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.
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:
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.
There are a number of pieces of information of public interest in the most recent financial statements for the three charities who received cease and desist orders from the California Attorney General. The appeal hearings start in a week, on November 27, 2018.
Part 1 of this series provided background, an executive summary, and a short discussion of Catholic Medical Mission Board’s disclosed accounting policy. Part 2 discussed the Food for the Poor financials.
This post will discuss the MAP International financials. Might want to get a fresh cup of coffee since this is a long read because it quotes the accounting policy in 2017 and 2016 along with a transition comment from the 2014 financials.
Previous post discussed the 12/31/16 financials for FftP, 9/30/17 financials for CMMB, and 9/30/16 financials for MAP. FftP and MAP have since issued their next year’s report; CMMB has not.
MAP International
The 9/30/16 financials were available for issue on February 2, 2017, about 4 months after year-end.
The audited financials for the year ending September 30, 2017 have a date on the audit report of September 27, 2018. That means the 9/30/17 financials were released, or available for issue, on 9/27/18, about twelve months after the fiscal year-end. Audit report is from the Lawrenceville, Georgia office of Capin Crouse.
This means the 2017 financials were prepared with knowledge of the AG’s allegations and known status of the case as of September 2018.
There are a number of pieces of information of public interest in the most recent financial statements for the three charities who received cease and desist orders from the California Attorney General. The appeal hearings start in about a week, on November 27, 2018.
Part 1 of this series provided background, an executive summary, and a short discussion of CMMB’s financials. This post discusses the Food for the Poor (FftP) financials. Part 3 will discuss the MAP financials.
Previous post discussed the 12/31/16 financials for FftP, 9/30/17 financials for CMMB, and 9/30/16 financials for MAP. FftP and MAP have since issued their next year’s report; CMMB has not.
Food for the Poor
Just checked on the most recent financial statements for the three charities who received cease and desist orders from the California Attorney General. The appeal hearings start in a week, on November 27, 2018.
Found a number of pieces of information in the financials that are of public interest to this developing story. Will point out some of the information now. Later on, as time allows, I’ll provide some commentary on the disclosures.
Previous post discussed the 12/31/16 financials for FftP, 9/30/17 financials for CMMB, and 9/30/16 financials for MAP. FftP and MAP have since issued their next year’s report; CMMB has not.
This discussion will be in three parts.
Executive Summary
All three charities disclose they use wholesale acquisition cost (WAC) to value donated medicine.
The Cease and Desist Order filed by the Michigan Attorney General on December 19, 2017 provides an analysis of the joint cost allocation methodology used by Food For the Poor. The Order can be found here.
FFP hires pastors from various denominations to make presentations at churches in the pastors’ denomination. FFP applies joint cost allocation accounting to classify a large portion of the speakers’ time as program services. The AG concluded the allocation methodology did not follow GAAP.
As mentioned previously, FFP settled the AG’s allegations by agreeing to pay the state $300,000 and revising its fundraising materials.
For general education of the nonprofit community, this post will quote the AG’s Cease and Desist Order at length on the joint cost allocation issue.
The authoritative explanation of what constitutes generally accepted accounting principles is found in FASB’s Accounting Standards Codification™ (ASC). I will add some citations from ASC to the AG’s Order. Will also add a few comments along the way.
A detailed look at the AG’s Order is valuable because it provides an in-depth analysis of a specific situation with a detailed comparison to authoritative GAAP.
You might want to get a fresh cup of coffee since this post is a long read, currently sitting at over 1,500 words. It is also quite technical.
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.)
See that fire siren at the top of the city’s fire hall?
The whistle is so loud my ears hurt.
The fire is valuation of donated medicine.
The town is the non-profit community.
It is time to rerun my fire alarm commentary.
My previous post provided a technical description of regulators’ concerns over accounting for donated medicine in the not-for-profit world. This post provides a word picture of the current situation.
Originally posted way back on November 9, 2012, here is my six-year-old discussion with some minor changes:
There is a fire burning in the nonprofit community. The fire is the issue of valuing donated pharmaceuticals. Primarily issue is about mebendazole. Albendazole and antibiotics are involved, but to a lesser degree. There are many alarm bells ringing.
The loudest fire alarm went off yesterday.
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.
For future reference, here is some select financial information on the charities that have been accused of overvaluing donated medicine.
In March 2018, the Attorney General of California filed cease and desist orders against three charities and a complaint against one.
The complaint was resolved with a stipulated judgment the same day the complaint was filed. Resolution? The National Cancer Coalition agreed to dissolve.
Listed in this post is some data from the most recent set of financial statements available at the charities’ web sites along with the 2015 info, which is the latest year cited in the cease-and-desist orders.
Since the cease-and-desist orders allege material misrepresentation in the audited financial statements, the auditor is also listed. Therefore this is an audit issue as well as an accounting issue.
I will make an educated guess that the 2017 financial statements for MAP and FffP will not be available until after the impact of the AG’s cease and desist action is assessed. Looking in from the outside, it seems to me like this issue would constitute a material subsequent event.
(update: headline modified)
The conflict over donated pharmaceuticals has heated up again.
The California Attorney General has filed cease and desist orders against three large charities who received between 89% and 98% of their revenue from medical GIK.
Update: Those percentages appear to include all GIK, not just medicines. For example, in 2015 Food for the Poor had $1,159M total income with $1,033M of donated goods, according to their audited financial statements. According to their 990 for 2015, of the total GIK $818.7M was drugs and medical supplies, $110.8M was clothing and household goods, with $103M of other GIK. For 2015 donated drugs and medical supplies are 70.6% of total support and revenue.
Update: For MAP in 2015, total drugs and medical supplies from Schedule M of the 990 ties to the donated inventory on the audited financial statements. The only other GIK listed on Schedule M are securities, which amount ties to the financial statements. For 2015, donated drugs and medical supplies are 97.8% of total revenue and support. Likewise for CMMB, the drugs and medical supplies listed on Schedule M ties to the line donated pharmaceuticals, equipment and supplies on the audited financial statements. For 2015, donated drugs and medical supplies are 90% of total support and revenue.
A complaint was filed against another charity, National Cancer Coalition, for overvaluation of GIK. The charity conceded the state’s claims and agreed to terminate the charity’s existence.
The three large charities are Food for the Poor, MAP International, and Catholic Medical Mission Board.
The cease and desist orders can be found at the AG’s web site:
Actions regarding the charity closing its doors:
This post will describe the complaint against NCC and the stipulated judgment.
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?
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.
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.