Food for the Hungry

Recap of known state and federal interest in medical GIK

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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Jim Ulvog

What it costs to deal with a major IRS audit. Case study from Food for the Hungry.

The IRS took serious exception to the methodology used by Food for the Hungry in preparing its tax return for the fiscal year ending September 30, 2008. The IRS audit of that 990 ran for years.

On March 24, 2014, the ministry announced the IRS closed their audit. The ministry says it did not have to file an amended return but did agree to change the way that it was accounting for gifts in kind.

A summary of the issues as I described them on 6/3/14:

  • In one sentence (as I understand the picture), the primary issue under audit was whether it was appropriate to value 500 mg mebendazole (which cannot legally be sold in the U.S.) at over $10 per pill when it can be purchased on the international market for one or two cents per pill. Two related issues were variance power and whether amounts paid in relation to a shipment of meds were a handling fee or a purchase price.

Now that tax returns are available through the 2014 fiscal year, we can see enough 990s to develop a case study about how much it costs to respond to a major challenge from the IRS.

Why the big deal?

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Jim Ulvog

IRS closes audit of Food for the Hungry’s 2008 tax return

On March 24, 2014, Food for the Hungry issued this press release:

Food for the Hungry’s 2007 Tax Return Audit Resolved – IRS acknowledges that FH followed all laws and accounting standards

In the press release the CFO, Barry Gardner, provided the following comment:

“After an exhaustive review lasting 1,030 days, the IRS allowed the 2007 return to stand as originally filed,” said FH Chief Financial Officer Barry Gardner. “Contrary to erroneous press reports in 2012, no fine was ever levied or paid. While FH and the IRS have minor disagreements concerning certain transactions from that period, those transactions were deemed not to require revision of FH’s tax return.”

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Jim Ulvog

Update to case study of legal and accounting costs during a major multi-year IRS audit

Update: The IRS has closed the audit.

The 2013 990 tax return and audited financial statements for Food for the Hungry (FH) are hot off the press and available at their website.

I previously discussed the costs incurred by Food for the Hungry to address their audit from the IRS. See previous post: Case study of legal and accounting costs during major IRS audit.

I am looking at that situation because this audit is of interest to the wider non-profit community and it is also a case study of the costs involved in a major dispute.

Try to stay out of court

Here are two posts on the whole idea of avoiding litigation:

Update of costs

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Jim Ulvog

Case study of legal and accounting costs during major IRS audit

Update 2/19, 6 p.m. – Earlier today I received a reply from Food for the Hungry sharing some background information with me.  They will look at this post in more detail and get back to me.  I will share with readers whatever additional information the organization wishes to share.

Update:  IRS audit has been resolved.

A charity going through a major dispute with the IRS has incurred a lot of costs dealing with an audit.

After seeing two sets of financial statements and 990s that were restated last fall (yes, yes, I’m a little slow on the uptake), I thought about checking to see if the Food for the Hungry financials have been restated. Checked the New York AG web site and didn’t see any revisions.

I would like to use the Food for the Hungry financial statements as a case study of the costs incurred from getting involved in a tax or legal dispute.

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Jim Ulvog

Food for the Hungry financial statements and 990 are available for 2012

The audited financials are available on the finance page of their website here. Their 990 is not yet available on their website but is available at the North Carolina Secretary of State’s website here.

I think the financials were posted in the last few days. The N.C. material has a date stamp of 5/17/13. 

Just a few brief tidbits from the reports. (more…)

Jim Ulvog

Food for the Hungry adjusts 990 amounts for valuation of GIK

Food for the Hungry has prepared pro forma revisions to its 990s for 2007, 2008, and 2009. They are following the suggestion of Charity Navigators to revise the 990 amounts to reflect what would have been reported if the valuations used in 2010 had been applied in prior years. Previous post discussed that briefly.

You can find the revised amounts at their website by clicking the “about us” tab and then clicking the “Finances” tab.

At the bottom of the page you can find the downloadable audit reports and 990s for the last three years. Under the “Charity navigator exhibits” heading you can find an attestation letter from the audit committee here and the restated pro forma amounts for 2005 through 2009 here.  The letter is in PDF format while the pro forma amounts are in an Excel spreadsheet.

I have not had time to analyze the numbers, let alone ponder the implications. Just wanted to get this information out, since it is very fresh. The letter from the audit committee chair is dated August 22.

