On October 1, 2018, Mark Hrywna reports in Nonprofit Times that Food For the Poor Settles With Michigan AG. The settlement calls for FFP to pay the state $300,000 and to revise its fundraising appeals.
Action is based on 2015 financial data. The filed data shows 96.5% of all expenses are categorized as program services, according to the article. The AG asserts that if gifts-in-kind are excluded, program services would be about 67%.
The AG issued a cease and desist order in December 2017. More on that later in this post.
Might want to get a fresh cup of coffee. This will be a long read.
My summary of the numbers mentioned in Attorney General’s Cease and Desist Order:
|$ total expense||$program||$ supporting svc||prog %|
One particular fundraising pitch is mentioned in the article. FFP conducted a “6 Cents Appeal”, in which it claimed, quoting the article quoting the campaign, that “It only takes 6 cents to provide a meal for a starving child.” The AG took exception to this campaign for multiple reasons. More later in this post.
Article says FFP denies the accusations which leaves us in the typical situation seen in such settlements: While denying the quite serious allegations, the charity will write a $300,000 check from donor funds to pay the state since they did nothing wrong and change their fundraising materials, all of which was actually fine, with both those actions done voluntarily since they didn’t do anything inappropriate.
Dropping the smart alack tone, I really do understand why such comments are absolutely necessary in negotiating a settlement, especially since the California AG still has a separate Cease and Desist Order under appeal. It still rubs me the wrong way, but that’s just me.
Press release from AG
The AG’s press release says Food for the Poor Agrees to Pay $300,000 to Settle Allegations of Deceptive Charitable Solicitations. Another particular fundraising appeal was cited in the article. FFP asserted, again quoting the press release quoting the appeal, that “more than 95% of all donations go directly to programs that help the poor.”
Looking at the data listed above shows me why regulators have problems with those type of comments. The appeal suggests that 95% of cash contributions go to program services, while it is 95% of all expenses that are categorized as program expenses. (Cease and Desist order explains that objection in more detail.)
One of the great things that sadly gets overlooked in the discussion of big GIK charities is the amount of goods that get moved to field locations to help hurting people. Look at the table listed above. The $124M of cash donations provides the infrastructure and staffing to obtain and transfer $1,034M of GIK to overseas charities who then use the GIK in their relief work. That means that a $1 cash contribution provides the infrastructure to get $8 of GIK to a place where the $8 of stuff will help people ($1,034M / $124M = 8.34, rounded to 8.0).
If you yearn for “bang for your buck”, how about you give $1 to a charity, of which $0.32 is for that dreaded “overhead”, with the remaining $0.68 providing programmatic infrastructure (another bad word), which in turn facilitates $8.34 of GIK getting to overseas charities. That is a complex idea to explain, but to my mission focused accounting brain seems to be a really good idea.
Cease and Desist Order
The Michigan AG issued a cease and desist order dated December 19, 2017. Order can be found here. Here are few items of interest to me after reading through the document. Think these items will be of interest to others as well.
The AG issued a demand for documents in March 2017. FFP replied in April. Additional material was requested in June 2017, with a reply in July 2017.
Order quotes a response device and includes a copy of it. The response device says:
Our mailings cost so little, but do so much. Fundraising and other administrative costs comprise less than 5% of our expenses; more than 95% of all donations go directly to programs that help the poor.
Footnote 1 says that the Michigan AG suspects the GIK is overvalued, but since the California AG is investigating the overvaluation of GIK issue, this action is focused only on the alleged deceptive solicitation.
That suggests to me that the Michigan AG and California AG are coordinating their efforts. Looks like they are splitting up the enforcement costs. I wonder how many other AGs are involved. I wonder how many other cease and desist orders are out there that haven’t gotten any public visibility.
Back to the Order.
Paragraph 11 contains comments describing the AG’s position:
… Essentially, Food for the Poor’s 95% Statement told donors the following, but failed to include the bracketed information: “Fundraising and other administrative costs comprise less than 5% of our expenses [–expenses that include donated gift-in-kind pharmaceuticals we valued at $1 billion]; more than 95% of all donations [including cash donations of $124 million and gift-in-kind pharmaceutical donations we valued at $1 billion] go directly to programs that help the poor.”
In this way, Food for the Poor subtly transformed itself from a charity with $124 million in cash donations, of which $84 million were spent on charitable programs and $40 million on fundraising, salaries, and other administrative costs (67% efficiency) to a $1.157 billion charity with $1.117 billion in charitable programs (96.5% efficiency).
Paragraph 12.c.iv says the AG “believe(s) donors would be surprised to learn” the staffing level of the organization, which is:
|68||staff working in program areas|
|74||staff working in administration|
|280||staff employed in fundraising|
That is probably staff count, and not full-time equivalents. Nevertheless, think I’ll agree with the AG. After saying over 95% of donations go to program, most donors would be a bit surprised to learn 2 of every 3 staff work in fundraising.
Paragraphs 16 through 21 discuss the “6 Cents” appeal. Some response devices included options of $12 providing 200 meals or $24 providing 400 meals. AG indicates FFP asserted they did not treat any of those funds raised as temporarily restricted. Comments such as that, particularly when combined with including a nickel and a penny in some appeals and asking the coins be returned, would suggest to my audit brain there is a material risk such appeals ought to be categorized as donor restricted.
The AG did not pursue the issue of whether those funds should be categorized as donor restricted. From an audit perspective, that seems to be somewhat material.
Paragraphs 22 through 31 discuss joint cost allocation.
Joint costs, in millions of dollars, during 2015 include:
|10.8||4.8||44.4%||All joint costs|
|3.3||3.0||90.9%||Roman and Other Speaker program|
Three paragraphs cite the accounting rules from ASC.
Pro tip: If an AG focuses on your ministry, you need to assume they have as good an understanding of ASC as you do.
AG’s Order then assesses FFP’s speaker program and doesn’t see any call to action beyond asking for funds. Thus, in the AG’s opinion, none of the speaker program costs should be allocated to program.
That conclusion by the AG is perfectly consistent with my observations during two presentations by FFP speakers.
If I have time, I’ll quote the entire section in a separate post. It is the clearest joint cost allocation analysis of an actual situation I’ve ever seen. As an aside, an audit senior could drop those paragraphs directly into workpapers as an assessment and disposition of the joint cost allocation accounting. Your manager and partner would appreciate the concise analysis and clear conclusion.
Paragraphs 34 through 42 contain the AG’s allegations of law violations. The allegations are in two groups with captions for each, dealing with the 95% claim and the 6 Cent appeal. Included in both groups of allegations are diversion of funds (para 35 & 38), on the basis that 95% of cash contributions not being used for program services is a diversion from program to supporting services.
Seems to me that paragraphs 40 through 42 should have had a separate header for joint cost allocation, similar to what is show above para 34 and 37.
The joint cost issue generates three alleged law violations, specifically submitting false statements to the AG (para 40), misrepresenting charitable activities (41), and filing audited financials that don’t comply with GAAP (42).
Paragraph 45 contains a cease and desist order.
Paragraph 46 says civil action and fines may follow if there are any violations of the C&D order.