Details on FTC enforcement action against four cancer charities – 6

This is the sixth 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.

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

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

Continuing with the complaint…

  1. Corporate Defendants also could not permissibly claim ownership of the donated GIK because, in numerous instances, they had no discretion in choosing the beneficiary of the goods. Other than paying INTERMEDIATE’s fee, in numerous instances, Corporate Defendants did nothing to locate or research the foreign beneficiary or facilitate its receipt of the donated goods. INTERMEDIATE’s communications about “donation opportunities” routinely listed the planned destination and foreign recipient for available shipments. Corporate Defendants could accept or reject the opportunity to participate in any given transaction, but could not change the shipment’s destination or beneficiary. In numerous instances, prior to accepting INTERMEDIATE’s advertised shipment opportunity, Corporate Defendants had had no prior contact with the foreign recipients. Corporate Defendants did not typically communicate directly with the foreign recipients at all. Instead, in numerous instances, such communications were handled by the upstream donors or by INTERMEDIATE. Corporate Defendants did not verify the recipients’ needs for, or potential uses of, the goods, did not restrict such uses, and received little documentation regarding the end uses of the goods, which were often redistributed by the foreign recipients to other organizations.

There are multiple factors mentioned in paragraph 120, any one of which, if it occurred with a particular shipment would severely undercut any claim of variance authority. Each GIK shipment should be reviewed in light of that information.

A few factors that jump out at me which would call into question whether a shipment should be recognized as revenue:

  • no discretion for determining beneficiary
  • not researching beneficiary (there are federal income tax issues as well for oversight of recipients)
  • lack of ability to change recipient
  • lack of any contact with recipient
  • not verifying need of recipient
  • no oversight or even knowledge of end use (also federal income tax issue)

Am I misreading this paragraph?

  1. Corporate Defendants also, in numerous instances, lacked documents related to these GIK transactions that owners of GIK goods are expected to maintain. Without such documentation, Corporate Defendants could not claim the GIK as contributed revenue. What documentation that Corporate Defendants did have had come from INTERMEDIATE and did not adequately substantiate Corporate Defendants’ claimed receipt, possession, and subsequent distribution of the goods. Among other things, documents from INTERMEDIATE included thank you letters and distribution reports supposedly sent by foreign recipients to Corporate Defendants but that were instead manufactured by INTERMEDIATE using form letters, letterhead, and digital signatures on file in INTERMEDIATE’s computers. In numerous instances, such documents were backdated. In other instances, documents described GIK transactions that were literally impossible. For example, in some instances, the upstream donors purported to transfer title of goods to Corporate Defendants after the shipment had been received by the foreign recipient.

Those are severe accusations from the FTC.

This addresses the documentation issue as well as variance authority and even existence. Multiple items mentioned here would raise substantive questions about variance authority for any shipment involving that element. Some items here raise questions about existence of shipments.

For example, Intermediate creating documents from the recipients or backdating documents is problematic. Variance authority obviously cannot possibly exist if the shipment has already arrived at the recipient.

Now that we are pondering audit issues, think about SAS 99 for a moment. Any CPAs reading this should know what I mean. Any CPAs with clients recording large volumes of GIK should be uncomfortable right about now. Is this happening at any of your clients? How do you know?

  1. Under these circumstances, Corporate Defendants did not own the GIK goods; they were simply acting as “pass-through” agents between the upstream donors and end recipients. Such intermediaries may not report the value of goods passing through their hands as contributed revenue or as program service expense in their financial statements.

Again, for analysis in light of accounting rules, substitute variance authority for ownership in this paragraph. All issues stand.

If any of the preceding factors apply to any specific shipment, there is a serious question whether variance authority exists. If any of those factors applied, sure does seem to me that the container would be an agency transaction and no revenue should be recorded.

Based on the comments in the complaint, large number of containers should not have been recognized as revenue. Because this is a complaint, the details of what factors applied on which shipments will have to come out at trial before we can see the specifics.

Next: part 7.

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