Assessment of allocating cost of speakers in Food For the Poor’s financial statements.

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The Cease and Desist Order filed by the Michigan Attorney General on December 19, 2017 provides an analysis of the joint cost allocation methodology used by Food For the Poor.  The Order can be found here.

FFP hires pastors from various denominations to make presentations at churches in the pastors’ denomination.  FFP applies joint cost allocation accounting to classify a large portion of the speakers’ time as program services.  The AG concluded the allocation methodology did not follow GAAP.

As mentioned previously, FFP settled the AG’s allegations by agreeing to pay the state $300,000 and revising its fundraising materials.

For general education of the nonprofit community, this post will quote the AG’s Cease and Desist Order at length on the joint cost allocation issue.

The authoritative explanation of what constitutes generally accepted accounting principles is found in FASB’s Accounting Standards Codification™ (ASC). I will add some citations from ASC to the AG’s Order. Will also add a few comments along the way.

A detailed look at the AG’s Order is valuable because it provides an in-depth analysis of a specific situation with a detailed comparison to authoritative GAAP.

You might want to get a fresh cup of coffee since this post is a long read, currently sitting at over 1,500 words. It is also quite technical.

The AG finds problems with the purpose and content criteria.  In my opinion, the audience criterion is also problematic in this situation, but the AG did not pursue that issue.

Quoting from the AG’s order:


Improper Joint Cost Allocations

22. Food for the Poor’s 2016 Form 990 and its audited financial statements reported $10,781,473 in joint costs of which $4,770,584, or 44.2% were allocated to program services. Exhibit L, 2016 Form 990, p.10; and audited financial statements. The audited financial statements purport to be prepared in accordance with generally accepted accounting principles (GAAP) and the Form 990 claims that Food for the Poor followed GAAP in accounting for the joint costs.

23. According to information provided in Food for the Poor’s responses, the largest joint cost allocated to program services was Food for the Poor’s Roman and Other Speaker programs. The total cost of the Roman and Other Speakers programs was $3,307,824 of which $2,977,042, or 90%, was allocated to program. Exhibit M, 2016 Audit Joint Costs spreadsheet from Response to 2nd Investigative Order.

24. GAAP in the area of joint costs is provided by the Financial Accounting Standard Board’s Accounting Standards Codification (“ASC”). The ASC requires that, for joint costs to be allocable, the criteria of purpose, audience, and content must be met.

ASC 958-720-45-28 through 958-720-45-55 discuss the rules for Accounting for Costs of Activities that Include Fundraising.

25. The ASC states that, to accomplish program functions, the activity must call for specific action by the audience that will help accomplish the organization’s mission. Actions that help accomplish the mission are activities that will do either of the following:

a. Benefit the recipient (such as improving the recipient’s physical, mental, emotional, or spiritual health and well-being);

b. Benefit society (by addressing societal problems).

See 958-720-45-35. Points a and b are verbatim, with paragraph 25 being near-verbatim, only modified for readability.

26. The ASC provides the following examples of activities that fail to call for a specific action by the audience that would help accomplish an organization’s mission:

a. Educating the audience about causes or motivating the audience to otherwise engage in specific activities that will educate them about causes is not a call for specific action by the audience that will help accomplish the NFP’s mission. Such activities are considered in support of fundraising.

b. Asking the audience to make contributions is not a call for specific action that will help accomplish the NFP’s mission.

Point 26a is a combination of 958-720-45-37 subparagraphs a and b. The AG could have added subparagraph c, since that fail of the purpose test seems to be the justification for the speakers meeting the purpose criterion.

Fundraising is defined in the ASC glossary as

Activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, other assets, or time.

Asking for money is by definition fundraising.

The separate and similar activities test in 948-720-45-45 and -46 is likely problematic, but the AG did not address that issue.

Moving on to the content criterion, the Cease and Desist Order says:

27. The ASC further states:

Information identifying and describing the NFP [not-for-profit organization], its causes, or how the contributions will be used is considered in support of fundraising.

The quote in paragraph 27 is from ASC 958-720-45-51 of the content criterion, which discussion goes from paragraph -50 through paragraph -53.

