GIK valuation

What are the legal costs to fight a major cease and desist order from the California Attorney General?

Attorneys talking to judge. Image courtesy of Adobe Stock.

It took a major amount of effort to oppose the cease and desist orders issued by the California Attorney General against three charities.

Various filings in the case and the one day of transcripts I’ve read indicate that each of the charities had a couple of highly experienced trial attorneys representing them.

Have you ever wondered what the tab runs for a major enforcement action? I do. When reading of massive cases against big banks I’ve been curious what the legal costs run.

Normally that information is invisible. Appropriately, there is no way to look inside private companies, massively huge public companies, and checkbooks of individual to see their legal bills.

With not-for-profit organizations, the situation is different. Charities are required to file a 990 with the IRS and send a copy to many state regulators. The majority of charities post the last several years of 990s on their website.

Part IX on page 10 of the 990 shows the detail of expenses. Line 11b discloses legal fees, line 11c shows accounting fees, and line 11g shows other professional fees not listed on one of the previous lines. Pull the 990s and you can see the disclosed information.

 

So, let’s take a look at the 990s for MAP International, Food for the Poor, and Catholic Medical Mission Board to see what their legal fees have been running.

For each of the charities, the legal fees for the last five years are pulled from the 990 and listed. You can visually see where the costs increased.  I will assume the large increases are related to the actions of the AGs from California and other states, with the California effort being the overwhelming majority of the costs.

An average of the earliest 3 years is calculated to provide a baseline, then compared to the legal costs for 2017 and 2018.  The increase over baseline is assumed to be an approximation for the costs to address the CD&O.

I have listed my calculations so you may check them. You may revise any assumptions or amounts as you wish.

 

MAP International

Here is the calculation of increased legal costs for MAP:

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Jim Ulvog

How big is the world of donated medicine?

Pharmaceutical products and medicine on shelves. Image courtesy of Adobe Stock.

All this attention on donated medicine got me wondering just how big the sector is.

There is a small number of charities receiving big volumes of medicine donated by the pharmaceutical companies. Those charities then get all those meds distributed to charity clinics and hospitals around the world. That is incredible work which is improving the lives of millions upon millions of poor people around the world.

So, how large is that sector?  Here is a bit of research.

For the charities I’m aware of, plus those that have been in the news over the last eight years or so, plus those on the record as being opposed to AB 1181, I looked up their most recent 990 on their website. For a few of the charities there wasn’t a 990 visible (or at least I couldn’t find it) so I pulled the most recent 990 from the California Registry of Charitable Trusts.

Data tabulated below is:

  • total revenue from 990 Part I line 12,
  • non-cash donations from 990 Part VIII line 1g (referred to as gifts-in-kind or GIK), and
  • disclosed amount of drugs and medical supplies on Schedule M line 20.

Amounts are converted to millions, then rounded.

Last column in the table is the dollar amount of drugs & medical supplies divided by total revenue. A higher percentage shows larger portion of income from donated meds, and thus a higher likelihood AB 1181 will have a bigger impact on the financials.

Only charities with over $20 million of donated meds and supplies are listed; charities below that level are excluded.

Summary of results

Table below includes 17 charities. Another 17 whose volume of donated meds is below $20M each are not listed.

I think there may be another dozen charities with donated meds in this sector. As I come across additional names and look up their 990s, this table will be updated.

For the not-for-profit organizations (NFP) listed, total revenue is about $8.9 billion, total donated items are about $8.1 billion, and donated drugs and supplies are about $7.5 billion.

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Jim Ulvog

California Board of Accountancy requests veto of AB 1181.

Request from the CBA. Image courtesy of Adobe Stock.

On September 17, 2019, the chair of the California Board of Accountancy sent Governor Newsom a request to veto Assembly Bill 1181.

You may read the letter here.

The core of the letter, if I may be so bold, is the disruption AB 1181 would create for GAAP, which is set at the national level and applies to all reporting entities in the country.

