Recap of known state and federal interest in medical GIK

Superior court facade in downtown Los Angeles, California. Image courtesy of Adobe Stock.

There are a number of state and federal actions visible for financial reporting by charities. Focus of the efforts currently is valuation of GIK and the impact of those valuations on fund raising appeals. Perhaps a recap of those efforts will provide some helpful context to the charity community.

Update: End of this post describes the change in accounting over the last seven years in terms of how to value meds that legally may not be distributed in the U.S.  Hint: a 180 degree change.

Today is the 9th day of out of 15 days scheduled for hearings on the California AG’s cease and desist order (C&DO) for MAP International (MAP), Food for the Poor (FftP), and Catholic Medical Mission Board (CMMB).

Here is the list of publicly visible Attorneys General who are focusing on financial statements of the large medical GIK charities:

California:

MAP, FftP, and CMMB – AG filed an amended C&DO against each of the three charities on 3/12/18, alleging that donated medicines were materially overstated, thus misrepresenting their financial statements when soliciting donations from California citizens.

All three charities appealed. Due to the overlap of allegations and issues, all three cases were consolidated. The major accounting issue of compliance with GAAP and all other issues were bifurcated (how cool to use that nifty word again!).

Hearings on GAAP accounting are underway at this moment. After the GAAP compliance issue is resolved, the other issues will be addressed.

Michigan:

FftP AG requested documents in March 2017 and again in June ‘17. AG issued proposed C&DO on 12/19/17, proposing a $500K penalty. AG alleged the fund raising appeals were misleading because the program service percentage of all expenses was presented as the program service percentage for cash contributions.

AG also alleged improper joint cost allocation of fund raising speakers. The C&DO shreds the FftP accounting for joint costs. Hint: Any other AGs that want to disassemble the joint cost accounting approach of FftP or any other charity that is aggressively allocating fund raising can use the Michigan C&DO order as a roadmap. Hint: Charities that want to push hard on joint cost allocation and their auditors need to realize AGs can read and apply the accounting rules.

Part of the C&DO that ought to draw everyone’s attention is a comment that the Michigan AG is not addressing what they think is overvaluation of the GIK since the California AG is addressing that issue. This means the Michigan and California AG have divvied up the enforcement workload. This forces the question: what other slices of the enforcement work have been picked up by other AGs?

On about 10/1/18, the allegations were resolved by a $300K payment from FftP, of which $50k of donor funds are used to reimburse the AG for investigative costs and $250K goes to two different feeding organizations in the state.

FftP agreed to revise the challenged fund raising material. Near the end of that statement is this comment:

Food For The Poor has agreed to coordinate with the Michigan Attorney General regarding other solicitation materials.

That means the AG will be reviewing other appeals and coordinating on changes. Long ago when I worked in a bank and audited banks earlier, I think those types of understandings were called letter of agreement. When I read about the U.S. Department of Justice resolving a federal case, such things are called consent decrees. If I’m reading between the lines correctly, it sounds like the Michigan AG has an ongoing enforcement action in place.

Minnesota:

Fftp:  AG has requested information in “a prior year” according to the FftP 12/31/17 financials. That means the AG requested info in calendar year 2016. FftP asserts they do not have indications of the status of the investigation. That hints to me the status is anywhere from they have dropped the investigation up to a C&DO is being drafted.

South Carolina:

Fftp:  Same disclosure in the 12/31/17 financials as for Minnesota. That means the info was requested in calendar year 2016. No indications of the status of the investigation. Like with Minnesota, I’ll guess that means anything from having dropped the investigation up to drafting a a C&DO.

IRS

Food for the Hungry: Okay, the IRS isn’t an AG, but they did pursue a major case against Food for the Hungry alleging overvaluation of medicines, particularly mebendezole. A range of other issues were raised.

Allegations were resolved, according to the charity, without revising the previously filed 990 and without paying a penalty.  The CFO told me the charity would change its accounting for donated meds.

My summary of the issue, posted 6/3/14:

In one sentence (as I understand the picture), the primary issue under audit was whether it was appropriate to value 500 mg mebendazole (which cannot legally be sold in the U.S.) at over $10 per pill when it can be purchased on the international market for one or two cents per pill. Two related issues were variance power and whether amounts paid in relation to a shipment of meds were a handling fee or a purchase price.

Change in accounting rules

If you enjoy irony, consider the shift in the hard-fought position, which is that 500mg mebendazole pills which are not legal for distribution in the US should be valued at US prices. Check out the current position, which is seen in the following comment from the current AICPA risk alert, Not-for-Profit Entities Industry Developments – 2018, which I will quote:

GIK use is often subject to donor restrictions and sometimes legal restrictions. An NFP needs to be thorough in understanding which restrictions are characteristics of the donated assets (and, thus, are restrictions that affect valuation) and which are donor-imposed use restrictions (which are entity restrictions that affect classification of net assets but don’t affect measurements of fair value). For example, when pharmaceuticals are sourced in foreign countries (and, thus, unable to be sold in the United States because the pharmaceuticals do not meet U.S. Food and Drug Administration standards), it is a best practice to assume a rebuttable presumption that international market prices should be used to determine fair value. The inability of the pharmaceutical to be sold in the U.S. marketplace is an asset characteristic to be considered in valuing the GIK. However, a donor-imposed restriction to use the pharmaceutical in Africa is a donor-imposed use restriction, which affects the classification of the contribution revenue but not the valuation of the GIK.

What was standard practice worth defending at the cost of nearly a half million dollars seven years ago is now gone.

The ‘best practice’ accounting is now the exact opposite, specifically being “…to assume a rebuttable presumption that international market prices should be used to determine fair value..” for such medicines. That is a 180 degree change.

Notice that paragraph restates the currently hard-fought position on valuing GIK in the actions brought by the California AG.

I wonder what the AICPA’s industry risk alert will be saying seven years from now.

Cancer charities

This post won’t go into the combined effort of 50 AGs taking action against four cancer charities. Only item I’ll mention is that if all 50 AGs are sufficiently upset about something to take combined action, there is something seriously wrong. Perhaps the charity community ought to ponder what it might be.

Another ponderable question to ponder:  What would make several state AG’s so irritated that they split up enforcement actions, with different states taking one slice of the whole?  Is there some deep issue that ought to be addressed?

Since I’m pondering, perhaps we could all ponder the visible issues identified by Michigan and California AGs. Could those issues apply to other charities?

Other states?

Again, that comment by the Michigan AG makes me wonder what other cases are being developed. I’m not aware of any hints in anything visible on-line about any other cases, or even any interest.

Anyone out there willing to share anything they have heard? Is there anything in the wind?

Update: Full disclosure – Forgot to add a comment. Long time ago, before I started my own firm, I worked for Capin Crouse in their California office. They are the auditor for MAP International and Food for the Hungry. They also prepare the 990 for Food for the Poor. If memory serves correctly, MAP was an audit client the last few years I was with the firm.  I think I charged a small number of hours to the Food for the Hungry audit for one or two years. I am currently a teeny tiny, little bitty competitor to the firms auditing these charities.

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