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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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

Image courtesy of Adobe Stock.

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

Image courtesy of Adobe Stock.

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

Image courtesy of Adobe Stock.

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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Background on appeal of California AG’s C&D order for GIK valuation: Quotes from 2018 audit risk alert – part 7

April 4, 2019, 7:26 am

How do you value a pallet of those meds? Image courtesy of Adobe Stock.

Previous post gave background on the 2017 and 2018 nonprofit audit risk alerts from the AICPA. The timing and contents of the 2018 alert were discussed.  The small discussion of GIK in the 2017 risk alert was quoted.

This post continues with some comments on the 2018 edition and then a long quote from that document.

You might want to read the previous comments for background to this post. Also might want to get a fresh cup of coffee and maybe a snack. This will be a loooong post.

 

Not-for-Profit Entities Industry Developments – 2018 / Audit Risk Alert

The 2018 risk alert added extensive discussion of valuing GIK, with a particular focus on pharmaceuticals and even more so for those which have a donor imposed restriction on the use of asset.

Ponder for yourself how this discussion applies to an asset that is restricted for use by any party who gets subsequent possession of the asset at any point during the remainder of the asset’s life. Keep in mind, meds have to be destroyed at their expiration date.

Quite simply, for the meds under discussion the restriction on the asset lasts as long as the asset lasts, regardless of who has the asset.

Also ponder the materiality level of the valuation when my impression is the AG seems to be claiming there is something in the range of a 10:1 ratio of US prices to international prices. From the few examples provided by the AG in its complaint, I infer that ratio may apply to just about all donated GIK.

Think back to the days when millions of doses of mebendazole were being booked by so many charities.  Back then the ratio of US to international prices for that med was something in the range of 350:1 or even 500:1. (If you don’t believe me, take the $10+ inferred US price per pill which was routinely used to recognize income and divide by 3 cents or 2 cents or less per pill offered by multiple vendors in the international market. One charity was reportedly recognizing revenue at $15+ per pill.)

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