Details on FTC enforcement action against four cancer charities – 8

Federal Trade Commission Building in Washington, DC. - Picture courtesy of DollarPhotoClub.com

Federal Trade Commission Building in Washington, DC. – Picture courtesy of DollarPhotoClub.com

This is the eighth in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities. The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the second of two posts on comments in the complaint addressing valuation at an overall level. Next discussions will go into detail of valuation issues by charity.

My goal is to highlight some of the information that I think is of particular interest to the wider nonprofit community. This complaint is the most detailed information available in the public realm about the range of issues that have been visible in the charity world over the last few years. The issues discussed in this complaint are not limited to these four charities.

  1. Corporate Defendants were ultimately responsible for the valuations they reported in financial documents. In numerous instances, however, they did nothing to oversee, monitor, audit, or otherwise check INTERMEDIATE’s processes and procedures for such valuations. They did not ascertain that the contents of the shipments were as described in the inventory lists they received from INTERMEDIATE. Nor did they make sure that donated pharmaceuticals were not expired or were in otherwise useable condition. In numerous instances, inventory lists provided by INTERMEDIATE to Corporate Defendants did not specify the drugs’ expiration dates. In other instances, when expiration dates were provided, some of the listed drugs had expired or were very close to expiring. (A drug’s expiration date affects its monetary value as well as its efficacy.)

The complaint identifies the following problems but does not quantify the frequency:

  • Sometimes the charities had no involvement with valuation.
  • Sometimes they did not look at expiration date or whether the medicines were in physically usable condition.
  • Sometimes they did not know what the expiration dates were.
  • I am inferring that when medicines had short expiration date the valuations were not adjusted for that factor.
  1. Corporate Defendants also failed to maintain records supporting the valuations provided by INTERMEDIATE, including, for example, documents related to INTERMEDIATE’s qualifications for conducting appraisals of value, documents detailing the specific valuation method(s) used by INTERMEDIATE, the assumptions made by INTERMEDIATE in determining appraised values, and records of INTERMEDIATE’s conclusions of fair value.

This paragraph is rephrasing the previous point. At issue is the named charities did not have documentation supporting why they should believe the Intermediate’s valuation, or explaining the Intermediate’s skill set to determine values. In addition, the complaint says the named charities often did not have support for the assumptions that went into the determinations and support for Intermediate’s conclusions.

What this paragraph implies to me is that Intermediate told the named charities this is the value for each medicine and here’s the total for the shipment without explaining how they came to those valuations.

The analogy that comes to mind is an appraisal for real estate. If you have seen those lately you know a commercial appraisal will often be 75 or 100 pages long. At the front is a one or two page letter that says the value is such and such. If the methodology asserted by the complaint were used on an apartment building, I would imagine the appraisal would be one paragraph instead of 100 pages. One paragraph would leave you with no idea how the valuation was derived and wondering why the appraiser’s opinion has any value.

One final thought – I don’t quite understand how an auditor could obtain sufficient audit evidence if there wasn’t documentation for the valuation of donated medicine. Anyone have any ideas?

Next: part 9.

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