Is 500mg mebendazole a red herring or a way to focus discussion on many issues surrounding GIK valuation?
GIK Valuation: The issues not being discussed is a guest post on this blog. The author starts his/her post by saying the discussion of 500 mg mebendazole is distracting us from the real issues, which are much more serious.
From Dictionary.com
Red Herring: something intended to divert attention from the real problem or matter at hand; a misleading clue.
The author and I disagree on the role of 500mb mebendazole.
I think the author’s point is that focusing on mebendazole distracts us from other issues.
I believe it is this specific med that is generating a disproportionate amount of GIK revenue. I perceive a very material portion of GIK revenue in the sector went away when this one med was revalued at the time SFAS 157 went into effect. My guess is that a material portion of the remaining GIK revenue in the sector would go away if that one med were valued at something similar to the price on the international market.
I also think that talking about just one medicine allows us to see a host of other issues. If the NPO community can resolve the issue arising from a discussion of mebendazole, I think that most of the other issues regarding GIK valuation would fall into place.
Once we get beyond whether mebendazole is a red herring or a presenting problem, the author and I are in agreement on quite a few issues.
Issues for discussion
Let’s look at some issues the author mentioned in the guest post that should be addressed beyond mebendazole. I will rephrase them as a question. Included in the questions are hints where I think the discussion could or should go.
- Is there a significant valuation issue for other deworming meds, specifically albendazole?
- Is there a significant valuation issue for other classes of meds, specifically antibiotics?
- Are there other families of meds we should be looking at for possible large amounts of overvaluation?
- Are there overvaluation issues in clothing, shoes, medical equipment, and books?
- Is there a pattern of overvaluation in medicines that are approved for use in the U.S. but an inappropriate pricing indicator is used? (AWP is generally discredited, WAC at 20% of AWP is only slightly better). The author is suggesting actual wholesale prices in the U.S. are something in the range of 20% to 50% of AWP. This is characterized as hiding behind FDA approval in the guest post.
- Is there an issue with the existence assertion if ‘daisy chains’ used?
- Is there an issue with the existence assertion if GIK shipments being recorded as contributions when the organization’s only involvement was paying the freight?
- Is variance power being misused to record revenue which should not be recorded?
- Should some measure other than the functional allocation of expenses be used to assess organizations?
- How do we develop useful outcome measures?
- The author dropped the accounting f-bomb. Don’t get upset, the word he/she used was “fraud”, but using that word about someone’s financial statements is dropping the f-bomb in the audit world. Please remember it is the author, not me, that is raising this question: Is bad intent present in some of these transactions? The New Mexico assistant AG has also dropped the f-bomb. The report that is in wide circulation from one revenue agent uses a very genteel and polite phrasing of the same question.
Related questions
Other questions that flow from the discussion:
- Are there some categories of GIK, such as shoes and clothes, that actually cause harm when distributed overseas?
- If an organization pays an acquisition or handling fee as a part of the transaction and those fees have a rough correlation to the prices on the international market, is the transaction a purchase instead of a donation? Phrased differently, in that combination of circumstances, is there any contribution?
- If the acquisition fee for a shipment is based on the count of specific meds in the shipment and the fee for each med has a stronger correlation to the value of the med rather than the volume or weight or size or difficulty of packing/shipping, is the acquisition fee actually a purchase price instead of a donation?
- If an acquisition or handling fee was paid as part of the transaction, shouldn’t that fee be part of the inventory valuation of the medicine, which would reduce the amount of GIK revenue?
Here is the bonus question:
- Do the above questions apply both before and after SFAS 157 went into effect?
Significance of these questions
If the answer to any of these questions is affirmative, I believe there is a systemic issue for overvaluation of GIK revenue in the NPO sector.
These are not new questions
The author of the post and I are not the only people thinking these thoughts.
Some of these questions are being pondered by the state Attorneys General.
Several of these issues are addressed in the IRS report on their audit of an Arizona charity.
There is a large and constantly growing number of reporters who are looking at a lot of those questions. They are not limiting their research to mebendazole. They are looking at more issues that I mentioned above. It looks to me like a really high proportion of the reporters actually understand the accounting theories involved.
It is only my gut feel, but it is my gut feel that none of those three groups have lost their interest in the overall issue of valuing GIK.
My concern about attention from reporters, in addition to them understanding what they write about, is there may be more that are gaining interest.
Doesn’t matter how we characterize this one med
Whether we categorize mebendazole as a red herring or a means to address most of the above questions, there is a long list of serious issues in play.
There have been multiple quarter billion dollar restatements of financial statements for a variety of reasons, not just this one med.
Do you realize the severity of what I said in that one sentence? Multiple organizations have restatements or revisions. It is only a mild exaggeration to say the typical amount is a quarter of a billion dollars.
There are very serious issues in play. I am increasingly concerned the time is running out for the NPO community to clean things up before others clean things up for us.
The author of the guest post and I agree: this isn’t just about mebendazole.
Hey Jim,
To your point “I believe it is this specific med that is generating a disproportionate amount of GIK revenue.” you should know that most organizations have stopped receiving deworming meds as donations and stopped sending or using them for their programs.
Unfortunately this has had a devastating effect on people in impoverished countries. I have personally heard from local people in Central America and Africa wondering why they are no longer receiving deworming meds which they count as crucial for their well-being. I explained to them the situation in the US surrounding mebendazole and they were incapable of understanding – not what was happening – but why it was happening. They – the people being helped – couldn’t understand why their lives and well-being were less important than accounting concepts. They were offended, outraged, and felt cast-off by US stupidity… their words, not mine.
