After attending CalCPA’s Not-for-Profit Organization conference last week and talking to a number of my CPA colleagues, I have two thoughts. (Yeah, yeah, I obviously don’t think much if I only have two thoughts after a full day of great presentations.)
Let me offer two questions which provide a way to focus my thoughts:
- What is the primary concern of the regulators?
- What is the specific, focused target of California AB 1181?
I have long wanted to develop an extensive discussion on multiple accounting issues found in the California AG’s three cease and desist orders. I would also like to discuss the host of accounting and auditing issues that are explicit or implied in the January 2019 settlement and the May 2019 litigation. It would be fun for me and informative for readers of this blog to dive deep into the wide range of issues raised by the AG.
That discussion would have probably run something in the range of 6,000 or 10,000 words, or perhaps longer.
I have not had the time to go into that extensive detail and don’t anticipate having that much spare time in the near future.
Instead, I will describe in the next post what I perceive is the very precise, very specific target of AB 1181 from the California Assembly and in this post will describe my perception of the key concern for the regulators.
This shorter (?) discussion in two parts has passed 2,400 words.
If you need background, there are 35 posts on this blog with the tag California A.G. That is a subset of the 136 posts on this blog tagged with GIK valuation.
What is the primary concern of the regulators?
After having read through and commented on the three cease and desist orders and some of the follow-on filings, the agreement at the time by a 4th charity to dissolve, the settlement agreement in January 2019, the lawsuit filed against another charity in May 2019, the Michigan AG’s settlement with one of the recipients of the California AG’s C&D order, the IRS case against an Arizona charity a number of years ago, and the FTC & all state AG’s action against four charities a while back, I think I can see a general pattern that cuts across all the cases and ties them all together.
It is my perception, perhaps wrong, perhaps out of focus, yet still my perception that the regulatory community has one overriding concern.
Here it is, the central, primary, focused, core concern of the regulators:
Over-recognition of revenue from donated pharmaceuticals.
The range of claimed overstatements include:
- In the California AG’s C&D orders, six different shipments were cited with ratio of recorded value to AG’s claim of fair value ranging from six times overstated up to 184 times overstated.
- In the January settlement the AG claimed a $225K purchase (not donation, but a purchase by a controlled-by-other-means related party) was recorded at $34.9M, which is an alleged overstatement by a factor of 155 times.
- Several years ago, 500 mg doses of mebendazole (which cannot be legally distributed in the US) were booked by many charities at $10.54 while the meds could be purchased on the international market for a few pennies. Assume high at three cents per pill internationally and that is a possible overstatement by a factor of 350 times international prices. At two cents a pill, that is an overvaluation of around 500x.
- The existence assertion was raised as an issue in the IRS case, the January 2019 settlement, and the May 2019 litigation. For non-CPAs, this means the IRS and California AG questioned whether any revenue should have been recorded for particular transactions.
The magnitude involved can be seen for the three charities litigating the cease and desist orders from the California AG. For those three NPOs, gift-in-kind revenue was 86%, 94%, and 98% of total revenue.
The available filings by regulators have a common theme, showing there are a few different acquisition methods in play, but all having a financial impact in the same direction.
Filings by the California AG, Michigan AG, and FTC are public and available to anyone who wishes to hear the regulators explain their issues. Filter out the strong wording always found in such documents and you will hear their concerns in their own words. The IRS case is not public but it is my perception that lots of charities have a copy of the key document since it was reported to have been widely circulated. You can find the public documents with a few minutes research. If you don’t have a copy of the agent’s report, ask around – somebody you know can give you a copy.
For whatever my opinion may be worth, for those who have ears to hear the regulatory community has an extremely small number of major concerns which are easy to discern.
In auditor words, the existence and valuation assertions for gift-in-kind revenue constitute the core issue for all of the above mentioned enforcement actions.
Sitting here at my little desk in my little corner of the world, it seems to me that a wide range of accounting and reporting issues are secondary and would resolve themselves after the valuation issue is resolved.
What do you think?
Your comments are welcome. Stay professional. Remember that all comments are moderated.
Keep in mind I have sole authority for determining what constitutes a professional comment.
Next post: Upon which one single sentence of the accounting rules is AB 1181 focused?