GIK valuation

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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In previous posts discussing the California AG’s cease and desist order against three charities, which you can read by clicking this tag, I have mentioned the 2018 audit risk alert from the AICPA. The Administrative Law Judge (ALJ) explicitly cited paragraph .56 as support for the charities’ position.

As mentioned previously, the discussion in paragraphs .53 through .57 was new in 2018. I can find no similar comments, or even reference to the issues, in the several years before.

Likewise, the discussion in the section title Challenges in Auditing GIK, found in paragraphs .172 through .181, was new in 2018. I cannot find any comparable comments in the 2017 or 2016 audit risk alert after browsing those documents and running multiple word searches.

The NFP audit risk alert is routinely published in the summer, with references to economic statistics such as GDP change, unemployment, and interest rates from the prior year fourth quarter. That means each year’s NFP risk alert is written and put into final form somewhere between late January (when 4^th quarter stats start becoming available) and about April/May (allowing for editing and production time).

Update: On day after publishing this post, saw a twitter comment pointing to a webcast on May 1, 2019:  Not-for-Profit Entities: 2019 Audit Risk Alert. The webcast will update auditors on issues affecting their 2019 audits. This will be based on the 2019 edition of the risk alert. The 2019 edition is not yet available on the AICPA’s web site. I don’t know what their production cycle is, but the upcoming webcast suggests to me the document is nearing completion. It isn’t done, but getting close.

Here is a question for you to ponder for yourself:  Was the discussion in paragraphs .53 through .57 and .172 through .181 added to the 2018 NFP audit risk alert in response to the AG’s C&D order?

Let me spell out some of the things visible to me:

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In resolving the Cease and Desist order against three charities, the Administrative Law Judge hearing the appeal cited paragraph .58 of the 2018 Audit Risk Alert as being directly on point.  I perceive the comments in the 2018 risk alert were prepared in light of the AG’s case.

Paragraphs in the section containing .58 will be quoted for more context since that will likely be helpful for people reading all the way through this series of posts.

Introduction to this series of posts explained the Administrative Law Judge (ALJ) hearing the appeal of the California AG’s C&D order ruled in favor of the charities on the GAAP compliance issue.

The basis for his decision was that the charities’ expert witnesses were more persuasive than the government’s expert witness.

Another post illustrated why attorneys quibble so vigorously and described the remaining issue of whether the charitable solicitations by the charities are misleading.

Previous post explained where the case is now and the remaining issue of allegedly misleading solicitations.

2018 Audit Risk Alert

This discussion is new in the 2018 risk alert. Maybe I missed it, but word searches and browsing the 2012 and 2014 through 2017 risk alerts did not reveal more than a couple of brief mentions of GIK valuation with those comments not much deeper than identifying GIK as an issue.

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Introduction to this series of posts explained the Administrative Law Judge (ALJ) hearing the appeal of the California AG’s Cease and Desist order against three charities has decided in favor of the charities.

The basis for his decision was that the charities’ expert witnesses were more persuasive than the government’s expert witness.

Yesterday’s post illustrated why attorneys quibble so vigorously and described the remaining issue of whether the charitable solicitations by the charities are misleading.

Today’s post mentions where the case is now and the remaining issue of allegedly misleading solicitations.

Is GAAP the real world?

The ALJ discusses his reasoning for continuing the hearing to address the allegedly mislead appeals, raising the entertaining question of whether this separate world with its rarefied atmosphere containing its own set of exquisitely detailed rules we call GAAP has an overlap with the real world where actual people actually reside and lead actual lives.

Additional testimony and a separate decision will resolve that issue for this case.

The ALJ’s comments:

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Introduction to this series of posts explained the Administrative Law Judge (ALJ) hearing the appeal of the California AG’s Cease and Desist order against three charities has decided in favor of the charities.

The basis for his decision, as mentioned yesterday, was that the charities’ expert witnesses were more persuasive than the government’s expert witness.

Are the charities’ appeals misleading?

The remaining issue in the case is whether the charitable solicitations were misleading to donors.

The state alleged that the financial statements did not comply with GAAP and as a separate matter that solicitations to donors were misleading.

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Introduction to this series of posts yesterday explained the Administrative Law Judge (ALJ) hearing the appeal of the California AG’s Cease and Desist order against three charities has decided in favor of the charities.

Preliminary ruling

The ALJ concluded that the testimony from the charities’ expert witnesses was more persuasive than that of the AG’s expert witness.  On that basis, the ALJ concluded the AG did not prove its case that the financial statements were in violation of GAAP.

I will summarize and quote some of the comments in the transcript and provide select quotes on the assumption many of my readers won’t download and read the transcript for the day. As a matter of my style choice, I will only use the first letter of the last name of witnesses and attorneys.

The basis for conclusion is whose arguments were more persuasive. The ALJ decided the charities had better expert witnesses.

He said:

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