This series of posts looks at the issues surrounding valuation of GIK medication in the nonprofit community that have been getting attention lately by seeing how those issues present themselves in one set of financial statements.
See the first post in this series for tips on downloading a copy of the full 990 and audited financial statements.
I just checked their website today and found it is up and operating. You can find their last 3 audited financial statements here and the last three 990s here.
The 2011 financial statements have the cover letter from Dr. Harder indicating the ministry will use cost for 2012.
Kudos to the organization for making the reports for the last three years easily available on their website.
As I’ve mentioned before, the goal is to see a live set of financials that lets us see the issues, not to pick on any particular NPO.
Supplemental schedule
An astute reader of financial statements will notice that the supplemental opinion on page 21 indicates there was a clean opinion on the basic financial statements while the opinion on the financials is qualified.
While from a technical audit perspective that is not correct, it really isn’t material. Anyone looking at these financial statements carefully (which I have done and if you’re reading this post, you are doing as well), will understand the whole of the financial statements. There is an incredibly clear message that the GIK valuation numbers cannot be relied upon and management does not know what the correct numbers are.
As a practicing auditor myself, ahh, let’s just say, ummm, I completely understand how a tiny little mistake in the supplemental opinion can happen. Some little oopsie like that has, ahh, never happened to me. At least that you know about.
Enough of my feeble attempt at humor.
The accountant’s opinion on the supplemental schedule does not affect a reader’s understanding of the financials.
The two biggest numbers on the supplemental schedule of expense are Shipments to Ministries of $45,491,390 and Pharmaceutical purchases of $1,854,765. The shipment amount ties exactly to the Estimated average wholesale value of pharmaceutical shipments on the statement of activity. The purchase amount ties to line 24a on statement of functional expenses at page 10 of the 990 and rolls in to the Other pharmaceutical costs on the statement of activity.
I may come back to those two amounts in a later post.
Conclusion
There may be other things to discuss, but I think the core issues on valuing donated meds can be summarized in three questions. I perceive these would apply to many organizations, not just the one discussed in this series of posts. Here are three key ideas, all of which relate to fair value:
- Should the medicine be valued at what was paid in the course of acquiring it or is there a bargain purchase?
- If there is a bargain purchase, what is the appropriate indicator of value for medicine that is illegal to distribute in the U.S.? Phrased differently, is it appropriate to use any indicator of value from inside the U.S.?
- When looking at fair value of medicine approved for distribution in the U.S., does AWP have any relevance as an indicator?
Those questions are discussed at length by other writers on this topic. Check out articles from William Barrett at Forbes and Caroline Preston at Chronicle of Philanthropy. Also see discussions from Robert Anglen at Arizona Republic and video from the Anderson Cooper 360 investigative team.
Here is a bonus, extra credit question: To what extent are the answers to those questions dependent on when SFAS #157 went into effect?
If you read through the Blessings International reports for 2011, you can see how the valuation issues present themselves in an actual set of financial statements.
No matter how you answer the three questions I listed, you can see one set of positions as they work through these financial statements.
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Re the notion of a qualified opinion deep into a set of financial statements, Blessings International is not alone. The auditor for United Way of King County (Seattle), the nation’s largest United Way unit by gifts received, did much the same thing. Here’s a link to my account of it: http://bit.ly/zgUoCG .
That is an interesting comment from the auditor in the supplemental opinion. The auditors are taking no responsibility for the presentation. Your characterization of their opinion was “You’re on your own, buddy.” Not quite how a CPA would paraphrase it, but quite reasonable for anyone that doesn’t speak accountantese.
As a CPA I see a big difference between a qualified opinion on the basic financial statements and the comment from the auditor you mentioned on the supplemental schedule. For starters, there is a big difference in scope – the entire financial statement versus one specific calculation. From another perspective, the auditor is not standing behind the numbers in both situations. I hadn’t thought of it that way before.
New audit rules that went into effect for 12-31-11 financial statements, called SAS #119, which should make it more difficult to create your own operating measure in a supplemental schedule.
You can see why they wanted their own calculation, because the typical method of analyzing supporting services would be to divide supporting services by total expenses. That would have given a calculation of $9.52M divided by $41.62M, or 22.9%. Not quite what the supplemental schedule calculates.
Thanks for mentioning your earlier post.