Details on FTC enforcement action against four cancer charities – 5

This is the fifth in a series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

This is the first of two posts on specific comments in the complaint addressing variance authority.

I will quote and comment upon the complaint which can be found here. My posts in this series are visible using the FTC tag.

Defendants Improperly Reported Receipt and Distribution of GIK They Did Not Own  

  1. Under applicable accounting rules, in numerous instances Corporate Defendants did not have legal ownership of the GIK goods that they claimed to have received. As a result, they should not have reported the goods’ value as contributed revenue or program expense. Among other things, Corporate Defendants could not permissibly claim ownership of the donated GIK because, in numerous instances, they had neither physical nor constructive possession of the goods, and did not assume the risks and rewards of ownership.

If you are substituting “variance authority” for “legal ownership” at this point, this paragraph doesn’t derail the discussion. The next few paragraphs are quite problematic in terms of variance authority.

  1. Other than paying INTERMEDIATE’s fee, Corporate Defendants, in numerous instances, did nothing to solicit, locate, or facilitate the contributions they supposedly received from upstream donors, which were themselves nonprofits that had received the goods from yet other upstream donors. Corporate Defendants did not know the identity of the pharmaceuticals’ manufacturers or the origin of the goods, and they had no direct contact with the upstream donor. They did nothing to verify that the supposed donor actually possessed the right to transfer title of the goods, or to determine whether use of the goods had been restricted in any way. For example, in numerous instances, Corporate Defendants reported receiving donations from an upstream donor, World Help, when World Help did not have title to the goods it supposedly donated to Corporate Defendants. Corporate Defendants could not legitimately claim to own such goods.

So many concerns in one paragraph. If you are an accountant, substitute “…have variance authority over such goods” for “…own such goods.”

This introduces the concept of ‘daisy chain’ which is when charity A donates a shipment to charity B, who donates it to charity C, who gives it to charity D, who approves A shipping the container to A’s program partner who was previously selected by A.

I have discussed World Help several times. See this tag for the posts.

When restating their 2011 financial statements, the amount of GIK fell by 99.3%. Total revenue dropped by 92.8%.

To World Help’s credit, they did restate 2009, 2010, and 2011 financial statements. Took several tries to get to the final results, but they acknowledged the overstatement.

Since World Help determined they did not have variance authority for the shipments they received and in turn passed on to other charities, that means the downstream charities could not have received variance authority. World Help cannot pass on authority it did not receive.

Seems to me that factor by itself means every donation from World Help to the named charities needs to be revisited. Perhaps someone else can explain to me how a charity can receive variance authority when the donor did not have it.

Seems to me it would be hard to explain booking a shipment as revenue if the named charity either had no contact with the upstream donor, or did not verify variance authority, or did not determine whether there was a restriction on the shipment.

Next: Part 6 which completes the section on variance authority.

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