GIK valuation – Page 6 – Nonprofit update.

CNN reports two charities accused by FTC agree to close their doors.

Federal Trade Commission Building in Washington, DC. - Picture courtesy of DollarPhotoClub.com — Federal Trade Commission Building in Washington, DC. – Picture courtesy of DollarPhotoClub.com

CNN investigators David Fitzpatrick and Drew Griffin report: Cancer charity targeted by feds agrees to put itself out of business. Article says preliminary documents filed in Federal District Court in Phoenix indicate Cancer Fund of America and the related fundraising arm, Cancer Support Services, agreed to turn control over to receivers for liquidation.

In May 2015, the FTC and 50 state attorneys general sued these two charities and two others run by relatives of the president of CFA, alleging fundraising fraud. Two immediately agreed to liquidate. The two discussed in the CNN report initially fought allegations but have now agreed to close their doors.

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February 15, 2016, 3:43 pmJim Ulvog

Who might want to look more closely at the four paragraph summary of valuation issues in the FTC complaint against four charities? 13

There are four paragraphs in the FTC complaint against four cancer charities that summarizes the issues raised by the FTC. These paragraphs cover the main issues about valuation of GIK that have been under discussion in the NPO world for several years now.

These issues do not just apply to the four named charities.

The issues are not limited to the secular cancer charities.

These issues actually apply to a large number of high visibility religious charities. The issues may have drop out of news coverage, but they have not gone away. I hope those who have ears that are able to hear, will hear.

Who might want to take a second look at the FTC’s summary?

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August 12, 2015, 7:54 amAugust 12, 2015, 7:58 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 12

This is the twelfth in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

This is the fourth post on a series of paragraphs in the complaint addressing valuation of donated medicine.

The complaint can be found here. My posts in this series are visible using the FTC tag.

By reporting these GIK transactions as contributed revenue and program expenses, at inflated values, Corporate Defendants represented themselves to be both larger and more efficient than they actually were. They obscured the high percentage of donated funds spent on, among other things, for-profit fundraisers, executive salaries, and employee perks, and concealed the very small amounts spent on the charitable purposes described to donors. As a result, the Forms 990 and other documents filed by Corporate Defendants with the IRS and state regulators, and made publicly available to consumers, were false and misleading.

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August 10, 2015, 7:09 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 11

Marble panel on FTC building in DC. Photo courtesy of DollarPhotoClub.com

This is the eleventh in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

This is the third post on comments in the complaint addressing valuation at an overall level.

The complaint can be found here. My posts in this series are visible using the FTC tag.

On the impact of the allegedly misstated information: (more…)

August 3, 2015, 7:05 amAugust 10, 2015, 7:10 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 10

This is the tenth in a looooong series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the second post discussing allegations in the complaint asserting that the financial statements of the charities were misstated. Four paragraphs summarize the problems the FTC has with the accounting for donated medicines.

Corporate Defendants obtained the paperwork they used to claim these figures for just the cost of the payment to INTERMEDIATE (which included both INTERMEDIATE’s fees and shipping costs). For example, in connection with a 2011 shipment to Guatemala, CFA reported contributed revenue and corresponding program expense of over $8 million, but only paid INTERMEDIATE a fee of $50,550. For one 2010 shipment to Ghana for which CCFOA reported contributed revenue and program expense of over $3.8 million, CCFOA paid INTERMEDIATE just $39,960. In addition, for a 2011 shipment to Honduras for which BCS reported contributed revenue and program expense of at least $3.8 million, BCS paid INTERMEDIATE just $28,120. Although Corporate Defendants used such transactions to add hundreds of millions of dollars in program expenses to their financial reports, these “programs” existed entirely on paper. Corporate Defendants did not possess the goods and played no role in their overseas distribution. They hired no additional staff to manage these multimillion-dollar international GIK programs and in most instances spent virtually no staff time on them. In addition, the very high dollar values associated with these transactions largely resulted from overvalued pharmaceuticals.

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July 29, 2015, 9:09 amAugust 8, 2015, 8:00 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 9

This is the ninth in a series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the first post in a series discussing allegations in the complaint asserting that the financial statements of the charities were misstated. Paragraphs 127 through 130 provide a condensed summary of the massive concerns the FTC has over the accounting for GIK shipments. There are severe accusations embedded in these four paragraphs.

To give you a hint where the FTC is going with this section, my paraphrase of the last sentence of paragraph 130 is the FTC alleges that the charities’ audited financial statements and 990s as provided to the IRS, state regulators, and the general public were “false and misleading.”

Deceptive Impact of Reporting GIK Transactions

The increased contributed revenue and program spending Corporate Defendants reported – collectively over $223 million – had the effect of diminishing the reported percentage of revenue they spent on fundraising and administrative costs and increasing the proportion of reported expenses they spent on program services, making Corporate Defendants appear more efficient to donors than they actually were. Thus, the reported international GIK revenue for the five years from 2008 through 2012 resulted in CFA’s reported fundraising expenses being 25.4% of total contributions. In reality, 67.4% of consumers’ donations (including revenue from CSS), or 82.9% without counting CSS’s “contributions” to CFA, were spent on fundraising. For the same period, CCFOA used its international GIK revenue to report fundraising expenses of 47% of total contributions. In reality, 81.5% of consumers’ donations were spent on fundraising. Similarly, BCS reported fundraising expenses of 29% of total contributions, while in reality 84.6% of consumers’ donations were spent on fundraising. Corporate Defendants also used the inflated contributed revenue amounts when choosing purported “comparable organizations” for setting their executives’ pay, thus improperly increasing the Individual Defendants’ salaries.

