July 24, 2012         Kitsap Humane Society   Board of Directors   9167 Dickey RD NW   Silverdale, WA 98383     RE: Independent Investigation of the Kitsap

Humane Society     Dear Kitsap Humane Society Board of Directors:     Berntson Porter & Company, PLLC (“BP”) has been independently retained by the Kitsap   Humane Society (“KHS”) to perform an investigation and to evaluate various concerns regarding   conduct of KHS and its Board of Directors. Our opinions and findings included in this report the   independent and separate from current and former KHS Board Members, current and former are   KHS staff, and other informed third parties.     This BP work product was performed by and under the direction of Mr. Douglas S. McDaniel.   Mr. McDaniel is a Certified Public Accountant (CPA), Certified Fraud Examiner (CFE), and is   Certified in Financial Forensics (CFF). Mr. McDaniel’s educational background includes a   Masters of Accountancy/Information System (MA IS), a Masters of Business Administration   (MBA), and a Bachelor’s degree in Accounting. He has over 22 years of professional experience   including but not limited to consulting in areas of construction, board of directors, internal   controls, fraud investigations, forensic accounting, dispute resolution, and serving in testifying   expert roles.     During the course of our investigation, we conducted two in-person interviews, twelve telephone   interviews, and an onsite visit of KHS to see the facility and to talk with various employees.   Persons interviewed included current and former employees, current and former Board   Members, Heather Straub, and Ball & Treger LLP (See Appendix A – List of Participants and   Non-Participants). BP has examined thousands of pages of documents including: financial   statements, audit reports, tax returns, budgets, contracts, bids, and emails.     The majority of the concerns were stated in a letter dated February 27, 2012 from attorney   Heather Straub on behalf of her clients that was addressed to you and Phil Havers (hereafter   known as “The Letter”). We have reviewed The Letter from Ms. Straub and have categorized   the   concerns into the following major categories:     I. Project Humane   II. Other Capital Projects   III. Contracts and Policies  IV. Other Concerns
 
     

                                               Berntson Porter & Company, PLLC                                                       155 108th Ave NE Ste 510  —  Bellevue, WA  98004  www.bpcpa.com                    voice: 425.454.7990      fax: 425.454.7742      toll free: 800.876.6931 

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I.

Project Humane

Project Humane is a KHS program to modernize the Veterinary Clinic and to improve the services that the clinic provides. Construction for Project Humane began in 2011 under the direction of Tom Chaffey, a Board Member at the time. According to KHS financial records, the cost of the Veterinary Clinic (“Vet Clinic” or “Clinic”) remodel and veterinary equipment was $119,693.29. The remodel of the Vet Clinic started as a small project but the scope continued to grow and it morphed into a larger project. Budget There is a concern that construction for the Vet Clinic was $155,000 over budget. Based on interviews and documentation provided, it was impossible for the construction to be $155,000 over budget. The combined expenditure for the Clinic and veterinary equipment was under $120,000. For Project Humane to be $155,000 over budget, expenditures would have to exceed that amount. There was a lack of documentation regarding what should have been the budget for Project Humane. We were able to determine the budget for the Vet Clinic and veterinary equipment was around $100,000. The construction did go over budget by nearly $20,000 but not by the $155,000 that has been suggested. We did discover a document that appears to be an incomplete financial report that describes the financial condition of KHS. One page of the document shows that the Building Committee spent $255,000 with a budget of $100,000. This document is inaccurate. KHS did spend $255,000 on capital projects in 2011; however, KHS had several other capital projects (including a new generator and additional work on the Cattery) in addition to Project Humane that were appropriately planned for using Restricted and Reserve Funds. As already mentioned, Project Humane’s cost was only $120,000 of the $255,000 of capital expenditures. One concern we have is that there appears to be a lack of complete budgets on record for capital projects at KHS. A budget is an important document that helps determine if projects are being completed as planned. Comparing actual spent vs. budget will allow an organization to determine if there are any problems with capital projects including mismanagement. Based upon the documentation provided, we were able to determine that some projects came in under budget and some projects were over budget. We recommend that detailed budgets are prepared for each project and filed with the Finance Director. These budgets should be reviewed monthly by the project head, the Executive Director, the Finance Director, and the Finance Committee. Another concern we have is incomplete and inaccurate financial documents being circulated. Organizations rely on accurate and timely financial information to make the best decisions. We recommend that all draft financial documents produced be marked as such and that documents are only circulated to the individuals that require them. This will prevent any confusion in the future and prevent wrong conclusions being made.

