "...deferred tax assets primarily result from net *operating loss* carryforwards." This means that CS LOST MONEY over the years (despite collecting a ton of donation income and then spending tens of thousands of dollars annually on unneeded airfare to luxurious tourist destinations...arrrgh!)...and they are spreading those losses out over several years to gain the tax benefits of posting a loss.

The auditors report that the carryforwards will expire before they run out, since a corporation may only carry the losses forward for 7 years (according to the audit on page 11, CS has a whopping $3,900,000 of posted loss to spread over the years until 2030!!! good lord, that's a lot of loss) http://www.wikinvest.com/wiki/Tax_loss_carryforward

I'm only speculating, but the losses, I'll bet, are due to IRS penalties and legal fees that ate up the donation income. Aren't y'all happy that you donated your money to CS?:)

Apparently, the "2008 through 2010 tax years remain subject to examination by the IRS and NH Dept of Revenue. The 2007 through 2010 tax years remain subject to examination by the California Franchise Tax Board." (audit page 10) so CS is still in legal deadlock with the regulators...and the legal fees will continue to build. *sigh*

If any reader here has a professional background in tax law or accounting, please review my analysis and comment...let me know if I've made any statement or opinion in error. I want to hear from you; thanks!

Thanks for making the audit available to everyone, Uli! Thanks also for your careful read.

Comments:
1. I don't know, but Casey told me that they were seeking to correct a small error and didn't want to release the document before this error was corrected.

2. I guess CS considers verification income as a donation and the auditors agreed with this designation.

3. dont' know about the code value...good point!

4. I'm betting that the emergency money, which appeared and disappeared annually, is in the CD, but I'm totally guessing on that.

5. bad market?

6. I was wondering about that in-kind donation of services, too! CS volunteers have contributed untold amounts of extremely valuable free labor over the years....it's amazing. I guess they didnt' want to report this since it would increase the value of the organization, but not the cash on hand, and they'd have to pay tax on it as legitimate donated income. Not sure, otherwise. Does anyone know?

I'm guessing that the sublease income was from Base Camp...that CS charged rent from the staff after they switched to a salaried structure. (see page 9)

thanks all! Please please hit me with critique!!! I want to know if my analysis is correct, since I'm not an expert in this area...and am, honestly, only speculating. thanks!

Posted August 14th, 2011 - 3:45 pm by from Paris, France (Permalink)
Thanks for having read all the way to the end of the document, Margaret!

"The Corporation has federal and state net operating loss carryforwards totaling approximately $3,900,000"

Again, I am not an accountant or a tax lawyer, but the only way I see for a loss to build up while the company has consistently reported operating income every year which was put into a "savings reserve" ($ 275.000 through 2009) is via tax liablities which had not been taken into account. Could someone more knowledgeable about U.S. tax law please fill us in? What is this $ 3.9 million operating loss and who is liable for it?

Sounds like they should have hired the services of someone like Lautze & Lautze years ago:

"Lautze & Lautze does not treat taxes as an afterthought—and encourages its clients to also be forward-thinking. Capitalizing on the lowest effective tax rates directly impacts cash flow, making this goal an integral part of strategic planning for an entire organization."

As for the other points:

1. If the document was revised on the request of CS I would have expected it to have a new date. Perhaps Lautze & Lautze refused to modify their audit report as requested by CS?

2. If the auditors agreed with the "donation" designation, perhaps they didn't realize that those payments buy users premium services.

4. The savings reserve emergency money cannot be invesgted entirely in the Certificate of Deposit because the former should be $ 275.000 and the latter is only $ 135.000. So at least $ 140.000 seem to be unaccounted for.

Posted August 16th, 2011 - 10:21 pm by from Dongshi, Taiwan (Permalink)
Just curious what CouchSurfing executive salaries look like. Let us know what you dig up.

Posted August 17th, 2011 - 2:22 am from Buenos Aires, Argentina
This member has chosen to allow only Couchsurfing members to see their group posts. To see this full converstion, sign up or log in.

Posted August 17th, 2011 - 2:25 am from Buenos Aires, Argentina
This member has chosen to allow only Couchsurfing members to see their group posts. To see this full converstion, sign up or log in.

Posted August 17th, 2011 - 1:10 pm by from Alexandria, United States (Permalink)
Indeed Pablo: we all wish that the CS financial documents looked like any other responsible corporation's, either for-, or non-profit, but they don't.

It's essentially impossible to find out good financial information from the CS reports linked on this website. According to the 2009 report, salaries accounted for $116,598.17 USD but this is meaningless because we don't know how many staff members this lump sum paid. Many jobs, on CS, are contracted out, too, and this payment is listed separately...but again, we don't know for whom, or for what services, these contracts were funded. We do see that, in 2009, Directors and Officers on the BoD, apparently, were paid $30,500.

For Casey's most recent salary, reported on the 2008 form 990, please see: http://www.couchsurfing.org/group_read.html?gid=7621&post=9795471#post9865002

Posted August 17th, 2011 - 2:50 pm by from London, England (Permalink)
Could the $3.9million operating loss be related to the fact that they have been retroactively taxed as a for-profit from the beginning, whereas previous financial statements were operating on the assumption that they were a non-profit?


Struggling to see how a company can make such a huge loss with very little in terms of website functionality to show for it. Most of the good parts of this website (hosting, events etc) are provided for free by the community to itself.

