Background on appeal of California AG’s C&D order for GIK valuation: Quotes from 2017 audit risk alert – part 6

Where does one look to find a value for those medicines? Image courtesy of Adobe Stock.

In previous posts discussing the California AG’s cease and desist order against three charities, which you can read by clicking this tag, I have mentioned the 2018 audit risk alert from the AICPA. The Administrative Law Judge (ALJ) explicitly cited paragraph .56 as support for the charities’ position.

As mentioned previously, the discussion in paragraphs .53 through .57 was new in 2018. I can find no similar comments, or even reference to the issues, in the several years before.

Likewise, the discussion in the section title Challenges in Auditing GIK, found in paragraphs .172 through .181, was new in 2018. I cannot find any comparable comments in the 2017 or 2016 audit risk alert after browsing those documents and running multiple word searches.

The NFP audit risk alert is routinely published in the summer, with references to economic statistics such as GDP change, unemployment, and interest rates from the prior year fourth quarter. That means each year’s NFP risk alert is written and put into final form somewhere between late January (when 4th quarter stats start becoming available) and about April/May (allowing for editing and production time).

Update: On day after publishing this post, saw a twitter comment pointing to a webcast on May 1, 2019:  Not-for-Profit Entities: 2019 Audit Risk Alert. The webcast will update auditors on issues affecting their 2019 audits. This will be based on the 2019 edition of the risk alert. The 2019 edition is not yet available on the AICPA’s web site. I don’t know what their production cycle is, but the upcoming webcast suggests to me the document is nearing completion. It isn’t done, but getting close.

Here is a question for you to ponder for yourself:  Was the discussion in paragraphs .53 through .57 and .172 through .181 added to the 2018 NFP audit risk alert in response to the AG’s C&D order?

Let me spell out some of the things visible to me:

  • The first amended Cease and Desist order from the AG is dated March 12, 2018. I don’t know the date of the original order. The information requests went out an unknown number of months earlier, perhaps a year or more.
  • The charities have known for a long time they are under investigation. Based on what was likely in the information requests, I’ll guess they figured out the AG’s issues rather early.
  • I have no insight on the details of AG’s C&D process, but can guess there were discussions between the AG and the three charities on multiple specific points before the orders were issued. The main reason I can guess about conversations in advance of the orders is it became public that a fourth charity agreed to dissolve itself at the same time as the C&D order was issued. That means there were a lot of conversations with that charity before the order was issued.
  • As just mentioned, I’m guessing the comments in the 2018 risk alert were finished sometime between January and around May, well after the charities knew the AG’s specific points and easily after reading the exact details in the C&D order as issued. I’ll further guess drafting of the comments could have started as early as late 2017 or even early 2017.
  • The comments in the 2018 risk alert are well matched to the AG’s position.

I have more questions to ponder but will save those for later.

This post will quote the 2017 and 2018 risk alerts under fair use for two reasons. First, so these audit risk alert comments will be visible in public. Second, to let you ponder whether the comments were added in response to the AG’s case and assess the possibility of conflict of interest.

AICPA’s audit risk alert: Not-for-Profit Entities Industry Developments — 2017

The visible discussion of gifts-in-kind in the 2017 risk alert is in the context of charity watchdogs evaluating audited financial statements, reporting the results, and even modifying the statement of activity amounts based on their criteria. These are new comments in 2017. The comments were not repeated in the 2018 risk alert, although there are a few brief mentions of donors, regulators, and those monitoring entities paying to GIK valuation within the other sections.

Select comments:

Charity Watchdogs Concerns With GAAP

.12 The two general types of charity watchdog agencies are accreditation organizations, which allow NFPs to become members if they adhere to certain industry standards, and charity rating agencies, which evaluate NFPs against criteria established by the agency. The latter collect vast amounts of governance and financial data on organizations and rank or rate an NFP against similar organizations.

.15 Some watchdog rating agencies adjust financial results reported on IRS Form 990 for their own evaluation purposes. Through online forums or newsletters, some watchdog agencies are taking a public position that contradicts established IRS practices. Such agencies purport to be remedying controversial accounting practices and promoting transparency.

.16 Charity watchdogs are most frequently adjusting IRS-basis financial information in two areas: joint costs and valuation of gifts-in-kind. For example, some watchdog agencies reallocate all joint costs reported as program expense by an NFP under IRS standards to fundraising expense. One watchdog reportedly does this when a charity is not sufficiently transparent with donors about its process for allocating joint costs to programs. Another has taken the position that most donors do not consider a charity’s joint solicitation activities to be equivalent to purely programmatic activities.

.17 Determining the fair value of in-kind goods and services is another controversial area because fair value is a more principles based standard. For example, one rating agency excludes the value of in-kind goods and services from financial results when applying its rating methodology. This particular watchdog’s objective is to provide donors a clear picture of how efficiently an NFP uses its cash donations.

That is the extent of the discussion of GIK I can find in the 2107 risk alert.

Next: Quotes from 2018 NFP audit risk alert.

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