I believe in the necessity for proper accounting. My concern is that the accounting and regulatory industries, who have no knowledge or involvement in the actual good being done, are actually causing an even greater problem by threatening the decades of work by nonprofits to create inroads into foreign countries for humanitarian relief supplies.
To your point “There have been multiple quarter billion dollar restatements of financial statements for a variety of reasons, not just this one med.” I think you may be coming to an inaccurate conclusion based on your current understanding and paradigm… maybe.
Given the overwhelming – and often times unfounded accusations by charity watchdogs (which for some reason seem to influence actual law makers) I would suggest that some of these restatements are meant as a type of “sacrificial offering”, a way to let the accuser’s feel they won something in hopes that they will eventually move on to other things. Some organizations are restating solely because other organizations are restating and they don’t want to have everyone’s gaze shift to them. Not all of these organization’s need to restate because their original valuation and accounting methods were correct. Isn’t it sad that nonprofit organizations who are trying to address the world’s poverty and disease crisis have such a flinch reaction from being beaten on so frequently by un-involved third parties?
Are we incapable of addressing these accounting issues without beating these organizations to near death through accusation and regulatory and media investigative action?
I have many other thoughts regarding the questions in your post… not sure if you want me to take up significant real estate on this page doing so.
DJ:
Thanks for all the posts.
Anyone else have thoughts on the post or ideas on DJ’s comments?
The efficacy of deworming meds are not dependent on the value at which they are recorded. As to public pressure, I’ve not seen public pressure from anyone other than me over valuations in the $0.35 to $2.00 range.
Not everyone adjusted their valuations after SFAS 157 went into effect. As the initial articles from Forbes and Chronicle of Philanthropy pointed out, some organization were already using amojunts at the lower end of the range.
I’m not sure if anyone has been beaten to death. Granted, cutting your revenue by over 90% is quite painful, but in two situations where that happened, the values were overstated. One because of an existence issue and the other due to a qualified opinion from the auditor for using AWP.
When I have time to do so, I will write a post that summarizes the adjustments and restatements I’m aware of.
Jim
Well, as promised I never have a lack of insight or opinions, so here’s my contribution to your issues for discussion. I have broken my responses up into smaller groups for discussion purposes.
GROUP 1
Is there a significant valuation issue for other deworming meds, specifically albendazole?
Is there a significant valuation issue for other classes of meds, specifically antibiotics?
Are there other families of meds we should be looking at for possible large amounts of overvaluation?
– Here is my answer to the first 3 questions: There is only a valuation issue if GAAP and FASB principles are not followed. Beyond that any perceived “issue” is in the eye of the beholder, not the nonprofit or accounting industry. I feel the very approach and nature of these types of questions go beyond the realm of GAAP and FASB guidance and into the realm of the individual CPA’s responsibility. They have the feeling of being a “witch hunt”. This leads to narrow vision and potentially losing sight of the greater realities which are that each CPA must provide their knowledge and expertise in the interpretation of accounting principles to their own clients. It seems like many, yourself included, are trying to standardize the interpretation of GAAP and FASB guidance for recording the value of donated items. You, as a CPA, when employed by a nonprofit offer your knowledge and expertise in the interpretation and application of accounting guidelines and principles. I work independently from you. How can it be justified to force me, or others to follow another’s interpretation of accounting guidelines and principles?
Are there overvaluation issues in clothing, shoes, medical equipment, and books?
– Again, only if GAAP and FASB principles are not followed.
GROUP 2
Is there a pattern of overvaluation in medicines that are approved for use in the U.S. but an inappropriate pricing indicator is used? (AWP is generally discredited, WAC at 20% of AWP is only slightly better). The author is suggesting actual wholesale prices in the U.S. are something in the range of 20% to 50% of AWP. This is characterized as hiding behind FDA approval in the guest post.
– AWP is generally discredited??? By who? And what difference does it make? I know many organizations that take the AWP value of donated medicine and have NO problem with their CPA or the IRS. Each CPA is responsible for their own service provided.
– WAC at 20% of AWP is only slightly better? Says who? Where is this written? Since when have opinions determined standardized business practices?
– The cost of medicines in the US is unknowable either by retail or by wholesale. To single out a data point as unreasonable because someone “feels” like it is too high is outrageous and completely unprofessional. Data is what counts. There are multiple data points available. If the true cost is unknowable, reason and logic would dictate that any and all viable data points should be considered.
GROUP 3
Is there an issue with the existence assertion if GIK shipments being recorded as contributions when the organization’s only involvement was paying the freight?
– I do not understand how you are relating existence with paying freight. Existence requires proof that the donated goods are real and not just pretty words on a piece of paper. I do not understand how you are linking existence to an organization’s ability to record the contribution? Paying the freight proves 3 things: ownership, control, and existence. Why would an organization pay freight for something they do not own? Paying freight as the shipper of the goods gives the shipper risk of loss which is proof of ownership. The organization paying freight is sending it to their destination program = control. With the exception of fraud, no air freight or ocean freight company would create a waybill for goods that do not exist. So, if an organization is paying freight, it would be because they own the goods.
Is variance power being misused to record revenue which should not be recorded?
– Please provide an example of how this would work. Either an organization has variance power, or they do not. They either have control, or they do not. If they do not then they are an agency pass through.
Cool. I just figured out how to next comments.
Jim
I’ll comment on DJ’s comments later. What do others think?
Jim