There is more to the IRS audit report on Food for the Hungry than is yet visible

CharityWatch has an article discussing the IRS audit report on Food for the Hungry – – View Through the Looking Glass.

One sentence background – the IRS claims that Food for the Hungry substantially overstated the valuation of donated medicine in their 2008 tax return.

I’ve mentioned the report here and here.  I’ve been talking about the valuation of deworming meds, especially mebendazole, for several months.

The CharityWatch discussion provides a bit more information from the report that has been discussed publicly. It looks to me like there is more to be revealed.

Here are the two main articles discussing the IRS audit:

For the most part, the CharityWatch article provides the same information as do Mr. Barrett and Ms. Preston.  Here are a few observations that are new.

Copies of the report floating around.  It is obvious there are at least two copies of the audit report circulating. After reading the three reports, I’m thinking there might be three different copies that are being passed around.

Purchases as handling fees.  Mr. Barrett and Ms. Preston suggest a practice of paying for pills and recording them at a higher donated value. The CharityWatch provides off-the-record background on how that works:

.. Some nonprofit executives have explained off-the-record how it can be done: … When a charity is not successful in soliciting donations of such products in large volumes directly from donors or companies, it will purchase them instead. The charity will then claim that what they paid for these products was simply a “handling fee” and that the products themselves were donated. Of course, these supposed “handling fees” often exceed what a person would pay on the open market to purchase the goods in question. …

This is where it looks to me like there is far more unpleasantness in the IRS’ report that we haven’t yet seen.  CharityWatch cites the audit report as claiming Food for the Hungry asked vendors (notice that is plural – vendors) to provide documentation that the transaction was a donation.  Here is CharityWatch’s characterization of the report:

After reviewing emails between FH and commercial vendors of pharmaceuticals, the IRS alleges that before FH purchased medicines it required the vendor to provide a donation letter and documentation describing the sales or acquisition costs as “fees.” The IRS letter alleges that, “eager to make a sale,” the drug vendor “was willing to provide whatever documents [were] requested in order to facilitate the sale.” For example, the IRS refers to one email to a vendor showing that FH was to pay only $35,000 for deworming medicines that it wanted to value at $21.3 million for financial reporting purposes.

For me, a major issue in the CharityWatch article is opening up the allegation of asking vendors to generate supporting documentation.  Because that is a fairly major allegation, it seems to me there would be lots of discussion within the report to support that claim.  I would hope there is a large volume of documentation in the audit files.

If my inference of the veiled comment that hasn’t been made public is correct, there is more bad news in the report. If that is the case, and please notice I’m stringing together several qualifiers and assumptions, this would undercut the assertions that are being floated that the donors are making a good faith effort to determine the market value of meds they donate.

The rest of the report.  There are now three reports on the IRS audit that we can compare and contrast.  CharityWatch indicates the copy of the report they received did not include attachments.  That means the information CharityWatch described about the allegation of asking vendors for documentation would have been mentioned in the body of the letter.  Mr. Barrett says the report he read was 21 pages long.

I would make a wild guess that the body of the letter is the 21 pages mentioned by Mr. Barrett and that there are quite a few more pages of attachments, which would probably be the supporting documents, emails, and correspondence.

Again, my point is looks to me like there are a lot more details yet to surface in public.

Support from the auditor.  CharityWatch cites the IRS report as saying Food for the Hungry supported their position by calling attention to the clean opinion from their auditors after the auditors specifically looked at the valuation issue.

Full disclosure.  Sunshine is the best disinfectant, so there are few things I’d like to say. 

It is worth mentioning again that I worked for Capin Crouse LLP in their California office.  While working there, I was a colleague of Mr. Gregg Capin and Mr. Barry Gardner, both of whom worked in other offices.  That firm is the auditor of Food for the Hungry.  My recollection is that I worked briefly on the several of the Food for the Hungry annual audits in the mid or late ’90s.  I was neither the in-charge accountant nor manager on the audits.  I have few specific recollections of those audits and obviously will not be discussing anything I do recall.  My firm is a competitor to Capin Crouse LLP. 

Filter my comments as you wish.

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