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Required Number of Bids There is a concern that KHS was not following its policy to acquire three bids per contract. Based on our interviews, the building committee was receiving multiple bids on most projects but not all projects. After review of KHS policy documentation, we discovered that KHS does not have a written policy for requiring three bids per contract. Although KHS was not violating its policies, it is good business practice to acquire three bids per contract if reasonable. If not, then document and communicate the reason why three bids were not obtained. We recommend that KHS institute a new written policy to require three bids per contract and that all bids are filed with the Finance Director. We have learned during our investigation that KHS has adopted an unwritten policy to require three bids per contract since January 2012. Since implementation, this policy has worked to successfully start two projects. Check Signing There is a concern that the Executive Director was not able to review all checks that were issued by KHS. The KHS check signing policy requires two people to sign all checks, the Executive Director and one of the Executive Officers of the Board. There was also an additional restriction that was placed on the Executive Director that prevented the Executive Director from signing checks over $500. Based on our analysis, it was the general practice for the Executive Director to review all checks; however, the policy did not authorize the Executive Director to sign checks over $500 which meant that the Executive Director did not necessarily need to review all checks over $500. During the course of our investigation, it has come to our attention that the Check Signing Policy has been changed so that the Executive Director signs all checks, increasing the oversight of the Executive Director. Veterinarian Equipment Selection One of the aspects of Project Humane was to provide the new Vet Clinic with modernized veterinary equipment. Tom Chaffey and Sean Compton started to find bids for equipment. Mr. Chaffey was referred to Apexx Veterinary Equipment (“Apexx”) by a friend. Apexx is a national company that specializes in veterinary equipment to clients across the country. Mr. Chaffey contacted Apexx and received a bid for the equipment. This bid was shared with Dr. Jim Moore, Board Member; Dr. Jen Stonequist, Head Veterinarian; and Sean Compton, Executive Director in June 2011. Discussions were held with these individuals over email. Ms. Stonequist reviewed the bid from Apexx and tried to find the equipment from several local veterinarian equipment providers. A list from various equipment suppliers was provided to the group by Ms. Stonequist. Mr. Chaffey reviewed all of the information provided and decided to award the entire contract to Apexx. There was also a concern that the washer and dryer purchased for the Vet Clinic by Mr. Chaffey were unnecessary.

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Based on interviews and documentation provided, Mr. Chaffey’s use of Apexx for veterinarian equipment is not self-dealing. In addition, the washer and dryer were determined to be necessary to the Vet Clinic. Based on interviews, the lack of a specific washer and dryer for the Vet Clinic would have been a detriment to the Vet Clinic. There were additional concerns uncovered during our investigation. Tom Chaffey unilaterally made the decision to give the veterinary equipment contract to Apexx. Although Mr. Chaffey did consult with multiple veterinarian staff, a committee rather than a single person is recommended to make final decisions in the future. Based on our analysis, Mr. Chaffey was acting in the best interest of KHS. However, a bigger decision team of at least three people would have prevented unneeded equipment from being ordered. Another concern that was highlighted while analyzing the veterinarian equipment was an apparent lack of communication between the Board of Directors and KHS staff. There is one distinct email chain that shows KHS staff believed they were to be included in the final decisions of the veterinarian equipment and a different email chain between Board Members and Vet Clinic Staff that were making the equipment decisions. When the final decision on equipment was made, KHS staff became upset because they were not included. By not communicating to KHS staff who was to be included in the decision team, distrust of the Board was created within the KHS staff. We recommend that the Board of Directors facilitate more open communication with the staff to increase a productive work environment. We have learned since the start of our investigation that KHS has implemented policies that allow designated KHS staff to attend Board Meetings and Board Committee Meetings. Additionally, there are other events where many KHS staff and Board Members interact and communicate.

