Comments in financial statements of three charities appealing California AG’s Cease and Desist Order. Part 2.

At issue in the AG’s claim: how should pallets of donated meds be valued if restricted by donor for distribution overseas? Image courtesy of Adobe Stock.

There are a number of pieces of information of public interest in the most recent financial statements for the three charities who received cease and desist orders from the California Attorney General. The appeal hearings start in about a week, on November 27, 2018.

Part 1 of this series provided background, an executive summary, and a short discussion of CMMB’s financials. This post discusses the Food for the Poor (FftP) financials. Part 3 will discuss the MAP financials.

Previous post discussed the 12/31/16 financials for FftP, 9/30/17 financials for CMMB, and 9/30/16 financials for MAP.  FftP and MAP have since issued their next year’s report; CMMB has not.

Food for the Poor

Financial statements for the year ended December 31, 2017 were available for issue on April 26, 2018.  The auditor’s report was issued by the Boca Raton, Florida office of Mayer Hoffman McCann, P.C.

FftP uses WAC for valuing donated medicine. Because it is of public interest and because it is relevant to the upcoming hearings, here is a quote of the disclosed accounting policy for GIK:

Gifts-in-kind – Gifts-in-kind (“GIK”) received through private donations are recorded and valued as revenue at their estimated fair value based upon the Organization’s estimate of the wholesale values that would be received for selling the goods in their principal or most advantageous market, even though, in fulfillment of its mission, the Organization may not distribute goods in the principal or most advantageous market.

Non-pharmaceutical GIK contributions received are valued at their estimated wholesale value as provided by the donor or, in the absence of the donor’s reasonable valuation, estimated by the Organization using like-kind analyses and past donation history.

Pharmaceutical GIK contributions received are valued using costing data acquired from recognized and published resources and are valued at their estimated wholesale acquisition cost (“WAC”) on a drug by drug basis. If WAC is not available in any published source, the Organization will refer to the donor’s value. This valuation policy most resembles one used by a wholesale distributor of goods, which is the market role the Organization has in the acquisition and shipment of pharmaceutical donations. Pharmaceutical GIK contributions acquired from non-U.S. donors for products legally permissible to be sold outside the United States are valued in U.S. dollars based upon the wholesale market price of the countries representing the principal exit markets for those products.

The 12/31/17 financials, again which were available for issue on 4/26/18, have the most detailed disclosures of the status of the California AG’s actions.  Note 9 on contingencies and subsequent event is lengthy. Because it is of public interest, relevant to the upcoming hearings, and the most detailed disclosure of the three charities, five paragraphs will be quoted verbatim:

The Organization has received letters from various State Attorney General Offices requesting information and documents relating to the Organization’s fundraising and solicitation activities for specified periods of time. Some of these letters have also called into question the Organization’s valuation of certain GIK transactions and representations made by the Organization on its gift solicitations.

On December 19, 2017, the Michigan Attorney General issued a Notice of Intended Action and Cease and Desist Order against the Organization requiring the Organization to no longer engage in what the state deems “unlawful solicitations.” The Organization denies any wrong doing and in connection with ongoing settlement negotiations and a $500,000 civil penalty proposed by the Michigan Attorney General, the Organization has retained legal counsel. The deadline to respond to the settlement offer is April 27, 2018. No amounts related to this matter have been accrued in the Organization’s financial statements as of December 31, 2017 as the Organization is unable to determine the manner in which this matter will be resolved. Pending final resolution, the Organization has complied with the directive from the Michigan Attorney General since the aforementioned notice and will continue to do so until this matter is resolved.

Technical accounting observation:  An available to release date of 4/26/18 means that management and the auditor are not obligated to report on what may have happened on 4/27/18 when the settlement offer expired. The context implies the offer is from FftP to the AG. If the offer was declined or accepted on the 27th that response from the AG does not need to be addressed in the financial statements.

The timing is important because if the AG accepted the settlement offer, that would create an easily estimable amount with likelihood of probable. If they declined, that would suggest that the settlement offer is the low-end of a range of possible outcomes. If the response to the settlement offer was known as of the available for issue date, such information would be disclosable.

