Who might want to look more closely at the four paragraph summary of valuation issues in the FTC complaint against four charities? 13

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

There are four paragraphs in the FTC complaint against four cancer charities that summarizes the issues raised by the FTC. These paragraphs cover the main issues about valuation of GIK that have been under discussion in the NPO world for several years now.

These issues do not just apply to the four named charities.

The issues are not limited to the secular cancer charities.

These issues actually apply to a large number of high visibility religious charities. The issues may have drop out of news coverage, but they have not gone away.  I hope those who have ears that are able to hear, will hear.

Who might want to take a second look at the FTC’s summary?

Regulators who have not yet tuned into the issues. Staff at those agencies newly assigned to an investigation could look at those paragraphs for a quick orientation of the issues involved.

Astute CPA auditors reading thus far into the dreary details of either the complaint or my blog posts might consider those points as hints for steps to add to the audit program for your upcoming audits.

An even more astute auditor might want to bring those points into conversations about the completed audit workpapers when it comes time to perform annual inspections, which is required as a part of your quality control program.

Peer reviewers who want to look at the core substance of the highest risk area in the financial statements might consider those ideas when reviewing workpapers. The paragraphs provide a perceptive CPA a road map of the major issues that ought to have been addressed in the workpapers.

Here is an extreme insider-baseball idea for the CPAs in my audience – Think about the presumptively mandatory requirement to assess revenue recognition as a material risk of misstatement. Do the workpapers reflect appropriate consideration of the severe risk in revenue recognition? What is the step above ‘high’ in the inherent risk assessment for valuation assertion of revenue? With zero internal control (as alleged by the FTC complaint), what would be the correct assessment of risk of material misstatement? What should the workpapers look like when there is an assessment of high for RMM of valuing revenue?

Peer review committee members performing oversight might look at these few paragraphs in the FTC complaint to consider whether the auditor and peer reviewer gave appropriate consideration to the most subjective issues in the most critical audit area addressing the most material number in the financial statements.

Think about materiality.  In my opinion, the existence and valuation of GIK drives every number and every ratio that any reasonably foreseeable user of the financial statements could possibly find important.  That GIK revenue amount is therefore the most material item to everyone who will ever look at the financials.

For non-auditors, let me translate. In an audit of an NPO where GIK makes up something in the range of 40% or 80% of total revenue, the issues discussed in the FTC complaint constitute the most important issue in the entire audit. Everything else pales in comparison. Auditors are supposed to focus their effort on the risky areas of an audit. As a result, the audit workpapers and peer review ought to indicate a large amount of attention was devoted to these issues. An “appears reasonable” or same-as-last-year tickmark would be quite inappropriate.

Discussion of those four key paragraphs are here, here, here, and here.

Next: part 14 which starts a long discussion explaining the impact on financial statements of each individual charity.

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