To family and friends of those who did not return, I humbly say:
My deepest condolences on your loss.
From someone who appreciates the price paid for the freedom I cherish everyday, please accept my thank you on behalf of your loved one who paid the price that my family and I can live free.
“Thank you” is so little, but it is all I have to give you.
Update: The Senate rules committee assigned the bill to the Judiciary committee a few days ago, 5/22/19.
The Assembly Committee on Privacy and Consumer Protection prepared a seven page analysis of AB 1181. The proposed bill, which has since passed the Assembly, would change accounting for GIK when the donor says the donated materials may only be distributed overseas.
Financial reports filed with the California Attorney General and solicitations to citizens of California would have to comply with the new accounting.
The following will be a loooong read, but the analysis by the committee is helpful for understanding the bill. There is good background in the discussion.
I will quote the analysis and provide some comments along the way. I quote the material without permission because it is a public document.
Highlights include the AG describing a successful enforcement action in which a charity turned a $225,000 purchase of meds into a $34,900,000 donation. Also, a representative of the California Society of CPAs makes an invalid argument against the bill.
From the committee analysis:
2) Author’s statement: According to the author, “AB 1181 addresses reported practices by some charities that grossly inflate the value of their publicly reported revenue and program expense, especially with respect to in-kind donations of pharmaceutical drugs. Overvaluation of the gifts-in-kind leads to an inflated total revenue for the charity which makes the charity appear more successful and efficient to the public and potential donors. An inflated revenue, in turn, can serve as a basis to hide excessive fundraising and administrative costs because these expenses would now appear smaller in comparison to the inflated total revenue. Inflated reports may also increase the charity’s ranking by charity watchdogs. This type of accounting practice is manipulative, misleading, and inconsistent with state law that safeguards transparency, fair reporting, and ensure a level playing field for honest charities that report accurate data to the Attorney General’s Registry of Charitable Trusts.”
At an overall level, the statement above provides a survey of the regulator’s and author’s concern regarding overvaluation of GIKs.
In particular, notice the last comment saying charities without large volumes of donated materials are at a disadvantage when appealing for donations from consumers.
Back to the analysis:
3) Addresses longstanding concerns with overvaluation of gift-in-kind donations: Under California law, the AG oversees registered charities to ensure that funds received are properly managed and devoted to charitable programs. The office derives its authority from the Charitable Purposes Act, which was originally enacted in 1959. This law generally requires every person or entity that holds or solicits property for charitable purposes in California to file specified documents and information, including annual financial statements, with the AG. These reports are in turn used by the AG to investigate and litigate cases of charity fraud and mismanagement by trustees and directors of charities. This bill seeks to address longstanding concerns with charities overvaluing gift-in-kind donations, a type of charitable donation where goods and services are given instead of cash to buy needed goods or services.
As far back as 2012, Forbes reported on a multi-state effort to crack down on nonprofits who greatly exaggerate the value of donated goods to make themselves look more successful than they actually are.
“In theory, there’s nothing wrong with gift-in-kind itself. A donation to a worthy charity is a donation to a worthy charity. The problem comes largely with the valuation. Cash is easily valued at, well, the amount of cash. But freed of the precision that cash provides, some charities value donated goods at many times the market price. The overvaluation makes a charity seem larger and more popular than it is, and also increases–artificially–financial efficiency ratios that many donors look at.” (Barrett, Charity Regulators (Finally) Eye Overvaluation Of Donated Goods, Forbes (Nov. 8, 2012).)
There has not been much visible discussion of California Assembly Bill #1181 (AB 1181). Here are the notable items I’ve seen.
Mark Hrywna reported on May 14, 2019 that the Bill to Recalculate GIK Value Advances In California. That is the only detailed article I’ve seen on the bill.
ECFA provides reaction from FASB and ECFA: California Bill Would Impose New Burdens on Nonprofits and Undermine National Accounting Standards.
Looks like the time to clean up the GIK valuation issue might be gone.
After reading about California AB 1181, I will guess you rather strongly dislike the proposed legislation that is rapidly making its way through the legislature. You probably have some serious heartburn about the bill.
In recent years, there has been major enforcement effort by:
Previous post mentioned the Assembly of the California legislature has passed Assembly Bill No. 1181 (A.B. 1181) which, if passed by the Senate, would require charities to use overseas valuations for donated items which are restricted by donors for distribution overseas.
Paraphrase of proposed changes
The wording is simple enough that readers of this blog can figure it out for themselves. I will summarize the changes anyway.
There are three main changes.
Update – Mark Hrywna (@mhrywna) tweeted on 6/17/19 the Senate Judiciary committee has scheduled a hearing for A.B. 1181 on 7/9/19.
The Assembly of the California legislature has passed Assembly Bill No. 1181 (A.B. 1181) which, if passed by the Senate, would require charities to use overseas valuations for donated items which are restricted by donors for distribution overseas.
As discussed in a series of earlier posts, the Attorney General has lost the substantive issues on cease and desist orders against three charities in a hearing. The Administrative Law Judge in the case found the expert witnesses for the charities was more persuasive that the expert witness for the AG. Thus the ALJ indicate he will decide in favor of the charities’ interpretation of GAAP. I don’t think a written ruling has been issued yet.
Proposed changes in law
The current law with changes made by this legislation are as follows, with red strikeout showing the removed text and blue italic showing new text.
