What is the specific, focused target of California AB 1181?

June 13, 2019, 5:00 am

Image courtesy of Adobe Stock.

Update – Mark Hrywna (@mhrywna) tweeted on 6/17/19 the Senate Judiciary committee has scheduled a hearing on AB 1181 on 7/9/19.

After attending CalCPA’s Not-for-Profit Organization conference last week and talking to a small group of my CPA colleagues, I have two thoughts on regulatory attention currently focused on the valuation of donated medicine.  Let me provided two questions which will focus my comments:

  • What is the primary concern of the regulators?
  • What is the specific, focused target of California AB 1181?

Previous post discussed the first question.

As I mentioned in that post, I have long wanted to develop an extensive discussion on the main accounting issues found in the California AG’s three cease and desist orders along with several accounting issues raised in their January 2019 settlement and May 2019 litigation.

That full discussion would have ended up somewhere around 3 or 5 times longer than these two posts. I won’t have time in the foreseeable future to write such an extended discussion. This pair of posts, at over 2,600 words, will have to do.

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What is the primary, core concern of the AG community over charity financial statements?

June 10, 2019, 11:14 am

What, oh what could be the core issue for charity regulators in their recent enforcement efforts? Image courtesy of Adobe Stock.

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.

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California AG settlement with charity for valuation of GIK

June 3, 2019, 8:12 am

What is the proper valuation of a pallet of medicine purchased on the international market? Image of pharmaceutical warehouse courtesy of Adobe Stock.

Back on January 29, 2019, the California Attorney General announced a settlement with a charity for financial reporting which was misleading because of the valuation of donated pharmaceuticals.

Although the settlement is four months old and thus counts as ‘old news’, it is worth discussing as an indication of the level of concern the AG has for valuing GIK.

The AG’s press release: Attorney General Becerra Announces $410,000 Settlement with Giving Children Hope, After the Charity Engaged in a Misleading Reporting Scheme.

The settlement consists of $400,000 from the charity and $10,000 from four named individuals.

A page on the charity’s website comments on the settlement: Giving Children Hope’s Settlement Resolution.

The charity says its insurance company agreed to pay the $400,000. The charity asserts the penalty was “not paid from donated dollars of program funds.” That would be a technically true statement because the insurance company would have cut the check and not the charity.

The charity also said there were “no fines or penalties levied against” the charity. On one hand I suppose that is correct because an agreement to pay four hundred thousand dollars is not the same as a fine or penalty. I don’t think that’s quite correct for two reasons. First, the AG doesn’t collect voluntary contributions; the payment was made as settlement of civil charges. Second, insurance companies don’t write checks out of the generosity of their heart; they settle the liability of their insureds.

I think most people looking at the situation would agree the charity was hit with a $400,000 penalty.

Individual penalties

The press release says four individuals will also pay $10,000 in total. It is not clear from the press release whether this is a joint and several liability or each person will be billed individually for $2,500.

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Legislative effort in California to change accounting for Gifts in Kind – part 1

May 20, 2019, 5:00 am

Image courtesy of Adobe Stock.

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.

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Repost: 2018 nonprofit risk alert is available. New edition adds discussion on valuation of GIK as rebuttal to California AG.

March 29, 2019, 8:15 am

Image courtesy of Adobe Stock.

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: 

  • discussion of GIK, especially paragraph .53 was added this year,
  • discussion in paragraphs .53 and .176 are directly responsive to the AG’s argument,
  • there is an overlap of ARL staffing with the R&D sector & auditors of that sector, and
  • the hard-fought, everybody-does-it-so-that-makes-it-right, spend-$475K-to-fight-the-IRS position on mebendazole has changed from the previously no-good, can’t-rely-on-it, non-representational pricing guide from five years ago now being the AICPA recommended standard for pricing.

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

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2018 nonprofit risk alert is available. New edition adds discussion on valuation of GIK as rebuttal to California AG.

June 11, 2018, 8:38 am

Cover of 2018 NFP risk alert, used under fair use since I’m recommending you buy the document.

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

Of particular interest are new comments responsive to the challenge from the California AG over valuation of GIK. The 2017 and 2016 editions had minimal comments on GIK.

The 2018 edition has a new section, Gifts-in-Kind: Reporting Contributions of Nonfinancial Assets, in paragraphs .53 through .57, which describes the AICPA’s interpretation of GAAP.

Years after the mebendazole issue has faded away, the second bullet point of paragraph .56 says that when GIK is sourced outside the U.S. and is not approved for distribution in the U.S., the meds should be valued at international prices. (If you have been following this issue for years, you realize the concession made by that comment.)

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Some details in the appeals filed by 3 charities

April 30, 2018, 12:44 pm

Image courtesy of Adobe Stock

As mentioned previously, appeals have been filed by the three charities receiving cease & desist orders from the California A.G.

This discussion will highlight some comments in the appeals. Will have a few observation from an auditor perspective along the way. Might want to get a fresh cup of coffee before you dig in. This will be a long post.

Previous posts:

 

Catholic Medical Mission Board appeal

At seven pages, this appeal is a bit shorter than the others. The page count includes the proof of service and a cover sheet which is the page the AG provided to request an appeal.

In the appeal, CMMB denies all the factual allegations and conclusions of law (para 4). Specific assertions are listed for emphasis:

  • The AG is not properly interpreting GAAP.
  • Geographic restrictions on medicine do not make the US a prohibited market for valuation purposes.
  • Representations to California citizens are neither unfair nor deceptive.

In the appeal, CMMB requests:

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