An open letter to the CPAs who audit R&D charities receiving GIK meds

Dear colleagues:

If you would like some background on the GIK issues, please read my open letter to your clients.

The accounting is problematic for donated pharmaceuticals that you have been auditing for the last few years. 

If you have a budget of 100 or 300 hours, it might be wise to allocate a few hours to read beyond AICPA risk alerts and Accord position papers. You can browse my blog for  discussions, which contain links to other resources that also discuss the accounting and valuation issues.

It is my considered opinion that many of the valuations are not supportable under GAAP.  The timing of SFAS 157 isn’t the issue. 

The amount of scrutiny on your client’s valuation methodologies is high and increasing.

A growing number of media sources are paying attention.

The IRS is in a serious argument with one charity in Arizona.

The state AGs are reportedly focusing on the issue.

From a distance, it looks like the IRS and AGs are quite upset by what they see.

That means there may be public scrutiny of your audit work.  “Where were the auditors?” is the inevitable question anytime there are issues with accounting.

You might want to carefully review your planning for the next audit cycle.

I will post a discussion later on planning. For the moment, consider such areas as concentration, material estimates, variance power, the presumption that revenue recognition is a significant risk, auditing fair value, tone at the top, bias, and management override.  Ponder GIK issues in terms of opportunity, motivation, and rationalization during your brainstorming sessions.

In terms of materiality, we are talking about numbers that are far beyond material. Just to put things into perspective, I recall financial statements where anywhere from 50% to 80% of revenue was from donated medicine. Dive into those numbers and you will find out that the vast majority of the revenue is regularly generated from one medicine – 500mg mebendazole.

The biggest number on the financial statements is one drug with a fair value that is difficult to determine.  That makes the fair value of that one med sort of like the allowance for loan loss on a bank.  Get that one number wrong and the entirety of the financial statements are materially incorrect.

I perceive lots of people have a copy of the IRS audit report on an Arizona charity.  If your client has a lot of donated meds, I’m guessing it is very likely the CFO or CEO has a copy of the report.  It might be wise to get a copy from your client and read it as a part of your year-end audit planning.

If my assumption is correct that there are lots of copies floating around and if your client doesn’t have a copy, it might be worthwhile to revisit their risk assessment process.  I think this is a serious enough risk for the R&D community that it should on your client’s radar screen.

As a part of  your client continuance process and as an overall planning step, it might be worth doing an internet search to ascertain what publicity your client has gathered in the last twelve months.

Might be worthwhile to do a post-issuance review of prior audit reports.

If you’ve been aware of the publicity surrounding GIK valuation over the last year, it might be worthwhile looking at a few sets of prior year workpapers. Consider the auditing and accounting with any new insights you’ve gained.

If you’ve just tuned in to the turmoil, you might want to browse the publicly available discussions and posts on my blog.  Then you might want to look at some prior workpapers with that new insight.

After doing some reading and pondering, you may have significant information and knowledge you didn’t have before.  If that’s the case, you might want to revisit AU 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report.

From what I can see and read, there is a lot of attention on the valuation issue.  It might be wise to consider what steps are necessary in your audit practice.  Maybe I’m wrong, but I think there is still time for some maneuvering room. 

Final thoughts.

Spend some time reading about industry developments in the last year.

Plan your upcoming audits carefully.

Consider whether anything is needed under AU 561.

You still have time, but I perceive time is running out.


James Ulvog, CPA, MBA

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