Auditing

California A.G. files cease & desist order against 3 large charities alleging donated medicine was overvalued

“The Evolution of Law; Bas Relief, Los Angeles Superior Court” by JoeInSouthernCA is licensed under CC BY-ND 2.0

As mentioned previously, the conflict over donated pharmaceuticals has heated up again. It seemed to have faded away over the last couple of years but has now gained renewed visibility.

The California Attorney General has filed cease and desist orders against three large, high-profile charities who received between 70% and 98% of their revenue from medical GIK.

A complaint was filed against another charity for overvaluation of GIK. That charity essentially conceded the accusations in a stipulated settlement, agreeing to terminate the charity’s existence. That action is discussed here.

The three large charities are Food for the Poor, Inc., MAP International, and Catholic Medical Mission Board, Inc.

The cease and desist orders can be found at the AG’s web site:

This is a long post, approaching 2,200 words. Might be worthwhile to get a fresh cup of coffee before diving in.

 

Background

This post will walk through a number of key comments in the cease and desist orders, which I’ll referred to as C&DO. Because the C&DO are roughly parallel to each other, I’ll walk through the MAP order and add comments on the CMMB and FftP order where it is helpful. The CMMB C&DO does not have the comments regarding state charitable filing requirements.

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Jim Ulvog

Free update on new and recent accounting rules from CCH

For a summary of the accounting rules released in 2017 and the most significant new rules from 2016, 2015, and 2014, check out A Closer Look: Discussion and Analysis of Current Accounting and Audit Issues.

CCH made this update available for free to people on their mailing list. I received permission from my editor at CCH to make it available on my blog.

Click here to download the 54 page newsletter. CCH does not  have a separate landing page for the document, so that link automatically downloads the newsletter. UPDATE:  If link didn’t work for you, please try again. I reloaded the link and it is working now.

 

For each of the accounting rules covered, the newsletter provides:

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Jim Ulvog

Various thoughts from continuing education classes this year, part 3. Not so good news on audit and peer review quality.

The road we CPAs need to be on, but not all of us are…
Image courtesy of Adobe Stock.

As I’ve mentioned here and here, I have reread my notes from several continuing education classes this year. Thought I would share a variety of stray ideas.

Probably need to note again that I have not gone back and read the original pronouncements supporting each idea and therefore I do not have a specific citation for you. (Reading three of the documents is the next step for  my writing project.)

I should probably throw in a disclaimer. All of the comments I’m mentioning were the opinion of the presenter, not the agency from whom the person was drawing a paycheck. That is why I’m not mentioning the names of the presenters, or even the CPE event. In addition, the rephrasing of their comments is my interpretation, not their words.

Here are some tidbits you might enjoy:

More interest in Financial Reporting Framework for Small- and Medium-sized Entities (FRF-SME)?

The FRF-SME framework is a non-GAAP alternative to GAAP. It is dramatically less complicated with the promise it will not be revised more often every three years.

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Jim Ulvog

Helpful comments from 2017 CalCPA Not-for-profit conference, part 1

Image courtesy of Adobe Stock.

Here are a few of the comments from the May 24, 2017 Not-for-profit conference presented by California Society of CPAs that I thought would be of interest to others in the nonprofit community. Since all comments are the opinion of the speaker, neither their names nor organizations will be mentioned. The ideas mentioned can stand or fall on their own.

This is the first of two posts. The next discussion will address changes in financial statement presentation outlined in ASU 2016-14. In this post: tax, revenue recognition, and single audit.

Tax update:

  • It might just be possible that filing a form 1023 or 1023-EZ is so easy that people can get exempt status for an organization without knowing the requirements to properly operate a charity and maintain exempt status. In examinations to follow-up after exempt status is approved, the IRS is finding a lot of charities are out of compliance.
  • One of several focuses of the IRS is filing of FBARs, those forms used to report overseas bank accounts. One ripple effect of chasing money laundering is the impact on charities who have overseas accounts. Even though there is minimal risk of those accounts being used for tax evasion the FBAR filing requirement still apply. As a reminder, the deadline for filing FBARs is now April 15 with a six-month extension available.