Paragraph 958-720-45-50a explains how a joint cost could meet the content criterion and be allocated to program. I’ll quote the ASC:

a. Program. The joint activity calls for specific action by the recipient that will help accomplish the NFP’s mission (see paragraph 958-720-45-35). If the need for and benefits of th action are not clearly evident, information describing the action and explaining the need for and benefits of the action is provided.

The audience criterion, discussed in 958-720-45-48 and -49, is problematic in my opinion based on my knowledge of how FFP runs the speakers program. The AG did not address that issue.

Back to quoting the Cease and Desist Order:

28. The Attorney General questioned Food for the Poor to determine whether its joint cost allocations were justified. Food for the Poor responded, “The overall purpose of joint fundraising/education is to bring awareness of the plight of the poor, to turn the face the First World Church and call them to act upon the Gospel’s message where ‘whatever you did for one of the least of these brothers and sisters of mine, you did for me.’ Matthew 25:40.” Exhibit C, 1st Response to Investigative Order, Response 15.b.

29. To “bring awareness of the plight of the poor” in its solicitations, Food for the Poor describes and provides pictures of the poor, especially children, in various other countries. Food for the Poor informs the reader about the circumstances in which the poor live. This “awareness” is really the same as educating the audience about the poor. However, the ASC states, educating about causes is not a call to action; information describing causes should be considered in support of fundraising. Thus, “awareness” is not a purpose or call to action that meets the criteria of the ASC.

See ASC 958-720-45-37 a, b, and c along with the sentence after the listed points.

30. FFP also provided examples of the presentations by providing video of two speaker presentations.

a. The first speaker specifically said that he was wearing two hats: that of a preacher and that of a beggar. While the “preaching” portion discussed having “mercy,” the “begging” portion made it clear that showing “mercy” meant providing Food for the Poor with a contribution. There was no call to action unless you consider the request for a donation a call to action. However, as the ASC states, asking for a donation is not a call to action under joint cost accounting rules.

b. The second speaker spoke of the needs of the poor and what Food for the Poor does. However, the ASC specifically states that such activity is in support of fundraising. Therefore, FFP’s joint cost allocations with respect to its Roman Speakers and Other Speakers programs do not meet the ASC’s criteria.

31. In addition, even if the allocation of joint costs of the Speaker programs were allowable, the ASC states that the cost allocation method must be rational and systematic and result in an allocation that is reasonable. Food for the Poor allocated 90% of the joint costs of the Speaker programs to program which is not reasonable.

The requirement for a rational and systematic allocation method is found in ASC 958-720-45-54.

In summary, the AG concludes the speakers program fails the purpose and content criteria.  The AG, for some reason, did not address the audience criterion. In my opinion, the program would have substantial difficulty passing that criterion.

Keep in mind that in order to apply joint cost allocation, an event or activity must meet all three criteria.

In paragraph 42 of the Cease and Desist Order, the AG alleges that FFP’s financial statements do not comply with GAAP and therefore violate state law. The full paragraph:

42. Submitting Audited Financial Statements that were not Prepared in Accordance with GAAP. MCL 400.273(2)(j).

a. As stated above, GAAP in the area of joint costs is prescribed by the ASC. Because audited financial statements were required to be submitted to support Food for the Poor’s registration, they were required to be prepared in accordance with GAAP.

b. The ASC requires that, for joint costs to be allocable to program services, the criteria of purpose, audience, and content must be met. Food for the Poor failed to meet the criteria of purpose and content because their Speaker program solicitations did not provide a call to action that would help Food for the Poor’s program. Also, Food for the Poor’s purpose was to provide awareness of the plight of the poor and to educate the donating public about what Food for the Poor does. None of these activities are purposes or calls to action which meet the ASC criteria.

c . Food for the Poor violated 400.273(2)(j) by submitting audited financial statements that were not prepared in accordance with GAAP.

What do you think?

What are your thoughts on the AG’s analysis?

Bear in mind that all comments are moderated. Professional comments will be allowed. Also keep in mind that I am the sole source of determining what comments meet the ‘professional’ threshold.

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