Continuing to paragraph 3:

On March 12, 2018, the Organization received a Cease and Desist Order (the “Order”) from the Attorney General of California requiring the Organization, among other things, to remove certain specific language from its solicitations and provide a copy of the Order to parties specified in the Order. The Order also seeks the revocation of the Organization’s California charity registration. Furthermore, the Order seeks the payment of penalties totaling $1,088,000 based upon the state’s allegations of violations of certain state charitable solicitation laws. The California Attorney General is also seeking reimbursement of attorney’s fees and costs claimed to be $775,000. The Organization denies any wrongdoing and has retained legal counsel who, on behalf of the Organization filed an appeal on April 10, 2018 denying the allegations made in the Order. No amounts related to this matter have been accrued in the Organization’s financial statements as of December 31, 2017 as the Organization is unable to determine the probability that the California Attorney General’s findings will be upheld. The Organization is complying with the terms of the respective Cease and Desist Order and will continue to do so until this matter is resolved.

Management believes that if any of the claims by the states result in losses, the Organization’s insurance policy, subject to policy limitations, would cover such losses. However, it is at least reasonably possible that the Organization’s estimate of any liability with respect to these matters may change in the near term.

Technical accounting observation:  This comment discloses there is a ‘reasonably possible’ chance that the recorded liability of zero could change by a material amount in the near term.  Obviously the results of the hearing, which had not been scheduled then, will provide a better idea of the likelihood and amount of the contingent liability.

On to the fifth paragraph.

State charity regulators in Minnesota and South Carolina have requested information from the Organization in a prior year, however, to date, no additional information has been requested and no action has been taken against the Organization, nor has the Organization been notified that any such action is imminent.

New information for me in that discussion is the California AG is seeking reimbursement of costs in the amount of $775K.

Also news to me is AGs in Minnesota and South Carolina are looking at FftP.

Information that would be interesting to know is when was the information requested, what was the focus of the requests, is their interest the same as California and Michigan or are the new inquiries pursuing different aspects of the GIK issue. These cases take a long time to develop, so it would be interesting to know how long the Minnesota and South Carolina AGs have been working on the issues compared to California and Michigan.

While such information would be helpful to know, neither of the AGs will say a word since these are open investigations and FftP is not obligated to discuss such subtle details in the financials because they are obviously not material.

In terms of resolving the uncertainty with the Michigan AG, FftP settled for $300K instead of the claimed $500K.

(Editorial comment follows:  If you are an auditor, please read the disclosures again after you pick your jaw up off the floor. Consider “unable to determine the probability” of resolution to a ~$1.9M contingent liability to California AG in light of FAS 5, which means likelihood is more than remote {yeah, yeah, I know FAS 5 isn’t the proper reference}. Ponder the range of combinations and permutations, such as the amount may be indeterminate and likelihood probable, thus only disclosure.  Or reasonable estimate of big number exists but likelihood only reasonably possible. Or likelihood has wide probability ranging from reasonably possible to probable.)

(More editorial comment:  Consider that as of the available to issue date of 4/26/18 there were settlement negotiations underway with Michigan AG, there was an offer to settle on the table with a deadline of the next day, and there is no accrual. Consider whether a settlement offer on the table might be the low-end of a range as discussed in ASC 450-20-25-5 {How ’bout that? I can look up ASC citations.})

I won’t seek comment from FftP because doing so would invite them to reveal confidential management assessments, or show their overall defense strategy, or let slip their plans for the appeal hearing, or some combination of the above.

FftP has the following undated statements posted on their website:

For background, the previous 2016 financial statements, which were available for issue on March 31, 2017 discloses the existence of the California AG’s inquiry as follows in Note 9:

On April 4, 2016, management received notification from the Attorney General’s Office of the State of California that the Organization had been selected for a correspondence audit. Pursuant to statutes in the State of California, the Attorney General has a duty to supervise charitable organizations that solicit donations from residents of, and do business in California. Although the purpose of the correspondence audit has not been clearly expressed to the Organization, the Organization has complied with all informational requests to date. While the ultimate outcome of this audit is not presently determinable, management believes that the resolution of this matter will not have a material adverse effect on the financial position or results of operations of the Organization.

Of note is this shows the AG has been working on this since before April 2016, since that is when they officially opened a “correspondence audit.”

Other posts in this series:

  • Part1  – Executive summary and comments on CMMB financials
  • Part 3 – Comments on MAP financials

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