Mortenson's control of the Central Asia Institute went largely unchallenged by its board of directors, which consisted of himself and two people loyal to him, the report prepared by the Montana Attorney General's office said. When an employee would question his practices, Mortenson either resisted or ignored the person, the report found.
The result was a lack of financial accountability in which large amounts of cash sent overseas were never accounted for. Itemized expenses listed as program-related were missing supporting receipts and documentation. Employees and family members charged items such as health club dues and gifts to CAI credit cards.
Mortenson himself reaped financial benefits at the expense of the Central Asia Institute, including the free promotion of "Three Cups of Tea" and his later book, "Stones Into Schools," and the royalties from thousands of copies CAI bought to donate to libraries, schools, churches and military personnel, the report said.
The books came under scrutiny last year when reports by "60 Minutes" and author Jon Krakauer alleged that Mortenson fabricated parts of both and that he benefited financially from the charity. The attorney general's probe focused only on the charity's finances and operations, and did not examine the books' contents.
The yearlong investigation concluded that the Central Asia Institute took in far more donations than it spent, and with $23 million in reserves, it still has a strong financial outlook. But the charity needs better oversight so that too much control is not in one person's hands, the audit found.
"Mortenson's pursuits are noble and his achievements are important. However, serious internal problems in the management of CAI surfaced," Attorney General Steve Bullock said in the report. "Despite the severity of their errors, CAI is worth saving."
Mortenson and the Bozeman-based charity attached their own statement to the report that said CAI is a small organization that experienced unprecedented growth quickly. The reason the charity is successful and financially viable is because of Mortenson and "Three Cups of Tea," they said.
"As co-founder, he is the face of CAI's mission, and he was the key person responsible for the overwhelming success of both the charity's domestic education and outreach mission and its mission to bring education to remote parts of Central Asia," the statement said.
The attorney general's office said Mortenson was permanently removed as CAI's executive director in November. A settlement agreement signed by Mortenson, CAI and the attorney general's office said Mortenson will be barred from being a voting member of the board and from holding any position of financial oversight as long as he is employed by the charity. The charity must expand its board from three to at least seven members, and the other two current board members must step down within a year, according to the deal.
Mortenson also must reimburse the charity more than $1 million under the settlement agreement. Nearly half has already been repaid.
The agreement also calls for an overhaul of the charity's operations and board.
"Three Cups of Tea" details how Mortenson resolved to build schools in Central Asia after he became lost and wandered into a poor Pakistani village, then follows him as he expands his school-building efforts there. The book was originally conceived as a way to raise money and tell the story of the Central Asia Institute, which Mortenson founded in 1996 with a $1 million donation from Dr. Jean Hoerni, a Swiss physicist and mountaineer
After its release in 2006, the book became a best seller and it, along with Mortenson's tireless promotion that included more than 500 speaking engagements in four years, resulted in tens of millions of dollars in donations to the Central Asia Institute.
Bullock, whose office oversees nonprofit organizations operating in Montana, launched his investigation in April 2011. Investigators signed confidentiality agreements that prevent many details of the probe from being made public.
Bullock's investigators examined financial statements, audits, meeting minutes and interviewed Mortenson, board members and employees.
They found that CAI spent $3.96 million buying Mortenson's books to give away, paying full price through online retailers instead of using the publisher's discount for Mortenson. A 2008 agreement between Mortenson and CAI required Mortenson to donate the equivalent of what he made in royalties from the CAI-purchased books, but he never did.
The investigation also found that CAI spent $4.93 million on advertising and promoting Mortenson's books, costs that the charity and the author had agreed to split but never did.
CAI paid $2 million in charter flights for Mortenson to keep his rigorous speaking engagement schedule before he started paying for his own travel in 2011. The investigation found that in many cases he was "double-dipping," where CAI paid for his travel to a speaking engagement and the host of the event also paid him a fee or honorarium for his travel, which Mortenson pocketed.
Mortenson and his family also charged personal items to CAI in 2009-2010 amounting to $75,276 that included "LL Bean clothing, iTunes, luggage, luxurious accommodations and even vacations," according to the report.
Mortenson has repaid more than $495,000 of the $1.05 million that the attorney general's office says he owes CAI. He has $560,000 left to repay and will have three years to do so - with interest - because he has "insufficient financial resources" to pay it all at once, the report said.
CAI must hire an accountant to pore over credit card statements from previous years to identify additional personal charges Mortenson made and determine how much more he may owe, the attorney general's office said.
The CAI board considered the money spent on Mortenson's books and travel "a worthy and prudent investment," the investigation found. From 2003-2011 CAI spent a total of $9.5 million on book production costs, book purchases and advertising and promotions, according to the attorney general's calculations. Over that same period, CAI took in $72 million in donations.
But the investigation found serious holes in CAI's operations and governance with Mortenson at the helm. The other board members weren't able to rein in Mortenson or persuade him to document his expenses, despite "requests, cajoling, demands and admonitions," the report said.
"There was a deliberate effort to put people who are loyal to Mortenson on the board," the report said. As a result, "the board did not exercise sufficient control and direction over Mortenson."
CAI and Mortenson said in their response that they disagree with some of Bullock's analysis. Their business judgment has been validated by the number of completed schools and other projects in Central Asia, the number of people who now know the importance of promoting peace through education and by its own financial stability, the response said.
The charity also must hire a consultant to assist in the search for a new executive director, conduct annual independent audits and implement methods of tracking projects and expenses.
The attorney general's office plans to monitor the changes by naming an independent observer who attends the CAI board meetings and by receiving the results of the independent audits for three years. CAI also will report on its progress in making the changes every two months starting in June.