Letter says changing GAAP the way this bill does would

lead to confusion for accounting professionals, regulators, donors to charitable organizations, and consumers who rely upon a consistent and predictable approach to financial reporting.

The letter requests a veto of this bill and then allowing the rulemaking process to address the issue.

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Jim Ulvog

Final decision from California AG for cease and desist orders against three charities.

Image courtesy of Adobe Stock.

On Friday 9/20/19, the California AG issued final decisions regarding the cease and desist orders against MAP International, Food for the Poor, and Catholic Medical Mission Board.

Those C&DOs have been discussed at length on this blog. See tag California AG.

If I understand the process correctly, this means the C&DO are now in effect. The fines are due soon and the clock is running on the several required actions. In addition, the various statements made by the charities regarding overhead efficiency must be changed.

I have asked the AG’s press office for copies of the actual final decisions. When I receive them, I see what new information they contain, such as appeal options.

My not-so-wild guess is the charities will follow whatever appeal options exist. (Since one of the three charities has told me they will appeal, I guess that isn’t actually a guess at all.)

Press release says fines total $1,490,175. Based on the preliminary decisions, the breakout by charity is:

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Jim Ulvog

AB 1181 still sitting on governor’s desk

Image courtesy of Adobe Stock.

From what can be seen on the ol’ internet, we are still waiting to see whether and when the governor will sign AB 1181. That is the law which will create “California GAAP” for charities receiving donated medicine which the donor has specified may not be distributed in the US.

Here is what I can find about recent signing of legislation.

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Jim Ulvog

California Assembly concurs with changes to AB 1181 by California Senate.

California state capitol building. Image courtesy of Adobe Stock.

AB 1181 was approved by California Assembly on a 56 to 0 vote.  Their vote concurs with changes by the Senate yesterday, which means the bill has been passed by the legislature.

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Jim Ulvog

AB 1181 passes California Senate

California state capital building. Image courtesy of Adobe Stock.

Final vote count:  31 in favor, 8 opposed, 1 no vote recorded. Holding the vote on call drew an additional 3 ayes, 1 nay, and 1 NVR.

First report 2:30 p.m. on 9/11:  AB 1181 passed the California Senate on a 28 to 7 vote with the bill moved on call, which means the 5 members who did not vote will be able to vote. Even if all vote no, the bill will still pass.

Update 4 p.m. on 9/11:

Senator John Moorlach, who is a California CPA in good standing, opposed the bill. He wished the bill had gone to two additional committees since it would be in their area of responsibility.

He suggested the bill should be postponed until FASB addresses the issue. He mentioned the Nonprofit Working Group formed by FASB and their efforts to address the issue.

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Jim Ulvog

Effective date of proposed AB 1181 set at January 1, 2021

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An amendment to AB 1181 establishes an effective date of January 1, 2021 for the revised reporting requirement to go into effect.

My understanding (for whatever that may be worth!) is that bills passed by the California legislature go into effect on January 1 of the following year unless there is an urgency clause, in which case the bill goes into effect immediately.

This means the new reporting requirement to value donated medicine restricted by donors for distribution overseas at the overseas values would be effective on January 1, 2020. This further means (if my thought process is correct) that reports filed with the Registry of Charitable Trusts in 2020 would have to be compliant. This finally means that financial statements for years ending 12/31/19 would have to reflect the new valuations.

That is a really, reaaaaaally short time to implement.

A revision to AB 1181 posted on September 6, 2019 sets the effective date at January 1, 2021.

It does two other things.

First, retains the AICPA as an official source of GAAP. Um, this might be a surprise to those of us who have read the ASC, but that is topic for another day. Might also be a surprise to FASB and FAF.

That definition of the AICPA as an official source of GAAP expires on January 1, 2021.

Second, the AG is authorized to “adopt rules and regulations” needed to carry out the new valuation requirement.