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Jim Ulvog

Initial reaction to alleged diversion of World Vision funds

Image courtesy of Adobe Stock.
How can you tell who is really behind the mask, and what is he doing inside your organization? Image courtesy of Adobe Stock.

Last week, the Israeli intelligence service accused a World Vision manager of diverting resources to Hamas. The allegation is he diverted about 60% of the annual funds flowing through the Gaza office, with the amount diverted allegedly around $7M a year.

Some initial reactions are surfacing from donors. Also, some context for magnitude of the alleged amount. Finally, some questions to ponder for leaders of charities and those of us who audit NPOs.

8/4 – World Vision – Statement on World Vision Staff Arrest – Full statement from World Vision. Doesn’t say a lot because they don’t yet know a lot. I’m sure there will be more comments as the situation develops.

8/5 – Reuters at Business Insider – Australia suspends World Vision funding over allegations its Gaza representative funneled millions to Hamas – The Australian government has provided about $4.4 million over the last three years to World Vision for use in helping people living in Gaza and West Bank. The aid has been suspended over the allegations.

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Jim Ulvog

How do you keep one person from diverting funds and causing a front-page fiasco for your charity? World Vision illustration.

Image courtesy of Adobe Stock.
Image courtesy of Adobe Stock.

How do you keep one person from creating a public relations fiasco or, even worse, damaging the reputation of your entire organization? How do you keep a manager from illegally diverting a huge amount of resources?

What controls and procedures do you have in place to prevent something like this in your organization?

Let’s start with a FBI agent who pled guilty to charges of passing sensitive and classified information to a Chinese government official and businesses in China.

8/1 – ABC News – FBI Employee Arrested for Allegedly Acting as Secret Chinese Agent – According to the story, we can drop the word ‘allegedly.’ This week he entered a guilty plea to one felony charge. The government claims he was gathering sensitive and classified material based on instructions from his handler.

He was born in China and was naturalized in 1985 at age 16.

So, the FBI with all its investigative powers and intentional counter-intelligence operations was not able to prevent this man from being an agent of the Chinese government.

So what chance does a nonprofit charity have of filtering out people who want to do bad stuff? That is something to consider as we grieve the following story.

This week the story broke that a manager of the Gaza office of World Vision allegedly diverted a lot of money to Hamas for use in terrorist activities. At this point the story consists of allegations, but allegations from the Israeli security service after a few weeks of interrogation are extremely serious.

8/4 – Hareetz – Top Official in Christian Aid Group Charged With Funneling Funds to Hamas – The security service, Shin Bet, arrested the director of the Gaza branch office on June 16. He was indicted Thursday.

Shin Bet accuses the manager of joining an armed wing of Hamas in 2004 and being sent to infiltrate a western aid organization a year later.

In 2005 he was hired by World Vision and in 2010 was promoted to director of the Gaza branch.

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Jim Ulvog

The overwhelming change you feel today is going to increase. Engage the change.

Image courtesy of DollarPhotoClub.com before they closed their doors.
Image courtesy of DollarPhotoClub.com before they closed their doors.

The massive volumes of change you see surrounding you everywhere you look isn’t going to stop. In fact the pace of change is going to increase.

Each of us have a choice. Either figure out how to cope with and embrace the change or ignore it.

The cost of ignoring massive change is that you and your organization will get left behind. That doesn’t just mean you will be a laggard as you continue doing next month what you did last year. Instead that means your organization will radically shrink and before you know it, will disappear.

The downsides are serious. There is an upside and it is exciting.

Four articles I’ve seen lately focus the mind. While these articles are written in either the accounting or church context, they also fully apply in the church and accounting context. They also apply to every individual and organization.

This article will be posted across all my blogs because it applies to all of them.

