Preliminary ruling in favor of charities for the California AG’s cease and desist order for GIK valuation – part 4

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Introduction to this series of posts 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.

The basis for his decision was that the charities’ expert witnesses were more persuasive than the government’s expert witness.

Yesterday’s post illustrated why attorneys quibble so vigorously and described the remaining issue of whether the charitable solicitations by the charities are misleading.

Today’s post mentions where the case is now and the remaining issue of allegedly misleading solicitations.

Is GAAP the real world?

The ALJ discusses his reasoning for continuing the hearing to address the allegedly mislead appeals, raising the entertaining question of whether this separate world with its rarefied atmosphere containing its own set of exquisitely detailed rules we call GAAP has an overlap with the real world where actual people actually reside and lead actual lives.

Additional testimony and a separate decision will resolve that issue for this case.

The ALJ’s comments:

Well, there are considerable assumptions and appears to be abstraction in GAAP as to the valuations in this case, and those are then carried over to these solicitations that are based in part on that.· And I’m not in a position to determine at this point, you know, the issue of whether those solicitations are misleading when they’re built on what could be construed to the general public as a number of assumptions that don’t reflect the real world.· I mean, it’s GAAP — it’s the GAAP world, but is the GAAP world the same as the real world?· I can’t say that I know that at this point. So I want to hear all the parties’ evidence on that issue and Complainant’s proposed, you know, remedies here and take those under — take those matters under submission for deliberation. (page 1916)

So although the charities’ financials comply with GAAP, according to their expert witnesses, we will later find out “is the GAAP world the same as the real world?

The next issue simplified

Let me paint a simple picture of the remaining issue in the case .

I will use dollars, but you can see the illustration could easily be converted to percentages.

Let’s assume a relief and development charity receives large volumes of GIK. Let’s assume the charity has income and expense which are equal and every dollar of GIK was distributed in the year.

Assume this charity generates $70 of its revenue from GIK and $30 from donations from individuals and foundations which means there is total income of $100.

Assume that of the total expenses in a year the program services are $90 and supporting services are $10 for total expenses of $100.  Included in that $90 of program expenses is the $70 of GIK which was recorded into income in the same year it was spent.

Now assume there are two statements made to donors in two different direct mail solicitations:

  • 90% of all revenue goes to program services
  • 90% of your donation goes to program services

To see the issue, ask yourself two questions:

  • Is there a difference between those two statements?
  • If so, is one of them misleading?

Where to from here?

If I understand the case and the process (which is an incredibly massive assumption with high probability of being wrong), the ALJ will issue a proposed ruling, which goes to the Attorney General. He can accept, modify, or reject the proposed ruling.

The issues of GAAP compliance and whether the solicitations are misleading have been bifurcated for purposes of hearing the appeal. (How fun to use that word again. In public.) Now that the first issue has been resolved, the ALJ has ruled the case may move to the second issue. Based on what I read in filings for the case, I understand (another huge and risky assumption) there will be another round of hearings scheduled to address whether the solicitations are misleading. My understanding is based on multiple comments in the filings last fall that the case was bifurcated, with the GAAP compliance issue addressed first with additional time in court if needed after that issue was resolved to deal with the charitable solicitations. The 14 days scheduled back in December were allocated for the GAAP compliance issue only.

A final ruling is expected sometime in 2019, according to MAP’s comments at Charity Navigator.

At Charity Navigator, FftP has posted a link to their comments. Their undated reply says the hearings ended on December 12, 2018, which is the next day after all the transcript I have read and described in this series of posts. The next step, according to the FftP reply, is for both sides to submit additional briefs on whether the solicitations are misleading. I do not know for sure, but think those filings will be followed by additional days in another hearing.

Next postQuote from, and discussion of, 2018 NFP Audit Risk Alert paragraph .58.

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