Details on FTC enforcement action against four cancer charities – 12

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

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

This is the fourth post on a series of paragraphs in the complaint addressing valuation of donated medicine.

The complaint can be found here. My posts in this series are visible using the FTC tag.

  1. By reporting these GIK transactions as contributed revenue and program expenses, at inflated values, Corporate Defendants represented themselves to be both larger and more efficient than they actually were. They obscured the high percentage of donated funds spent on, among other things, for-profit fundraisers, executive salaries, and employee perks, and concealed the very small amounts spent on the charitable purposes described to donors. As a result, the Forms 990 and other documents filed by Corporate Defendants with the IRS and state regulators, and made publicly available to consumers, were false and misleading.

The FTC has alleged some portion of the shipments should not have been recorded. Extremely strong inference from the complaint is very few, if any, met the requirements to record them as revenue under accounting rules.

Further, the FTC alleges the valuations used to record shipments are inflated. That allegation has not been fully developed thus far in the complaint.

Paragraph 129 stated the financial statements have been widely disseminated.

Paragraph 130 wraps up this four paragraph section by explaining why the overstatement is an issue.

Booking those shipments and doing so at inflated values (both ideas alleged by the FTC) increases total revenue, which makes them look like they have larger levels of economic activity.

In addition, those costs drop straight into the program service category on the functional allocation of expenses. That in turn improves any ratio of efficiency that a reader of the financial statements wishes to calculate. The FTC asserts this makes the charities look more efficient than if the revenue were calculated as they claim would be correct.

Furthermore, the FTC alleges the inflated efficiency hides the high volumes of money spent on fundraisers to raise the cash contributions.

The FTC alleges this also provides cover for salaries and benefits that are allegedly too high.

Finally, allegedly overstating revenue and overstating efficiency hides the small amount of cash contributions spent on the stated purposes of the organization.

The ultimate impact alleged by the FTC is that the financial statements are

false and misleading

The phrase accountants would use to recharacterize what the FTC alleges is cooking the books.

Those allegedly materially misstated financial statements went to the IRS, state tax agencies, charity regulators, self-appointed watchdogs, donors, and the general public. The unstated point from the FTC is all of those parties would have relied upon the published financial statements.

Next: part 13 which discusses who should be paying attention to the paragraphs in the complaint summarizing the valuation issues.

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