Committee analysis of California AB 1181

May 24, 2019, 7:41 am

Image courtesy of Adobe Stock.

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).)

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Other discussion of A.B. 1181, which would change accounting for GIK limited for distribution outside U.S.

May 22, 2019, 7:52 am

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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.

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Has time run out on cleaning up GIK valuation?

May 21, 2019, 4:30 am

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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:

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Legislative effort in California to change accounting for Gifts in Kind – part 2

May 20, 2019, 1:05 pm

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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.

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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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Recap of known state and federal interest in medical GIK

December 7, 2018, 9:29 am

Superior court facade in downtown Los Angeles, California. Image courtesy of Adobe Stock.

There are a number of state and federal actions visible for financial reporting by charities. Focus of the efforts currently is valuation of GIK and the impact of those valuations on fund raising appeals. Perhaps a recap of those efforts will provide some helpful context to the charity community.

Update: End of this post describes the change in accounting over the last seven years in terms of how to value meds that legally may not be distributed in the U.S.  Hint: a 180 degree change.

Today is the 9th day of out of 15 days scheduled for hearings on the California AG’s cease and desist order (C&DO) for MAP International (MAP), Food for the Poor (FftP), and Catholic Medical Mission Board (CMMB).

Here is the list of publicly visible Attorneys General who are focusing on financial statements of the large medical GIK charities:

California:

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Filings to seek depositions in the California AG’s cease and desist orders regarding three charities

December 4, 2018, 9:15 am

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The battle over the AG’s cease and desist order is in the appeal stage. Hearings are in day 6 out of 15 scheduled days.

The appeal is taking place in the state Office of Administrative Hearings (OAH). An Administrative Law Judge (ALJ) is overseeing the appeal.

This is the second in a series of posts describing some of the filings in the public record regarding the enforcement action and the appeals by the charities.

I have one stray follow-up comment to my previous post and then will dive into the filings about obtaining depositions from people living outside the state. Those individuals are not subject to an order to appear in person before the OAH.

Might want to get a fresh cup of coffee. This will be a long read. If you are at all interested in this case, you will find lots of interesting background info here.

Oh, everything I mention here is based on public documents available from the OAH.

Follow-up on Pro Hac Vice – FftP filed with OAH to get one of their attorneys granted Pro Hac Vice permission to practice in the state. This attorney is the lead litigator for the law firm on non-profit issues. Of note is the motion says it is unopposed by the AG. The OAH ruled they do not have authority to grant Pro Hac Vice. I don’t fully understand the reasoning, but I think it is essentially that the state bar or a court grants such status and the OAH is neither the state bar nor a trial court that can grant the permission. So, another motion, running 60 pages in length, was filed with the Superior Court of the county of Los Angeles. That court agreed it had authority and granted the attorney Pro Hac Vice status.

The docket shows a notice filed by MAP regarding Pro Hac Vice. I didn’t read it and assume it was announcing the same results for their counsel. I didn’t see anything on the docket from CMMB.

Protocol for naming individuals mentioned in filings

As I started this series of posts, I pondered how to name the individuals that are mentioned.

Full name? Initials? First name and initial of last name? No name?

Here is my conclusion:

For only the expert witnesses, my posts will list the person’s full name. Those individuals want to be in the public eye and want to be known as an expert. It looks like they usually speak in public on a regular basis. Thus I am comfortable listing their full name.

For everyone else in the case, such as management and staff of the charities along with partners and staff of CPA firms, it is different. They did not sign up to be in the public spotlight, so I’ll skip their last names. My posts will list their first name and first initial of the last name. I’ll also list job title or job description along with their employer when pertinent. Those in the know already know who has been dragged into the case.

Obtaining permission to obtain depositions

The AG wanted to depose a number of people who reside outside California but cannot be compelled to attend a hearing by the OAH. Thus the process the AG had to follow is request the ALJ to approve taking depositions.  The charities can file objections, which they did. (Charities unsuccessfully claimed these constitute discovery, which is not allowed under OAH regulations.). After addressing objections, the ALJ then issues orders allowing certain people to be deposed. The AG then goes to the Superior Court to request an enforceable order for those individuals to be deposed.

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