Posted August 17th, 2011 - 3:14 pm by from Paris, France (Permalink)
Net operating loss
From Wikipedia, the free encyclopedia
.
"Under U.S. Federal income tax law, a net operating loss (NOL) occurs when certain tax-deductible expenses exceed taxable revenues for a taxable year.[1]

If a taxpayer is taxed during profitable periods without receiving any tax relief (e.g. a refund) during periods of NOLs, an unbalanced tax burden results.[2]

Consequently, in some situations, Congress allows taxpayers to use the losses in one year to offset the profits of other years. This provision is achieved through the carryback (as far back as 5 years per the American Recovery and Reinvestment Act of 2009 ) and carryforward of NOLs.[3]"

The accounting concept seem quite straight-forward. The question is how were hypothetical or actual losses accumulated while the organization claimed operating income for 2006 - 2009(after a $290 loss in 2004/05), for what and how much?

Posted August 17th, 2011 - 3:38 pm by from Alexandria, United States (Permalink)
In one of my conversations with Dan Hoffer, he told me that the tax implications of running the collectives, and Base Camp, using multinational volunteers, became extremely complicated very quickly. He said that Casey had not been thinking about the tax consequences of those decisions when they were made.

I'm only guessing, but I suspect that CS accrued a *lot* of tax penalties over the 2005-2010 years operating from collectives, rather than an office (from essentially 'paying' volunteers in free rent, stipends, daytrips, and food, since this practice functions as a tax-dodge with no salary/no income tax....plus operating as business in California without some kind of registration as a public charity or business office in that state)...and now that these years are being investigated by the IRS, New Hampshire and California....the losses are piling up, retroactively.

Remember: Casey was making decisions rather blind, legally, because he had no competent lawyer on staff...and he, himself, has no experience or education in non-profit management. The BoD appears to have been inactive during this time.

Posted August 19th, 2011 - 11:21 am by from London, England (Permalink)
On the ambassadors thread margaret tells us that we lost the 501c3 because of the management's fraudulent spending.

It's incredibly frustrating and so I just wanted to vent a bit - why is it that Casey and his inner circle can never be held to account? If this was a real company with shareholders we could expect them to be making a lot of waves right now. Yet for some reason, being half way between non-profit and for-profit means that they can seemingly get away with no matter what degree of poor performance without having to worry about any personal repercussions.

Posted August 19th, 2011 - 11:21 am by from London, England (Permalink)
On the ambassadors thread margaret tells us that we lost the 501c3 because of the management's fraudulent spending.

It's incredibly frustrating and so I just wanted to vent a bit - why is it that Casey and his inner circle can never be held to account? If this was a real company with shareholders we could expect them to be making a lot of waves right now. Yet for some reason, being half way between non-profit and for-profit means that they can seemingly get away with no matter what degree of poor performance without having to worry about any personal repercussions.

Posted August 20th, 2011 - 1:51 pm by from Alexandria, United States (Permalink)
oh totally...I share your frustration, Niall

the problem: people *donated* their money to CS...they gave it away to these dudes because they believed in the sincerity of their message.

Unless they had some restriction put on its use, the donated money belongs to CS, and CS belongs to itself, as a general non-profit....*not* a 501c3. It can be spent, in the general operating budget, according to the managers and the BoD wishes...whether we like the decision or not.

If CS had gotten the 501c3, there are all kinds of penalties associated with how the donated money is used, and how the spending is disclosed. When CS was trying to get the 501c3, they were expected to be held to these same standards....yet being taxed out the whazoo, like a general corporation. They received no tax exemption, so, from the standpoint of the IRS, they could spend the after-taxes money as they liked. People gave it to them, free of restriction, and it's theirs to spend, legally.

Now, CS is not trying to get the 501c3 because they've been turned down multiple times...and they're not even pretending to be held to those standards.

In my little job as a arts commissioner, we're taught to view **non-501c3** organizations, which request public donations, as cons until proven otherwise (by the acquisition of a 501c3). We caution people to NOT GIVE MONEY to non-501c3 orgs because they're held to no strict standards of operation. This is how CS got away with taking a ton of donated income and doing whatever they wanted with it...however, they were, and are, very heavily taxed.

We get screwed, but the IRS makes sure they don't:)

it's like giving money away to your no-good nephew: he'll most likely spend it in ways you won't like...but it's his to do so.


Posted August 20th, 2011 - 1:53 pm by from Alexandria, United States (Permalink)
oops ps: I reported that *one* of the reasons they were turned down for the 501c3 was their unjustified spending decisions.

There apparently were other reasons: poor governance, a primarily social (not charitable) mission, and unprofessional appearance of the 1123 completion.

Posted August 20th, 2011 - 2:39 pm by from Paris, France (Permalink)
"however, they were, and are, very heavily taxed"

Any records of any such tax payments anywhere?

Posted September 5th, 2011 - 8:32 pm by from Paris, France (Permalink)
I just posted this to another group but its rightful place is here:

Total revenue in US$:

2004: 3,454
2005: 29,608
2006: 109,674
2007: 312,985
2008: 788,598
2009: 1,168,642
2010: 1,946,538

2011 1-8 based on verifications (75,727 x $25): 1,893,175
2011 total year projection: 2,7 - 3,0 million

Total 2004 - 8/2011: 6,252,674

So was there a need to bring in outside investors and give up control?
You judge.