II.

Other Capital Projects

Annex Construction A concern was raised about a $150,000 in-kind donation that Tom Chaffey received for work completed on the Annex. We reviewed the donation receipt Mr. Chaffey was provided and he received the donation for, “In kind services as a general contractor for projects completed in 2010.” A review of KHS financial records shows the $150,000 being allocated to multiple projects in addition to the Annex including the Main Building, Cattery, Training Center, and Leasehold Improvements. Based on the interviews conducted, Mr. Chaffey did not request the in-kind donation. It was upon the suggestion of someone else that KHS provide Mr. Chaffey with the in-kind donation. The in-kind donation that Mr. Chaffey received was not self-dealing. An additional concern that came to our attention related to the $150,000 in-kind donation made to Mr. Chaffey was that it was not properly documented. This error had been pointed out to KHS previously and has since been corrected. However, it has been a recurring theme that there

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are gaps in record-keeping, including financial documents that are not properly completed. We also reviewed the KHS Gift Acceptance Policies and Guidelines and discovered that it does not explicitly cover in-kind donations. We recommend that KHS amend the Gift Acceptance Policies and Guidelines to address in-kind donations. It should include language stating that the Finance Committee reviews all in-kind donations over $5,000 as an additional layer of review. Training Center The Training Center is a building located on KHS property that is used by the Behavior Department to work with animals. Tom Chaffey received a complaint from a member of the Behavior Department that it was too cold in the training center during the winter. Mr. Chaffey was offered a free heater by Bob Murphy of Air Management Systems for KHS. Mr. Chaffey approached Deana Case in the Behavior Department to see if they wanted the free heater in the Training Center. Ms. Case told Mr. Chaffey that the heater was unnecessary but if it was free, they would take it. Although the heater itself was free, the installation of it was not. After $5,000 was spent on installation, KHS cut off funding for the project leaving the heater uninstalled and duct work in the Training Center exposed. Based on the interviews and documentation provided, it is our opinion that Mr. Chaffey thought he was acting in the best interest of KHS and the Behavior Department. However, additional oversight and communication with employees at KHS would have prevented this project from being undertaken. It is also our understanding that Mr. Chaffey was the sole person on the Building Committee. We recommend that KHS have at least three people on a committee. Additional people on the committee would provide additional insight into projects and prevent unnecessary projects. We have learned during the course of investigation that KHS has started a new Facilities Committee that consists of two Board Members, three KHS staff, and one community member. We also recommend that any future capital projects should be discussed with the departments that project will impact. This will ensure that the appropriate work is done and no unnecessary projects are commenced.

III.

Contracts and Policies

Conflicts of Interest Policy According to The Letter, members of the Board of Directors of KHS were not filing their annual KHS Disclosure Statements. These statements were to be filled out by all Board Members, the Executive Director, and senior managers to acknowledge they have read the KHS Conflict of Interest and Disclosure Policy. Once completed and returned, the statements were to be kept in the Finance Director’s office. During the course of our investigation, there was a concern that the latest filed Disclosure Statements were filed in 2009. However, upon review of the Finance Director’s records, we found annual disclosure statements filed for 2008, 2010, 2011, and 2012. These statements

