More articles discussing the California AG’s enforcement actions over medical GIK

…What accounting rules sometime feel like.  Image courtesy of Adobe Stock.

Here are three more articles discussing the cease-and-desist orders issued by the California Attorney General against three large charities who have large amounts of donated medicine. Previous post discusses a few earlier articles.

Update:  Food for the Poor has provided a response to the Boston Globe article, which you may read here.

5/30/18 – editorial in Sun Sentinel – Food for the Poor controversy reveals need for nonprofit transparency – Editorial highlights that using US pricing compared to international pricing increases apparent efficiency.  The challenge, visible in the article, is that the charity claims 95% of all expenses are for program and the article says the California AG claims 66.7% of cash donations are used for program.

In a statement which should sober every accountant, CPA, auditor of NPOs, and staff of R&D charities, the editorial asks:

(S)uch accounting practices may be legal, and they may be the industry standard, but are they honest?

Let me paraphrase two questions embedded in that comment (yeah, CPAs actually talk that way – we look for embedded derivatives and embedded leases). The editorial is asking:

  • Is the industry standard consistent with GAAP?
  • Is either GAAP or the industry standard honest?

The first question will be addressed and resolved by the California administrative law judges and subsequently addressed by appeal court judges.

The second question will be resolved by the public without paying one ounce of attention to FASB’s pronouncements or FinREC’s considered opinion in the audit guide.

(Just in case some CPAs are not shaken up by that second question, image the impact if “honesty” were to become the basis for determining GAAP instead of GAAP being based on representational faithfulness and all those other sophisticated concepts only comprehensible to those of us who routinely read and understand FASB pronouncements.)

6/2/18 – Boston Globe – Leading hunger relief charity challenged on its claim of low costs – Article emphasizes much of the fundraising efforts for the organization are conducted from the pulpits of local Christian congregations. Pastors from many denominations are trained by the charity so they can give sermons in churches which are a part of their denomination.

Two comments in the article highlight the impact of the accounting for medical GIK. Consider the following quotes from the FFP website, before and after the AG cease and desist order:

More than 95 percent of all donations went directly to programs that help the poor.

More than 95 percent of all donations, including donated goods, have gone to programs that help the poor.

Pulling data from financial statements and e-mails, the article says that 64% of 2017 cash donations were used for direct support to poor people, which percentage included 7% of cash donations being used for food purchases.

Article says the Massachusetts Attorney General is interested in the issue.

Article quotes the president of a Massachusetts-based charity that supports a school in Haiti. He described one of the dark secrets of the aid world, specifically the quality and appropriateness of materials shipped overseas.

His wife said she saw a shipment of goods from the charity to the school which included gloves, scarves, winter hats, and diet cookbooks.

Those cold weather clothing items were sent to……Haiti.

The calorie-avoiding cookbooks were to help……starving people.

The school’s cooks said upon arrival the big bags of beans had stones in them.

Update: As mentioned above, you may read a response from Food for the Poor here.

6/6/18 – Nonprofit Quarterly – Food for the Poor: Questionable Tactics Threaten its Credibility and Reputation. Article summarizes the issue, with particular attention on the issues discussed by the Boston Globe article above.

Article explains the California AG is calling attention to two overlapping issues:  First, claimed overvaluation of medicine which the AG asserts overstates program percentages. Second, combining the medical GIK and cash transactions for a combined program percentage in a way that the AG considers to be misleading.

These issues apply more broadly

Essentially all the coverage I’ve seen of the California AG’s cease-and-desist orders has discussed Food for the Poor. Other than using pastors for fundraising, the same issues apply to MAP International and Catholic Medical Mission Board.

It is my perception the issues apply to all charities with large amounts of medical GIK.

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