Forbes article on Islamic Relief adopting exit pricing for donated meds

An article in Forbes by William Barrett reports that Islamic Relief USA Says Drug Donations Fell 91%.

Since I’m an accountant, I’ll comment on a couple of the things I observed in the financial statements. If you are interested in this issue, you really should check out the full article.

The organization had the highest value for 500 mg mebendazole that was visible amongst NPO’s in the relief and development sector.  Mr. Barrett’s November 2011 article indicates they were using $16.25 per pill.

For 2011, the organization used exit pricing in the principal market. Note 6 of the financial statements explains their policy:

Pharmaceutical Products – During the year ended December 31, 2011, IRUSA changed its valuation methodology to reflect exit market pricing. In general, the value of pharmaceutical products in the amount of $11,879,767 was determined from trade sales level data and reflects exit market pricing in the Africa and Middle East regions where the pharmaceuticals were distributed. This exit market data provides a detailed overview of unit volume and price data, and uses the wholesaler selling price for medicines shipped to IRUSA’s actual beneficiaries.

Notes to the financial statement break out the amount of GIK between pharmaceuticals and nonpharmaceutical donations. In 2010, the pharmaceuticals were $139,728,142. In 2011, pharmaceuticals were $11,879,767. That is a drop of $127,848,375. The decline in 2011 is equal to 91.50% of the 2010 amount. The audited financials do not indicate how much of that is a change in volume and how much is a change in valuation.

To see the impact on the financial statements, here are the expenses for the last three years, as listed in the audited financial statements.  I will abbreviate general and administrative as G&A. Fundraising expenses will be shown as F/R.

 FY 09  FY 10  FY 11
 Program    136,993,074    167,924,852   36,468,003
 G&A       4,735,004        6,293,005     5,113,900
 F/R       4,243,882        6,083,237     7,711,512
 —-  —-  —-
 total    145,971,960     180,301,094   49,293,415

The most consistent way to look at the amount of program services and supporting services over time is to calculate each of those categories of expenses as a percentage of the total expenses. This is the calculation I’ve made for other NPOs, so for comparabilty, that will be used here.  Results of the calculation are: 

 FY 09  FY 10  FY 11
 Program 93.8% 93.1% 74.0%
 G&A 3.3% 3.5% 10.4%
 F/R 2.9% 3.4% 15.6%
 total 100.0% 100.0% 100.0%

 Supporting services, which is the sum of G&A and fundraising, are 6.2%, 6.9%, and 26.0% in FY ’09, FY ’10, and FY ’11.

Turnover in auditors

Mr. Barrett hints at high turnover in the outside auditors:

Just before publication of the Forbes expose last year, Islamic Relief—which sources say has had four outside auditors in four years— …

I was looking at the California Attorney General’s website to see what documents they are making available now. You can find the search page here.

Basically, you can get 990s and the California RRF-1. Based on looking at just a couple of filings, it seems like you cannot get the audited financial statements at the site.

Interestingly, they have miscellaneous correspondence.

I took a look at the correspondence for Islamic Relief and found a request for extension of the December 2009 filing. You can see the letter here. Just for the record, that is a public document.

The May 10, 2010 letter says:

We are currently undergoing an annual external audit by the nonprofit CPA firm called Aronson and Company.

That means that in May 2010, the Aronson firm was engaged to audit the 12-31-09 financial statements.

That struck me as odd based on what I’d seen elsewhere, so I double checked the audit reports available from the North Carolina Secretary of State website. Here are the CPA firms and dates of their reports:

  • 12-31-07 – Files at NC SoS don’t have audited financial statements.  The 990 is signed by Quezada and Company, a CPA firm in Pasadena, California.  My guess would be that firm performed the 2007 audit.
  • 12-31-08 – The files at the NC SoS site don’t include the audited financial statements. The 990 is signed by the firm of Updegrove, Combs, McDaniel & Wilson PLC. That is a CPA firm in Virginia. My guess would be the Updegrove firm performed the 2008 audit.
  • 12-31-09 – Miller Musmar – opinion dated November 12, 2010
  • 12-31-10 – McGladrey & Pullen – opinion dated October 17, 2011
  • 12-31-11 – McGladrey & Pullen – opinion dated August 30, 2012

That tells me the Aronson firm either resigned the engagement or was fired before completing the audit. Or the firm and NPO came to a mutual conclusion that it would be better for another firm to complete the audit.

I would like to ask each of the firms about the circumstances of their not continuing to serve the organization, but confidentiality rules would prohibit them from answering any questions. That means I’ll just look at the public data.

So, the reports at the NC SoS and CA AG sites paint the picture as follows:  Quezada prepared the ’07 990, Updegrove prepared the ‘08 990, Aronson started but did not finish the ‘09 audit, Miller performed the ‘09 audit, and McGladrey performed the ‘10 and ‘11 audits. That would be five firms in the years from ’07 through ’10. 

Feel free to double-check my math and my comments on which firm did what work in which year. Did I miss anything?

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