“How will this look on the front page of the newspaper?”
That is a helpful way to evaluate decisions.
When you are trying to figure out what’s the right thing to do, ponder for a moment how your decision will look if you read about it on the front page of your local newspaper.
If you are going to look really bad, then maybe, just maybe, you might be making a bad decision. I mentioned this in a post some time ago.
We are seeing this illustrated live with the issue of valuing deworming medicines. Mebendazole is in the news!
Newspaper test in action
Here is one simple, recent illustration of how this looks in the newspaper.
I mentioned earlier a Pittsburgh Tribute-Review article by Mr. Bill Zlatos. The article says Mr. Tony Sellars, a spokesman for Feed the Children provided the following information:
In 2009, Feed the Children valued its 60 million deworming pills at $9.07 each on its financial statements, Sellars said. The next year, the agency reduced its program to 30 million pills and valued them at 35 cents apiece. Its revenue for that drug alone plummeted from $544.2 million to $10.5 million.
The reason for the change in valuation is because Statement of Financial Accounting Standards #157 went into effect, which refined “fair value” to a more specific “exit price in the principal market”.
Because of that accounting rule, the valuation for one specific medicine went from $9.07 to $0.35. The new value dropped to 3.9% of its previous valuation because of an accounting rule. Half a billion dollars disappeared from revenue because of a revised definition of fair value.
Nobody other than a CPA or someone working for a relief and development NPO has any clue what the previous two paragraphs mean. If you are reading this post, you probably understand.
Pretend for a moment you don’t have enough knowledge to understand what I’m talking about. What would your reaction be to a story that explains that contributions dropped by half a billion because of a change in some silly accounting rule that doesn’t seem to be a change at all?
Most people are probably thinking, “Come on. Going from one fair value rule to a different fair value rule is a massive change? Doing this fair value thing dropped income half a billion dollars? Really?”
Going with a technical explanation of the transition, especially for a medicine which is illegal to distribute in the United States but was valued at an extrapolation from values inside the United States, just makes it look worse.
No matter how it is explained, the transition from $9.07 to $0.35 looks bad. Doesn’t matter if the top number was $16.25 or $10.64 or $9.07 and the bottom number was $0.35, $1.54, $2.00 or $0.05. It is really, really hard to explain why that $9.07 or $10.64 was right last year but wrong this year.
Next – Part 2 on reputational risk, which media are following the story, and overlap of donor base to those media’s audience.
Here’s two questions for discussion. First, how do you think these stories look to people who don’t understand the accounting rules?
Second, would anyone like to write a detailed explanation of why the previous valuations were appropriate? I’m willing to run an anonymous guest post with extremely light editing. Leave a comment, which I won’t publish, giving an email for contact.