Second reading

Now that the bill has been amended again, it has to go back to the Senate floor for second read. That is scheduled for Monday 9/9/19. Having watched the Senate action a bit over the last two weeks, it will take a few moments at the start of the session to do a second read of every bill in that status. (That’s a few moments as in “the bills listed for second read are deemed read.”)

After that official step the bill may be called up for third reading and voted on during that reading.

At least that is my newly found understanding. If I’m missing something, let me know.

Amendments made on 9/6/19

I will quote the changes made on September 6, 2019 so you may see the change for yourself and assess whether my description is accurate.

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Jim Ulvog

No GAAP violation but charitable solicitations are misleading – – Preliminary Decision issued for appeal of California AG’s Cease & Desist Order against MAP International, Food for the Poor, and Catholic Medical Mission Board.

Image courtesy of Adobe Stock.

A Preliminary Decision has been written by the administrative law judge (ALJ) hearing the appeal over the California Attorney General’s cease and desist order (C&DO) against MAP International (MAP), Food for the Poor (FFP), and Catholic Medical Mission Board (CMMB).

I have obtained and read a copy of the Preliminary Decision for each of the charities.

 

Top line summary:  The ALJ concluded the charities did not violate GAAP in their accounting but did find their charitable solicitations were misleading and deceptive.

This will be a long read at over 3,400 words so you might want to get a fresh cup of coffee.

Two other notes. References to “Complainant” mean the California Attorney General.  This post will focus on the content of the decisions with lots of quotations and minimal interpretation. Several longer posts are needed to interpret, explain, and describe the implication of this case. I may add more discussion later. As I see others discuss this case, I’ll try to link to those discussions.

After describing the decisions, responses from each charity are listed.

Next steps?

I’m a bit fuzzy on the where this goes from here. It is seems obvious to me that the ruling is not yet effective.  I will string together a bunch of guesses on the next steps. Anyone bold enough to correct my wildly aimed guesses is welcome to do so.

So here go my guesses – – I think the decision will not go into effect until it is accepted or modified by the Attorney General.  So my guess is the AG will issue a letter declaring the Preliminary Decision in effect or reissue a modified C&DO or take some other specified action to make the decision effective. I’ll guess some sort of additional communication is also necessary to address a variety of technical issues not covered in the decision, such as address to send the check, contact point for future communications, consequences of violating the C&DO, and notice of appeal options.

The Preliminary Decisions say the charities must pay the penalty 30 days after the effective date. There is a separate requirement to provide a copy of the decision to all officers, directors, and employees within 15 days of the effective date.

Since one charity (MAP) indicates in their response to me that they will appeal, I’ll guess their appeal will be filed soon after the effective date, well before that 15 day time frame expires. I’ll also make an even bigger guess that given the strength of the proposed sanction on how to refer to program ratios, the other charities will also file an appeal.

 

Background on timing

In December 2018, the ALJ gave verbal explanation that he would rule in favor of the charities on the issue of whether the their financial statements complied with GAAP.

In January and February 2019 additional written briefs were submitted by the Attorney General (AG) and charities on whether the written appeals sent to citizens of the state were accurate or misleading.

On April 24, 2019 additional oral arguments were heard.

Then on May 24, 2019 the administrative law judge (ALJ) issued his preliminary ruling for each of the cease and desist orders.

 

Food for the Poor

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Jim Ulvog

California Senate does not take up AB 1181 on 8/26, but does provide a carve out from GAAP for escrow companies.

Photo of desks on the floor of the California Senate. Lots of desks have a microphone on them to save the time of senators having to walk to a mic. Photo courtesy of Adobe Stock.

Although AB 1181 (which would change accounting for donated medicine which donors restrict from use in the U.S.) was scheduled for a vote today, the Senate choose not to take up the bill. They addressed maybe around half or more of the bills on the schedule.

Next session was announced as Friday, August 30. Perhaps they will address 1181 then.

