There are some accounting concepts in the most recent financial statements released by World Help that warrant discussion. This post will walk through those items I noticed.
This will be a long post. You might want to get a fresh cup of coffee and settle in.
Efforts to reach out to World Help
I have been asking World Help for their comment for a week and a half. The only reply I have received was when the president’s assistant gave me the e-mail contact for the organization’s outside media consultant. I have sent e-mails to the president’s assistant and the contract media consultant several times and received no replies.
Proper accounting is a broader issue in the R&D community than has been discussed
The focus of conversation on accounting in the relief & development community has been variance power and the valuation of medicine, particularly 500 mg mebendazole.
I perceive there are issues involved in disclosures that haven’t yet been discussed.
In accounting shorthand, the matters I see that have not yet been addressed are disclosures of concentration of contributions, concentration of donors, and estimates with a reasonable possibility of change in the near-term.
Further, when there is significant attention on the entire R&D segment of the NPO community from multiple media outlets, the IRS, watchdog organizations, and several Attorneys General and when there is an emerging pattern of restating financials or substantially revised valuations it would certainly seem to me that disclosing the dollar amount of the largest medicines inside the gift-in-kind revenue, along with dosage, per unit valuation, and methodology used would be quite material to large numbers of reasonably foreseeable readers of the financial statements. Might not be explicitly required, but seems it would be hugely material (I’m using hugely to describe items that would still be material if they were one-fifth or one-tenth as large). By the way, seems to me that valuation methodologies would be a great disclosure for level 3 valuations under SFAS #157.
My comments are in CPA language for those who have ears to hear. I have seen exquisitely few financial statements that make the disclosures mentioned which would likely be highly material to readers of the financials.
I’m not picking on World Help. Their financial statements are merely the most recent and visible in a long string of financial statements that are missing disclosures. As time permits, I’ll have more to say about other financial statements.
There is still time fix things, but I fear the time is running out.
On to the accounting issues
There are several sets of financial reports that have appeared on the World Help website that contain the 2011 financial information. For ease of reference, I will refer to the different reports based on the date of the accountant’s report. The various reports are:
- 3/12/12 – original report with total revenue of $239M.
- 11/29/12 – revised report showing total revenue of $104M.
- 4/10/13(a) – first release of 2012 information containing revision of 2011 total revenue to $17.3M. This report contains an accountant’s report that uses superseded wording
- 4/10/13(b) – second release of 2012 information with accountant’s report that uses correct audit report.
Only the most recent of those reports is visible on the website today.
In non-CPA language, all of the audit rules were rewritten and restructured effective for December 31, 2012 financial statements. Probably the biggest single change is a complete revision to the auditor’s report. There is more explanation and its length is roughly doubled.
You can see a blog post I wrote describing the new report. You can compare that to any report you have on file for 2011 or earlier for any NPO. Another CPA who blogs on audit issues has described the new report in his post here.
When World Help’s financial statements for 2012 were first released, the accountant’s report used the old, superseded language. I will refer to that as the 4/10/13(a) report. The text of that accountant’s report was same as prior years and in conformity to the audit rules in effect for 2011. It did not incorporate the required, new language.
This was one of the items I mentioned to World Help in my e-mails asking for comment.
When I looked at the financial statements available at their website on Saturday, May 4, I noticed that the accountant’s report had been revised to reflect the new language.
The 4/10/13(b) financial statements, visible here, contain an accountant’s report that uses the correct language.
The organization’s annual report, visible here, was also revised by replacing the 4/10/13(a) opinion with the 4/10/13(b) opinion.
So, I know that management read the e-mails I sent because they revised the financial statements and annual report. Good for them that they made the revision.
I give credit to the organization and the CPA for rapidly revising the audited financial statements when they realized something was incorrect. Lesson to be learned for other CPAs is that it is possible to quickly revise audited financial statements.
To put this in perspective, I think there’s a good chance that a lot of CPAs will miss the change to the audit report. It is likely there will be a lot of CPAs going through peer review in the next year or two who will get dinged for not making the change.
I will not ask the CPA for his comments on this issue, because he would have to get written permission from his client before he could talk to me.
Why were the 2011 financial statements revised a second time?
The 4/10/13(a) financials reduced GIK revenue to $1.6M from $88.7M disclosed in the 11/29/12 financials. This was a further reduction from the $223.7M in the 3/12/12 financials.
Why was the GIK revenue reduced a second time?
I cannot find an answer to that question anywhere on the World Help website.
I also asked that question in my e-mails to the organization and haven’t received a reply.
World Help has no requirement to discuss the second revision on their website. They certainly have no obligation to explain anything to me. On the other hand, they do have some obligations when it comes to the financial statements.
Disclosure of reason for revision in previously published financial statements.
The 4/10/13(a) financials do not contain any disclosure of the reason for a revision from the amounts in the 11/29/12 financials.
Now we’re into the realm of accounting rules, not opinions and preferences.
This certainly appears to be a correction of an error. There is no visible change in accounting principle or any indication of the other reasons for revising previous financial statements.
For correction of an error, the appropriate accounting rules are found in Accounting Standards Codification (ASC) section 250-10-50-7 through -10, Correction of an Error in Previously Issued Financial Statements.
I will paraphrase the information that is necessary for correction of an error. The notes should include:
- disclosure that the previously issued financial statements have been restated
- a description of the nature of the error
- the effect of the correction on each financial statement line item
- cumulative effect of the change on net assets in the statement of financial position, as of the beginning of the earliest period presented
I do not see any of that information on the 4/10/13(a) financial statements. Those required disclosures are not visible.
I asked World Help if there was some reason that information is not present and have not received a reply.
Annual report includes accountant’s report but not full financial statements
Now I will get into some real minutia.
The organization’s annual report, visible here, includes the accountant’s report referring to both 2012 and 2011 information. The financial reports on the following pages only include the statement of financial position for 2012, the statement of activity for 2012, and the statement of functional expenses for 2012.
The annual report does not include the 2011 statement of financial position, 2011 statement of activity, cash flow statement for either year, or any of the note disclosures for either year. In other words, that is not a complete presentation of the 2012 financial activity and therefore cannot be a fair presentation. There is no information for 2011.
Yet including the accountant’s report means he is associating himself with 2012 information that is not a complete presentation and with 2011 information which is not present.
I cannot find a professional citation that says this presentation is not allowed.
Having said that, I don’t think this presentation is allowed by many CPAs and from a liability perspective it seems unwise.
The typical presentation would be to either include the full financial statements for both years or exclude the audit report & include condensed financial information.
I also asked for World Help’s comment on this issue and have received no reply.
If I receive some comment from the organization, I’ll update this post.