Suspected employee fraud leads to $1.438 million Woodruff Arts Center loss

Woodruff Arts Center officials scrambled to explain Tuesday how an employee defrauded the city’s largest cultural organization to the tune of $1.438 million over the last five years by submitting invoices for unrendered services.

While acknowledging the loss was “a serious amount of money,” Woodruff Board Chair Larry Gellerstedt pointed out that the embezzled funds account for a fraction of the $100 million the Woodruff takes in annually.

It is “not a situation that puts the art or the institution at risk, other than the most important part, which is our credibility with our supporters,” he said.

Money has been an increasingly serious matter at the Woodruff, with arts support falling nationally during the recession and public funding for the arts never strong in Atlanta and Georgia. The arts center — including its divisions the Alliance Theatre, Atlanta Symphony Orchestra (ASO), High Museum of Art and Young Audiences — ended fiscal 2012 with a $2.165 million deficit.

Woodruff President and CEO Virginia Hepner, on the job since July after a 25-year career in banking, said any loss is “appalling no matter what, but especially that it has occurred over five years.”

Woodruff officials did not release the name of the former employee suspected of embezzlement, who has not been charged. Woodruff conducted an internal investigation into the missing money since it was discovered in late October. Hepner said she has alerted the U.S. Attorney’s office and the arts center will share its findings with investigators “whenever they’re ready.”

The Woodruff has added an outside auditor in recent weeks, creating new oversight, Hepner said. The Woodruff is insured for such situations, but that it does not know yet if a claim for this particular loss will be eligible, she added.

Leaders of the Midtown arts center did not discover the fraud until the worker, employed since 2004, left at the end of October for reasons unrelated to the alleged embezzlement, Hepner said. The “midlevel employee” worked in the Woodruff’s administration, not in a finance-related job, she said.

A few days after his departure, some “suspicious” invoices were brought to Hepner’s attention and an investigation was launched involving independent outside experts. It quickly became apparent that the departed administrator had bilked the arts center out of substantial funds, officials said at a Tuesday morning news conference.

“This individual was able to find a weakness in our interior controls,” Gellerstedt said.

The board chair said his own reaction was one of “outrage and anger” and disbelief that the fraudulent activity had managed to go unnoticed for five years.

The ex-employee suspected in the crime acknowledged culpability when confronted with evidence uncovered by the arts center’s internal investigation, according to Hepner.

Atlanta lawyer Ken Hodges said a criminal case could be resolved quickly if the suspect is willing to accept a plea deal.

If not, the suspect could face racketeering charges and a lengthy prison sentence, said Hodges, a former Dougherty County district attorney.

Though prosecutors will conduct their own investigation, the arts center likely expedited matters by hiring the external experts to conduct a probe that included researching roughly 1,000 invoices and forensically reviewing years of data from Woodruff’s server.

Buckhead jeweler Jonathan Shapero, who has donated bling for Alliance Theatre fund-raisers, called the allegations of malfeasance sad.

“It saddens me that someone who’s working from within the arts community would feel they could rip them off,” he said. “It’s more difficult to get money for the arts than for other charities.”

Gellerstedt said he and Hepner are seeking to reassure corporate, foundation and individual donors that every dollar is being used responsibly.

“The first way to re-establish credibility is to let folks know this happened,” Gellerstedt said. “We take it very seriously, and we’re on it.”

He noted that many Woodruff board and audit committee members are from Atlanta’s leading accounting firms, that internal audit functions are in place and that an outside auditor has final audit of the art center’s books.

Gellerstedt said he believes the Woodruff’s audit process “is robust and this was a failing in a particular departmental area.”

The most financially distressed Woodruff division, the ASO, just emerged from acrimonious contract negotiations fueled by spiraling debt in late September. Its musicians ended a monthlong lockout by management by signing a two-year collective bargaining agreement in which compensation was reduced $5.2 million over two years. Management drew a hard line with the players, insisting $5 million annual shortfalls could not continue in the face of an accumulated debt projected to reach $20 million.

Chicago-based orchestra consultant Drew McManus said he did not think the revelation of the Woodruff’s $1.438 million loss would hurt ASO fund-raising specifically, unless the former employee was found to have worked more with the symphony than the other divisions.

“If anything the fact that they caught the person is a good sign,” McManus said. “It means somewhere along the line, the accounting and auditing procedures are producing the desired effect: to prevent this sort of thing from continuing.”

Through a spokesperson, ASO President Stanley Romanstein declined comment on the challenges of fund-raising after Tuesday’s news, referring all questions back to Woodruff officials.

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Staff writer Jennifer Brett contributed to this report.

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