Another carve out from GAAP

AB 412 was passed by the Assembly on 76-0 vote and passed today by the Senate overwhelmingly. Didn’t jot down the vote, but think there were probably zero votes in opposition.

Escrow companies in the state are required to have liquid assets greater than current liabilities by $25,000. Makes sense.

Escrow companies are required to submit audited financial statements that comply with GAAP.  Good idea.

However…

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Jim Ulvog

AB 1181 scheduled for floor vote in Senate on August 26.

Photo courtesy of Adobe Stock.

Wow. Things are happening fast.

AB 1181 is scheduled as item 201 of 250 for the California Senate’s floor session at 2 p.m. this upcoming Monday, 8/26/19.

Status page for the bill shows the schedule at the bottom of this page. The Senate’s calendar can be seen here. Select the dates you wish. The agenda for 8/26/19 is here.

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Jim Ulvog

World Vision withdraws opposition to AB 1181. Other changes in list of those opposed.

Image courtesy of Adobe Stock.

World Vision is now neutral on AB 1181.

Three of the five analyses prepared for AB 1181 contain a list of the organizations supporting and opposing the legislation. A comparison of the lists shows key changes.

Two items that jump out at me: first, growth and change in composition of charities opposed; second, the number of accounting groups opposed.

Charities in opposition

Forty-eight charities opposed the bill according to the 6/28/19 analysis (posted 7/8/19) prepared for the Senate Judiciary Committee.

On the 8/19/19 analysis (posted 8/21/19) prepared for the Senate floor vote, the count of opposed charities was again 48.

New to the list is Habitat for Humanity.

Dropped from the list in opposition is World Vision.

Of particular note is that a representative of World Vision had previously testified in opposition to the bill.

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Jim Ulvog

Senate Floor Analysis for AB 1181 posted on August 21.

Next step for AB 1181: roll call on floor of Senate. Image courtesy of Adobe Stock.

Analysis of AB 1181, which will be used for the vote on the floor of the California Senate, was posted yesterday, August 21. This follows the bill being read the second time on August 20 and moving out of the Appropriations Committee on August 19. You can download the analysis if you are so interested.

I don’t understand the timing of when votes are called. What I have learned is the next step after the second reading and printing the floor analysis is the vote. Stay tuned.

Oh, as an aside on whether the Assembly and Senate might resolve differences in the bills approved by the different chambers, I had an insight yesterday. Back on 8/12/19, the Senate Appropriations took action. It was reported as:

From committee chair, with author’s amendments: Amend, and re-refer to committee. Read second time, amended, and re-referred to Com. on APPR.

The ‘aha’ moment for me was realizing the Senate committee processed changes by the author, who is an Assembly member. Methinks that means the bill has a pretty good chance of sailing through the Assembly, assuming the Senate approves it.

Some comments on the floor analysis…

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Jim Ulvog

AB 1181 read on Senate floor second time. Next step: third reading and vote.

California Capitol building lit by setting sun. Image courtesy of Adobe Stock.

On August 20 Assembly Bill 1181, which would modify reporting requirements by those charities receiving specific donated medicine and supplies, was ‘read’ on the Senate floor a second time.

Second reading took place one day after bill was moved out of the Senate Appropriations committee.

As I explained yesterday, the next step is the third reading which will involve a vote of the full Senate.

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Jim Ulvog

FASB adds GIK project to technical agenda. Focus will be only disclosure and presentation on statement of activity. Will not address valuation methodology.

FASB decided to address disclosures for donated meds but not valuation. Image courtesy of Adobe Stock.

On October August 21, 2019, FASB held an open meeting to address the GIK issue.

You can watch the meeting video for yourself:

[youtube=https://youtu.be/cTH1rXE6we8]

Discussion of GIK starts about the 44 minute point.

The direction the board is taking is to consider enhanced disclosures in the notes and more detailed presentation on the statement of activity. The board decided to not address measurement, i.e. valuation methodology.

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Jim Ulvog