Here is the total revenue amount, as reported on the 990 and as recalculated on a pro forma basis. The ’07, ’08, and ’09 amounts are from the template. I pulled the ’10 amounts from the tax return. The amount of revision is calculated along with the changed amount as a percentage of reported revenue. (more…)

Jim Ulvog

There is more to the IRS audit report on Food for the Hungry than is yet visible

CharityWatch has an article discussing the IRS audit report on Food for the Hungry – – View Through the Looking Glass.

One sentence background – the IRS claims that Food for the Hungry substantially overstated the valuation of donated medicine in their 2008 tax return.

I’ve mentioned the report here and here.  I’ve been talking about the valuation of deworming meds, especially mebendazole, for several months.

The CharityWatch discussion provides a bit more information from the report that has been discussed publicly. It looks to me like there is more to be revealed.

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Jim Ulvog

Time to talk about GIK issues again

In the midst of a discussion of GIK valuation issues in December and January that I thought was taking place within the nonprofit community, news surfaced that the IRS had finished an audit which identified major concerns about the same issue.  I discussed that here and here.

I’ve held off on more discussion to see how many more shoes were going to drop.  Haven’t been too many – the Better Business Bureau and Charity Navigator are paying attention.

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Jim Ulvog

Valuation of deworming gets more complicated – the IRS gets involved

It’s not just two big-time reporters and this teeny-tiny blog looking at the mebendazole issue anymore. 

It is now obvious that the IRS has been paying attention for quite some time.  On Monday their involvement hit the papers.

Two articles appeared:

William P. Barrett, from Forbes magazine, posted  IRS Audit: Big Charity Filed Misleading Tax Return

Caroline Preston, of The Chronicle of Philanthropy posted IRS Levies Fine on Food for the Hungry Over Drug Valuations.

If you have any interest in the issue of valuing GIK meds, you will want to read both articles.

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Jim Ulvog

Impact on GIK values form change in accounting rules – Part 4 – A few final observations

Previously I’ve discussed the impact of new accounting rules on valuing of deworming medicine.  Have been looking at Feed the Children financial statements to quantify the impact.

I am not picking on Feed the Children.

I’m using their 2010 financial statements because they have the best disclosures in their financial statements that I’ve seen for the impact, plus there is public information on what per-pill valuation amounts they have been using.  It is to their credit that they have this amount of background available in their financial statements.

It is my guess, just a guess, that the same underlying valuation issues and impact on supporting services ratio that I have described previously here and here, would also be present in the financial information for other organizations that have large volumes of deworming medicine.  If I can find good info, I’ll do some calculations on other sets of financials.

I have a few more observations and then one more set of calculations.

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Jim Ulvog

Impact on GIK values from change in accounting rules – part 2

Previous post here discussed the impact of changes in valuation of GIK caused by new accounting.  I already discussed World Vision’s financials.  Next I will look at Feed the Children’s financials.

The beginning point of my discussion was a Forbes article, by William P. Barrett: Donated Pills Make Some Charities Look Too Good on Paper.  This series of posts started here.  I hope my observations from a CPA’s perspective will contribute to this growing discussion.

After looking at World Vision’s financials, I looked at the financial statements of several other NPOs trying to figure out the impact of FAS 157 and especially the change in valuation of deworming medicine.

Mr. Barrett has accumulated some good numbers.  I looked at publicly available audited financial statements and 990s available from GuideStar.  I could not get a clear understanding by combining information from his published report with public data to let me get a clear understanding.  Just not quite enough data there to work with.

Then I looked at the Feed the Children website. Kudos to them for making their 2010 financial statements available online, which you can find here.

Wow.  Found some superb information in the footnotes.  Check out this comment in note 2 on page 11, which I will quote at length:

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Jim Ulvog

Impact of changing rules for determining fair value (SFAS 157) on GIK of NPOs

Wow. When I started blogging about GIK valuations, I knew there was a major issue, but didn’t quite grasp how big it really is.

The beginning point of my discussion was a Forbes article, by William P. Barrett: Donated Pills Make Some Charities Look Too Good on Paper. In this post I will look at the impact of a change in accounting rules on the valuation of GIKs.

Additional background

Several articles by Caroline Preston in The Chronicle of Philanthropy outline the issues.  One deworming medicine, Mebendazole, seems to be the biggest issue. In her article Aid Charities’ Accounting Practices Draw Criticism, she quantifies the significance of that one med: (more…)

Jim Ulvog