You might wonder what’s the big deal if a charity records a GIK shipment when it should not, as alleged by the complaint. Revenue is increased by the valuation of the shipment and expenses are increased by the same amount. Impact on the bottom line, or change in net assets, is zero.

Why does it matter?

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July 27, 2015, 9:13 amJuly 27, 2015, 9:14 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 8

This is the eighth in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities. The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the second of two posts on comments in the complaint addressing valuation at an overall level. Next discussions will go into detail of valuation issues by charity.

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July 23, 2015, 9:00 amJuly 27, 2015, 9:48 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 7

This is the seventh in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities. The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the first of two posts on comments in the complaint addressing valuation at an overall level. Following paragraphs in the complaint go into detail by charity.

This will be a long post. Not sure how to conveniently break it into two or three separate discussions.

Corporate Defendants Improperly Reported the Value of GIK

Even assuming, arguendo, that in some instances Corporate Defendants could have properly claimed the GIK goods’ value as contributed revenue or reported it as program expense, in numerous instances, Corporate Defendants used improper valuation methods to inflate the reported values of donated goods. Corporate Defendants also failed to retain appropriate documentation of those valuations.

This is not going well. I think that paragraph asserts that none of the GIK shipments should have been included in revenue.

Furthermore, assuming shipments actually had variance authority there are two additional problems according to the complaint. First, goods were overvalued. Second, documentation is not retained to support the recorded valuation. (more…)

July 20, 2015, 7:20 amJuly 20, 2015, 7:21 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 6

This is the sixth in a series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

The complaint is visible be found here. I will quote and comment upon the complaint. My posts in this series are visible using the FTC tag.

This is the second of two posts on specific comments in the complaint addressing variance authority.

Continuing with the complaint… (more…)

July 16, 2015, 8:57 amJuly 20, 2015, 7:55 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 5

This is the fifth in a series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

This is the first of two posts on specific comments in the complaint addressing variance authority.

I will quote and comment upon the complaint which can be found here. My posts in this series are visible using the FTC tag.

Defendants Improperly Reported Receipt and Distribution of GIK They Did Not Own (more…)

July 14, 2015, 6:53 amJuly 20, 2015, 7:55 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 4

This is the fourth in a series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

I will quote and comment upon the complaint, which can be found here.

My posts in this series are visible using the FTC tag.

Continuing with the complaint…. As you see the references to INTERMEDIATE, remember that is a named for-profit entity that found and placed shipments of GIK. I choose not to mention their name since they have not been charged in any action. (more…)

July 10, 2015, 8:43 amJuly 14, 2015, 6:54 amJim Ulvog

Another cancer charity under investigation; a summarized 2013 income statement

The Wall Street Journal reports an additional Cancer Nonprofit Investigated by Tennessee Secretary of State’s Office.

If you have been following the suit by the FTC and all 50 AGs against a group of four cancer charities, it will be worth checking out the article to learn another charity is under investigation in its home state.

The key leader of this organization has a familial link to the four in the FTC investigation. The article links this charity to those four.

Not much detail in the article about the particulars of this investigation. As to the general direction, you can get some hints from this quote in the article:

“They appear to follow a pattern similar to the groups that were part of the [FTC] claim,” said CharityWatch President Daniel Borochoff.

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July 8, 2015, 9:43 amJuly 14, 2015, 6:57 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 3

This is the third in a long series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities. My posts are visible using the FTC tag.

My goal is to highlight some of the information that I think is of particular interest to the wider nonprofit community. This complaint is the most detailed information available in the public realm about the range of issues that have been visible in the charity world over the last few years. Keep in mind that unlike the long series of news coverage on the issue this information is from regulators who have subpoena authority.

The complaint is visible here. I will quote it and add my comments.

Continuing with the complaint:

Misrepresentations about Charitable Efficiency: Improperly Reported GIK Used to Disguise Low Charitable Program Expenditures and Minimize High Administrative and Fundraising Costs

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July 6, 2015, 11:42 amJuly 10, 2015, 8:43 amJim 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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July 2, 2015, 8:35 amJuly 6, 2015, 11:57 amJim Ulvog

Details on FTC enforcement action against four cancer charities – 2

This is the second in a series of posts diving deep into the detail mentioned in the complaint by the Federal Trade Commission and all Attorneys General against four named cancer charities.

My goal is to highlight some of the information that I think is of particular interest to the wider nonprofit community.

I perceive the attention paid to the complaint is drying up. Before discussing the FTC complaint, want to mention one interesting article of late:

6/1 – Suzanne Perry at Chronicle of Philanthropy – $187-Million Fraud Case Puts Charities on the Defensive – Article has reactions to the FTC and 50+ AGs going after the cancer charities that were so far over the line.

My description of the comments are they range from wondering what took the regulators so long to whether this is just a start. Article points out there has been regulatory action against some members of this group for a long time (over 20 years with CFOA) but that doesn’t seem to have deterred additional problematic efforts.

One focus on the article is the limited staffing at the AG offices which limits how much they can focus on the charity sector. Various industry sources comment on the limits of self-regulation.

Back to the FTC complaint, which can be found here. It is a public document. I assert journalist status, so will quote the document at length.

Here is the summary of the organizations’ activities, as interpreted by the FTC: (more…)

June 17, 2015, 8:39 amJuly 6, 2015, 12:19 pmJim Ulvog