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appear to have been filled out properly. It is unclear why the 2009 statements are missing, if they were completed at all. It appears that KHS employees required to submit a Disclosure Statement have been filing them annually with the exception of 2009. It is the duty of the Board President and Executive Director to review the disclosure statements each year. We recommend going forward that a third individual reviews a checklist of all required individuals who must submit a disclosure statement to ensure all statements are received by the Board of Directors Annual Meeting per the Conflict of Interest and Disclosure Policy. VCA Contract On August 19, 2011, Stacey Price executed a contract between KHS and VCA Animals Hospitals, Inc. (“VCA”). The contract was mutually beneficial to both parties as VCA was supposed to offer discounts to adopters of KHS and KHS staff and KHS was to include VCA in marketing materials and provide a daily list of names of KHS adopters. The Board raised concerns about the VCA contract in January of 2012. These concerns were staff entering into major contracts and the privacy of adopter information. As of the date of this report, the Board has not taken further action on the VCA contract and it remains in force. However, with the changeover in staff, the list of names of KHS adopters has stopped being furnished to VCA. The Letter states that the Board voted on whether or not to comply with the VCA contract and that conflicted Board Members did not recuse themselves from the vote. Based on the interviews and the documentation provided, the Board never held a vote on the VCA contract and thus, no conflict of interest arose. There are additional concerns with the VCA Contract. Article XII, Section 3 of the KHS Bylaws states, the Executive Director has authority to execute contracts after presentation to and approval by the Board President. The VCA contract did not follow this process; it was executed by the staff of KHS. We recommend that KHS reiterates this policy to KHS staff. However, requiring approval by the Board for all contracts can be a burden on the staff. To increase the flow of business, we also recommend that KHS reviews its policy on contracts and determine if staff can enter into contracts, and if so, what kinds of contracts. The KHS By-laws should be updated and the change in policy needs to be communicated to all KHS staff. Another concern is for the potential of conflicts of interest related to the Board of Directors. Although the Board never voted on the VCA contract, thus not creating a conflict of interest, there is the potential of future conflicts of interest. We recommend that for future Board of Directors votes, if a Board Member has a conflict of interest, or has been asked to recuse themself from the vote because of a conflict of interest, the Board Member shall abstain from the vote. “humane relocation” / Rescue Every Dog Hazel Bellinger, a former Board Member, is the Vice President of the Board of Directors of Rescue Every Dog (“RED”), a non-profit dog rescue that operates in Washington, Oregon, Idaho

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and Montana. The Letter states that Ms. Bellinger was opposed to the KHS program, “humane relocation”, because of a potential negative impact it could have on RED. Based on our analysis, “humane relocation” is an informal program within in KHS which brings in high demand animals to KHS from other animal shelters located across the country. KHS made agreements with other animal shelters to exchange animals as a part of “humane relocation”. Based on the interviews and documentation provided, the informal “humane relocation” program is still in operation but has not gone to the Board for an official vote. Ms. Bellinger was not opposed to the “humane relocation” program but was opposed to the Executive Director bringing in too many animals from out of the area, which could fill up the shelters and not leave room for local animals. We recommend better communication between the Executive Director and the Board on important issues that can have an impact on the local shelters. Invisible Fence Karyn Kline, the former Board President, is the owner of Invisible Fence Brand Peninsulas (“Invisible Fence”). We reviewed the website of Invisible Fence and found that KHS is listed as a local partner. A partnership implies an association between Invisible Fence and KHS. This potential association was also evidenced by cards for Invisible Fence left at the front desk of KHS but these cards have since been removed. Based on our review, we did not come across any documentation that describes this partnership. If KHS does not wish to have this implied association with Invisible Fence, we recommend that KHS request to be removed from Invisible Fence’s website. However, the website states that Invisible Fence is a supporter of KHS and this could lead to customers of Invisible Fence using the services of KHS. Additional recommendations include creating a policy for partnerships, who can authorize them, and with what type of organization and a policy for what literature can be left at the front desk.

IV.