7/7 – Bill Sheridan at LinkedIn – Embrace change or resist it: Only one option is viable.

The odds are really high that tax preparation will be completely automated in the next two decades. Estimated odds are almost as high that both accounting and auditing will be fully automated.

Consider my business and my core tasks of auditing charities. There is a real possibility those types of audits could be heavily automated in 10 or 15 or 20 years. I am not old enough to bank on retiring before that massive change starts eating away the entire audit profession.

Automation will take over an increasing number of tasks. The world of tax, accounting, and audit will be affected. Mr. Sheridan explains the shelf life of education and experience we have is shrinking.

As the Maryland Association of CPAs routinely points out our learning needs to be greater than the rate of change; L>C is their formula.

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Jim Ulvog

Want some free CPE course material? Not for credit, but for learning? Included is some material I wrote.

Cover of course courtesy of CCH.
Cover of course courtesy of Wolters Kluwer/CCH.

CCH (Wolters Kluwer) makes the material for some of its courses available for no charge.

If you want CPE credit there is a fee for grading the exam and awarding credit. However, if your goal is learning the materials are available gratis.

As I write this post, the following materials available:

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Jim Ulvog

Ulvog CPA passes Peer Review inspection

Image courtesy of DollarPhotoClub.com
Image courtesy of DollarPhotoClub.com

I am pleased to report my firm passed peer review in 2015.

Peer review is a process CPAs go through to inspect their audit and review work. Experienced CPAs from another firm look at your quality control procedures and read through the workpapers for a selection of audit, review, and compilation engagements.

In the current system there are three grades from a peer review inspection:

  • Pass
  • Pass with deficiency
  • Fail

I am pleased to report I received a pass report, the highest level currently available. I have gone through peer reviews in 2015, 2012, 2009, 2006, and 2003. Each time I received the highest grade possible.

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Jim Ulvog

Today’s “overhead ratio” sparring match: Nonprofit Quarterly versus Nonprofit Quarterly.

Image courtesy of DollarPhotoClub.com
Image courtesy of DollarPhotoClub.com

For today’s lineup we have Claire Knowlton arguing charities should be funded for the full cost of their operations (including building cash reserves, additional reserves for new opportunities, and repaying debt) in order to remain healthy versus Ruth McCambridge and Alexis Buchanan body slamming Wounded Warrior Project because one line item on the 990 is more than what a couple of media reporters decided it should have been.

Let’s check out the NPQ versus NPQ match:

In this corner…

1/25 – Claire Knowlton at Nonprofit Quarterly – Why Funding Overhead Is Not the Real Issue: The Case to Cover Full Costs – In order to be able to continue delivering services to clients, charities need to be healthy enough that they can pay all their bills and have the ability to respond to opportunities.

Author suggests grants to charities should cover all of their costs, not just the immediate program under discussion in a proposal. Author introduces a new term, full cost, which is:

Day-to-day operating expenses + working capital + reserves + fixed asset additions + debt principal repayment = full costs

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Jim Ulvog

Increased discussion of Wounded Warrior Project financial statements

 

Let's do a few calculations. Image courtesy of DollarPhotoClub.com
Let’s do a few calculations before finishing this post. Image courtesy of DollarPhotoClub.com

Looks like the coverage of the Wounded Warrior Project financial statements has blossomed in the last few days. I will discuss that coverage and then discuss WWP’s public comments. Will throw in a reasonableness test of the conference expenses for no extra charge.

Rewriting the initial coverage

One of the things I have learned through blogging is that when a big story breaks there will be a few major articles covering the issue immediately. Over the next several hours many media outlets will repeat the initial coverage verbatim. I think this is done by buying republish rights from the major wire services or major newspapers.

The more fascinating thing I have learned is that over the next several hours there will be dozens of papers and wire outlets who rewrite the initial coverage. It will be done under the byline of their writer and with their copyright.

