The draft bill to essentially change one phrase of an AICPA audit guide on valuation of donated pharmaceuticals is on its way to the floor of the Senate without a hearing in the Appropriations committee.
On August 19, 2019, the following comment was posted on Assembly Bill 1181:
From committee: Be ordered to second reading pursuant to Senate Rule 28.8
That raises two questions. What is Senate Rule 28.8? What is the next step?
Subtle changes were made to AB 1181 on August 12, 2019 by Assembly member Limón (the bill’s author) and the chair of the Senate Judiciary Committee. The bill was re-referred to the Appropriations Committee, which is still scheduled to hold hearings on August 19.
Two changes were made yesterday.
Information posted yesterday on the California Legislature’s web site shows the Appropriations Committee will hold hearings on AB 1181 next month, on August 19, 2019.
There has been relatively little public discussion of California AB 1181. Here are a few articles I’ve been able to find. Previous public comments discussed here.
CharityWatch
CharityWatch publicly supported AB 1181 on 7/12/19: CharityWatch Supports California’s Bill to Discourage Charities from Exaggerating Non-Cash Contributions. Comments in the article provide background on the issue. CharityWatch has long opposed the valuation methodology in place for the sector, mentioning there is an overvaluation issue.
CharityWatch perceives the application of current accounting rules creates enough variability and inconsistency in reporting that they remove all GIK from their ratings calculations.
Here is a one sentence summary of the underlying issue from the article:
AB 1181, which will require specific accounting treatment for GIKs when donors require the donation be used overseas, was approved by the Senate Judiciary Committee on a 7 to 1 vote, with 1 committee member not voting.
The bill was referred to the Senate Appropriations Committee. Mark Hrywna (@mhrywna) reports the committee will hold hearings on August 12. The last day to approve bills is September 13, when the legislature adjourns for this session.
FAF and FASB input
On June 28, 2019, the Senate Judiciary Committee made some minor changes to AB 1181. In one sentence, the bill under consideration would require charities to recognize gifts in kind at the fair value in the location where the items will likely be distributed if the items have a geographic restriction.
Comment at the legislature’s website says:
From committee chair, with author’s amendments: Amend, and re-refer to committee. Read second time, amended, and re-referred to Com. on JUD.
I am not quite sure how to read that, but think it means the author made some changes, probably at the suggestion of the committee chair, the bill was technically put back to the committee after that change, the committee made additional changes and the bill was technically put back to the committee again.
All that to say there were minor changes to the proposed bill.
Based on the “compare versions” tab at the website, changes made at this point include:
Yesterday I watched a webcast from FASB providing an update on Private Company Council and Not-for-Profit organization accounting issues By the way, there are a couple of nice accounting options in the PCC world that have been extended to the NFP world. (Yeah, yeah, pray for me since I sort of enjoy those kinds of discussions.)
One of the speakers mentioned FASB has formed a working group to look at the issue of valuation of GIK, especially donated pharmaceuticals.
Update – Mark Hrywna (@mhrywna) tweeted on 6/17/19 the Senate Judiciary committee has scheduled a hearing on AB 1181 on 7/9/19.
After attending CalCPA’s Not-for-Profit Organization conference last week and talking to a small group of my CPA colleagues, I have two thoughts on regulatory attention currently focused on the valuation of donated medicine. Let me provided two questions which will focus my comments:
Previous post discussed the first question.
As I mentioned in that post, I have long wanted to develop an extensive discussion on the main accounting issues found in the California AG’s three cease and desist orders along with several accounting issues raised in their January 2019 settlement and May 2019 litigation.
That full discussion would have ended up somewhere around 3 or 5 times longer than these two posts. I won’t have time in the foreseeable future to write such an extended discussion. This pair of posts, at over 2,600 words, will have to do.
After attending CalCPA’s Not-for-Profit Organization conference last week and talking to a number of my CPA colleagues, I have two thoughts. (Yeah, yeah, I obviously don’t think much if I only have two thoughts after a full day of great presentations.)
Let me offer two questions which provide a way to focus my thoughts:
I have long wanted to develop an extensive discussion on multiple accounting issues found in the California AG’s three cease and desist orders. I would also like to discuss the host of accounting and auditing issues that are explicit or implied in the January 2019 settlement and the May 2019 litigation. It would be fun for me and informative for readers of this blog to dive deep into the wide range of issues raised by the AG.
That discussion would have probably run something in the range of 6,000 or 10,000 words, or perhaps longer.
I have not had the time to go into that extensive detail and don’t anticipate having that much spare time in the near future.
Instead, I will describe in the next post what I perceive is the very precise, very specific target of AB 1181 from the California Assembly and in this post will describe my perception of the key concern for the regulators.
Went browsing around the web last night and found the settlement agreement for the AG’s case against the Giving Children Hope charity. Yesterday’s post discussed that case at length.
The National Association of State Charity Officials has a reprint of the California AG’s press release.
Included in the article is a link to the signed Assurance of Voluntary Compliance., which was approved by a judge on January 22, 2019.
Following are a few of the highlights from the signed agreement. In particular, the agreement fills in some of the details I was wondering about.
Remember my previous comment that I could see no reason one particular board member was included in the case? He was chair of the board from 2014 through 2016, according to paragraph 2. On the settlement agreement, he signed as chairman on behalf of the charity which agreed to dissolve itself.
The CPA cited in the case provided accounting services to GCH from January 2014 through June 2017 (para 2).
In paragraph 10a the AG asserts GCH had at least 25 transactions in which it had one of two controlled subsidiaries purchase medicine from a named wholesaler in the Netherlands for a “very minimal price” and then had the controlled charities donate the meds back to GCH.
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.
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).)
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.
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:
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.