Previous post gave background on the 2017 and 2018 nonprofit audit risk alerts from the AICPA. The timing and contents of the 2018 alert were discussed. The small discussion of GIK in the 2017 risk alert was quoted.
This post continues with some comments on the 2018 edition and then a long quote from that document.
You might want to read the previous comments for background to this post. Also might want to get a fresh cup of coffee and maybe a snack. This will be a loooong post.
Not-for-Profit Entities Industry Developments – 2018 / Audit Risk Alert
The 2018 risk alert added extensive discussion of valuing GIK, with a particular focus on pharmaceuticals and even more so for those which have a donor imposed restriction on the use of asset.
Ponder for yourself how this discussion applies to an asset that is restricted for use by any party who gets subsequent possession of the asset at any point during the remainder of the asset’s life. Keep in mind, meds have to be destroyed at their expiration date.
Quite simply, for the meds under discussion the restriction on the asset lasts as long as the asset lasts, regardless of who has the asset.
Also ponder the materiality level of the valuation when my impression is the AG seems to be claiming there is something in the range of a 10:1 ratio of US prices to international prices. From the few examples provided by the AG in its complaint, I infer that ratio may apply to just about all donated GIK.
Think back to the days when millions of doses of mebendazole were being booked by so many charities. Back then the ratio of US to international prices for that med was something in the range of 350:1 or even 500:1. (If you don’t believe me, take the $10+ inferred US price per pill which was routinely used to recognize income and divide by 3 cents or 2 cents or less per pill offered by multiple vendors in the international market. One charity was reportedly recognizing revenue at $15+ per pill.)
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:
Update: This is a repost of an article on June 11, 2018. As I mentioned last summer, some newly added comments in this risk alert entered heavily into the decision by an Administrative Law Judge finding the charities complied with GAAP.
Some particular items of note for those who enjoy deep inside-baseball tidbits from the accounting world:
So, here are some on-point comments from last summer with a few minor updates:
The AICPA has released the 2018 edition of Not-for-Profit Entities Industry Developments.
If you are a CPA serving the not-for-profit community, you need to read this document each year. It provides a survey of the accounting and auditing issues affecting the nonprofit world.
If you are an auditor, there are several other risk alerts you ought to be reading every year.
If you are working for a nonprofit, these alerts would give you a good survey of accounting issues in general and the audit issues your CPA will be dealing with this year.
Valuation of Gifts in Kind
In resolving the Cease and Desist order against three charities, the Administrative Law Judge hearing the appeal cited paragraph .58 of the 2018 Audit Risk Alert as being directly on point. I perceive the comments in the 2018 risk alert were prepared in light of the AG’s case.
Paragraphs in the section containing .58 will be quoted for more context since that will likely be helpful for people reading all the way through this series of posts.
Introduction to this series of posts explained the Administrative Law Judge (ALJ) hearing the appeal of the California AG’s C&D order ruled in favor of the charities on the GAAP compliance issue.
The basis for his decision was that the charities’ expert witnesses were more persuasive than the government’s expert witness.
Another post illustrated why attorneys quibble so vigorously and described the remaining issue of whether the charitable solicitations by the charities are misleading.
Previous post explained where the case is now and the remaining issue of allegedly misleading solicitations.
2018 Audit Risk Alert
This discussion is new in the 2018 risk alert. Maybe I missed it, but word searches and browsing the 2012 and 2014 through 2017 risk alerts did not reveal more than a couple of brief mentions of GIK valuation with those comments not much deeper than identifying GIK as an issue.
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:
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, as mentioned yesterday, was that the charities’ expert witnesses were more persuasive than the government’s expert witness.
Are the charities’ appeals misleading?
The remaining issue in the case is whether the charitable solicitations were misleading to donors.
The state alleged that the financial statements did not comply with GAAP and as a separate matter that solicitations to donors were misleading.
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:
On December 11, 2018, the administrative law judge (ALJ) hearing the case by the California Attorney General against Food for the Poor (FftP), MAP International (MAP), and Catholic Medical Mission Board (CMMB) announced his preliminary determination.
The ALJ concluded that the state did not prove its claim that the financial statements of the three charities violated GAAP.
If you are planning to do something that our society says is a felony, or even thinking about it, please don’t.
Please change your plans. You won’t like the result.
If you are still pondering something that our society says is a felony, you might want to avoid using electronic devices that record your planning. Definitely don’t use your phone in commission of the actual crime.
Here are a few examples of what not to do, for amusement of people who are inclined to read my blog. People likely to go ahead with felonious plans probably are not in my audience.
Tip #1
Don’t take along your location recording fitness device while conducting reconnaissance to plan an assassination and definitely don’t take it along for the ‘hit’: Runners World -1/17/19 – This Runner is a Hitman. His GPS Watch Tied Him to a Mob Boss Murder.
A competitive distance runner who moon lighted as a contract hit man took along his fitbit watch as he conducted recon and planning runs for two different assassinations. Also wore it for one of the actual hits. Police looked at the recorded location information on the watch which showed him making recon runs and placed him at the scene of the hit.
Result: Life in prison.
Tip #2
Don’t conduct an Internet search with questions of whether your plans are illegal: Cleveland.com – 10/19/18 – Brooklyn Woman falsely accused Parma Heights police chief of rape, investigators say.