Having observed this multiple times and having read dozens of articles of follow-up, I have learned the rewrite jobs rarely bring in new information. They merely rephrase and reorganize the initial coverage, with a reference or two back to the initial article. If that was the only thing you read, you would have the impression the paper did their own original research.

I did a search on the net for coverage of WWP and noticed several dozen articles out on the same day which were nothing more than a rewrite of the initial Washington Post and CBS stories. Maybe it has always been that way and I’m only now catching on. I do find it amusing.

New coverage

Here is some coverage that goes beyond a mere rewrite:

1/28 – The Hill – Wounded Warrior charity pushes back against allegations of waste – Two of the major accusations by The Washington Post and CBS against WWP are spending $26M on conferences in total and spending $3M on a training conference in Denver. The overriding issue is essentially the same conversation about the functional expense allocation that has been in play for years.

WWP provided additional information.

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Jim Ulvog

Overhead ratios getting more attention. Wounded Warrior Project is again focus of discussion.

Working on overhead. Yeah, that's a poor joke. Photo courtesy of DollarPhotoClub.com
Working on overhead.  Photo courtesy of DollarPhotoClub.com. Yeah, I know that is a poor joke.

A running debate in the donor and nonprofit community is whether the ‘overhead ratio’ is a good tool to measure the effectiveness of a charity. There seems to be more discussion of the issue lately. Wounded Warrior Project is the focal point for recent discussion. A few articles of interest along with some background:

1/27 – New York Times – Wounded Warrior Project Spends Lavishly on Itself, Insiders Say – Tell me your thoughts on the ongoing conversations in the nonprofit community about overhead ratios and I will tell you whether you will think this article is a balanced critique or a hit piece.

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Jim Ulvog

“How to get ready for a financial audit”

Image courtesy of DollarPhotoClub.com
Image courtesy of DollarPhotoClub.com

The website XPastor discussed How to Get Ready for a Financial Audit. Figuring out how to get going on an audit for the first time is a challenge. Main points from a CPA who is now an executive pastor:

Hire an audit firm

This is a board responsibility. Staff helps but it needs to be driven by the board with the real decision made there.

Meet with the auditors before the audit

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Jim Ulvog

Who might want to look more closely at the four paragraph summary of valuation issues in the FTC complaint against four charities? 13

Federal Trade Commission Building in Washington, DC. - Picture courtesy of DollarPhotoClub.com
Federal Trade Commission Building in Washington, DC. – Picture courtesy of DollarPhotoClub.com

There are four paragraphs in the FTC complaint against four cancer charities that summarizes the issues raised by the FTC. These paragraphs cover the main issues about valuation of GIK that have been under discussion in the NPO world for several years now.

These issues do not just apply to the four named charities.

The issues are not limited to the secular cancer charities.

These issues actually apply to a large number of high visibility religious charities. The issues may have drop out of news coverage, but they have not gone away.  I hope those who have ears that are able to hear, will hear.

Who might want to take a second look at the FTC’s summary?

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Jim Ulvog

Details on FTC enforcement action against four cancer charities – 12

Federal Trade Commission Building in Washington, DC. - Picture courtesy of DollarPhotoClub.com
Federal Trade Commission Building in Washington, DC. – Picture courtesy of DollarPhotoClub.com

This is the twelfth in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

This is the fourth post on a series of paragraphs in the complaint addressing valuation of donated medicine.

The complaint can be found here. My posts in this series are visible using the FTC tag.

  1. By reporting these GIK transactions as contributed revenue and program expenses, at inflated values, Corporate Defendants represented themselves to be both larger and more efficient than they actually were. They obscured the high percentage of donated funds spent on, among other things, for-profit fundraisers, executive salaries, and employee perks, and concealed the very small amounts spent on the charitable purposes described to donors. As a result, the Forms 990 and other documents filed by Corporate Defendants with the IRS and state regulators, and made publicly available to consumers, were false and misleading.

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Jim Ulvog