Nonprofit update

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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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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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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