Preliminary ruling in favor of charities for the California AG’s cease and desist order for GIK valuation – part 2

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Introduction to this series of posts yesterday explained the Administrative Law Judge (ALJ) hearing the appeal of the California AG’s Cease and Desist order against three charities has decided in favor of the charities.

Preliminary ruling

The ALJ concluded that the testimony from the charities’ expert witnesses was more persuasive than that of the AG’s expert witness.  On that basis, the ALJ concluded the AG did not prove its case that the financial statements were in violation of GAAP.

I will summarize and quote some of the comments in the transcript and provide select quotes on the assumption many of my readers won’t download and read the transcript for the day. As a matter of my style choice, I will only use the first letter of the last name of witnesses and attorneys.

The basis for conclusion is whose arguments were more persuasive. The ALJ decided the charities had better expert witnesses.

He said:

My determination concerning that evidence is that Complainant has not established a GAAP violation by a preponderance of the evidence.

The testimony of Complainant’s expert CPA, Mr. S, does not have more convincing force than the evidence opposed to it; particularly, the testimony of Ms. M and Mr. R for Respondents is more persuasive on the GAAP valuation issues than Mr. S’ testimony, and it supports the determinations of the entities’ accountants who certify these financial statements that those statements complied with GAAP with respect to the valuations in all material respects — I believe was the determination.· Furthermore, the audit risk alert from 2018 of the AICPA, particularly section.56, is directly on point.· Though nonauthoritative on GAAP compliance, it shows an interpretation at odds with Mr. Stevens’ interpretation. (pages 1907-1908)

If I understand the Judge’s comments correctly, he does not get to look at GAAP to determine what is correct or incorrect, what is the best application of GAAP, or what is the appropriate valuation of medical GIK that cannot be distributed in the US. He is allowed, as I understand, only to look at what the experts said.

His exact comment on point:

As an administrative hearing officer, I don’t get to put on the accountant’s green eye shade either. Resolution of GAAP compliance as to the valuations at issue here is a battle of expert sources.· Respondents’ expert evidence about GAAP compliance with respect to the valuation was more persuasive than Complainant’s expert evidence on that issue. Therefore, the determination I’ve just described will be reflected in my proposed decision or decisions after the conclusion of evidence. (page 1908)

The thing here that unsettles me is that if the AG had a more persuasive expert or the charities had a less persuasive expert, the three charities would today be preparing to write some big checks, drafting restated financials, preparing amended 990s, hiring new auditors, and three CPA firms would be preparing for disciplinary actions by their state boards of accountancy. What prevents those outcomes is the thin line of whose expert witnesses had a better day on the stand.

Since the expert witnesses for the charities were more persuasive, the charities are cleared on the GAAP valuation issue.

Next post: The remaining issue of whether the charitable solicitations were misleading and why attorneys quibble over words.

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