Other Concerns

Business Transactions with Board Members There was a concern that KHS was not properly disclosing business transactions with Board Members on its IRS tax form 990. For the year 2009, KHS answered “no” to question 28A, “was KHS a party to a business transaction with a current or former officer, director, trustee, or key employee?” Several transactions were pointed out during our investigation which could change the answer to “yes”. We recommend that KHS discuss this question with its independent auditors to determine the materiality of this error and if KHS needs to amend its form 990. Board Member in a Paid Position On September 17, 2010, Rosemary Shaw, a Board Member at the time, took a leave of absence from the KHS Board of Directors to accept a paid position with KHS. Ms. Shaw was

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approached and hired by Sean Compton for this position. The title of “Major Donor Officer” was given to Ms. Shaw and she worked on various tasks that were assigned to her by Mr. Compton. Ms. Shaw reported directly to Mr. Compton and did not have anyone reporting to her. Based on the interviews and documentation provided, Ms. Shaw’s acceptance of a paid position at KHS was not self-dealing. Telecommunication Services On March 1, 2011, KHS switched its dispatch service from in-house to CENCOM, the 911 dispatcher for Kitsap County, a government agency. It is our understanding that the previous dispatcher was inadequate. The previous dispatcher could only handle one call at a time preventing callers from immediate access to animal control. The phone line would also have to be manned 24 hours requiring pay for an employee overnight. To correct this problem, Jake Shapley, Operations Manager at the time, executed the contract with CENCOM. It is also our understanding that the Board was not involved in the selection of CENCOM and that CENCOM, as the sole provider of 911 services in Kitsap County, was the only option available to KHS to use 911 within Kitsap County. Based on the interviews and documentation provided, the CENCOM contract was not selfdealing. Delta Society In 2011, KHS executed a contract for about $1,800 with the Delta Society. Larry Norvell, a Board Member, was also President and CEO of Delta Society at the same time the contract was executed. Delta Society, now known as Pet Partners, is an organization that trains volunteers and their pets to become a registered Therapy Animal Team. In order for KHS to bring animals to rehabilitation centers, certification by Delta Society was needed to prove that KHS animals were properly trained which would reduce KHS’s liability risk. In addition, certification would lower KHS’s insurance liability costs. Additionally, Rosemary Shaw indicated to Sean Compton, Executive Director, that she was concerned about the liability risk involved with bringing in untrained animals into rehabilitation centers and suggested that KHS might want to consider a program such as Delta to improve risk management. It is our understanding that Mr. Compton made the decision to hire the Delta Society. A full vote of the Board of Directors was never taken on the Delta Society contract; thus, Mr. Norvell did not vote on the contract. Based on the interviews and documentation provided, the contract with Delta Society was not self-dealing.

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Summary We have analyzed and reviewed the concerns in The Letter and have determined that there were no instances of self-dealing or conflicts of interest. However, based on the interviews conducted and the documents examined, we encountered areas of internal control and governance that need improvement. We suggest that KHS adopts the recommendations provided throughout our report to help KHS strengthen its internal controls and management oversight. We reserve the right to amend or modify this report to the extent additional documents or information comes to our attention. Respectfully,

Douglas McDaniel, CPA, CFF, CFE, MBA, MA (IS) Principal, Director of Forensic, Litigation, & Investigation Services

CC: Phil Havers, Attorney at Law

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Appendix A – List of Participants and Non-Participants

All the individuals listed below were invited to participate in our investigation regarding the events that took place at the Kitsap Humane Society. The two non-participants were invited to participate but either declined our invitation or ignored our invitation.

Participants 1. Hazel Bellinger 2. Diane Canafax 3. Deana Case 4. Tom Chaffey 5. Steve Graham 6. Karyn Kline 7. Larry Norvell 8. Abby Ouimet 9. Stacey Price 10. Rosemary Shaw 11. Eric Stevens 12. Jen Stonequist 13. Heather Straub 14. Dennis Treger

Non-Participants 1. Sean Compton 2. Jake Shapley

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