Presentation at CalCPA Accounting and Auditing conference: “California GAAP” – A case study in valuation of donated medicine

Image courtesy of CalCPA.

On October 24 at 3:55 I will be speaking at the California Society of CPAs Accounting and Auditing Conference where industry speakers and experts will provide comprehensive updates on current issues and emerging trends. The conference runs the 24th and 25th.

My topic is valuation of donated medicine in the not-for-profit community. I have the privilege of working with a 75 minute block of time.

If you are able to attend the session you will gain an understanding of the long-term enforcement effort at the federal and state level regarding valuation of donated meds. My concern is that the governor’s veto of AB 1181 is not the end of the enforcement actions considering what has happened over the last 9 years.

Title of the session is “California GAAP” – A case study in valuation of donated medicine.

Overview of the session from the conference schedule:


Repost: 2018 nonprofit risk alert is available. New edition adds discussion on valuation of GIK as rebuttal to California AG.

Image courtesy of Adobe Stock.

Update:  This is a repost of an article on June 11, 2018. As I mentioned last summer, some newly added comments in this risk alert entered heavily into the decision by an Administrative Law Judge finding the charities complied with GAAP.

Some particular items of note for those who enjoy deep inside-baseball tidbits from the accounting world: 

  • discussion of GIK, especially paragraph .53 was added this year,
  • discussion in paragraphs .53 and .176 are directly responsive to the AG’s argument,
  • there is an overlap of ARL staffing with the R&D sector & auditors of that sector, and
  • the hard-fought, everybody-does-it-so-that-makes-it-right, spend-$475K-to-fight-the-IRS position on mebendazole has changed from the previously no-good, can’t-rely-on-it, non-representational pricing guide from five years ago now being the AICPA recommended standard for pricing.

So, here are some on-point comments from last summer with a few minor updates:


The AICPA has released the 2018 edition of Not-for-Profit Entities Industry Developments.

If you are a CPA serving the not-for-profit community, you need to read this document each year. It provides a survey of the accounting and auditing issues affecting the nonprofit world.

If you are an auditor, there are several other risk alerts you ought to be reading every year.

If you are working for a nonprofit, these alerts would give you a good survey of accounting issues in general and the audit issues your CPA will be dealing with this year.

Valuation of Gifts in Kind


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:



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?


Details on FTC enforcement action against four cancer charities – 1

The news coverage has died down about enforcement action taken against four charities by the FTC and every state attorney general. I’ve not seen anything that dives a deep into the accusations. This post is the start of a series of discussions on the case.

Why go into detail?

After having read through the accusation, it is obvious this case contains most of the problematic issues we have seen over the last few years in nonprofit accounting and fundraising. Off the top of my head, I don’t recall any issues under discussion in the charity world that are not present in this case. That makes this set of allegations a good case study.

The complaint can be found here. That is a public document. I claim journalist status, so will quote the document at length.

Here is the opening of the complaint, with a few comments added: (more…)

More followup on FTC action against 4 cancer charities

There is a lot more to say on the FTC and all AGs going after four charities that were way out of line.

5/19 – William P. Barrett at Forbes – Cancer Charities Agree to Dissolve Amid Fraud Claims – Article summarizes the case by the FTC. Two of the four charities have agreed to close their doors. Three of the named individuals have agreed they will not have future involvement with charity management or even fundraising.

We did nothing wrong and we agree not to break the law again

Article points out the irony we seen these kinds of settlements. Even though the three individuals agreed to not be involved in the charity sector again during their lifetime and two of the charities agreed to be taken over by receivers and then liquidated, the charities and individuals involved denied doing anything wrong.

It is as if it’s a normal and everyday thing that individuals agree to be legally barred from involvement in their economic sector and charities agree to corporate suicide when they have done nothing wrong.

But that’s the legal dance that is necessary. Denying wrongdoing is necessary to prevent the consent degree from becoming proof to anyone who later tried to sue the charities or individuals.  Even though I understand the reason, it seems silly to those looking in from the outside.

Contested claims


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 ResolvedIRS 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.”


Another explanation why meds cost so much; this ties into the GIK valuation issue

This post will be deep background on the GIK valuation issue. I won’t connect the dots to the international versus US pricing issue, just lay out a few pieces of the puzzle.

One of many fascinating things I’ve learned about pharmaceuticals while blogging about mebendazol and the related valuation issues is the dramatic disparity of the prices for meds in the US and overseas. There is also a huge gap between branded and generics.

I’ve looked for data on the difference in consumption of meds and costs paid here in the US versus the rest of the world. Can’t find what I’m looking for. Somewhere sometime I saw a comment that we in the US consume 10% of all prescription meds but pay 50% of the costs. Can’t support that with anything other than hazy memory. I am fairly comfortable that the disproportionate relationship exists, even if the numbers are off.

Why does that disparity exist? Is it, perhaps, a good thing?

The underlying economic model is US residents pay for all the astoundingly huge development costs of brand new wonder drugs and the rest of the world pays the incremental costs of making another pill.

What that model does is recover the billions of dollars needed to find a new drug and motivates big pharma to look for another blockbuster.

Megan McArdle explains the issue much more clearly in her article Would you Pay $84,000 for a New Liver?


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.


Mebendazole: red herring or presenting problem?

Is 500mg mebendazole a red herring or a way to focus discussion on many issues surrounding GIK valuation?

GIK Valuation: The issues not being discussed is a guest post on this blog. The author starts his/her post by saying the discussion of 500 mg mebendazole is distracting us from the real issues, which are much more serious.


Red Herring: something intended to divert attention from the real problem or matter at hand; a misleading clue.

The author and I disagree on the role of 500mb mebendazole.

I think the author’s point is that focusing on mebendazole distracts us from other issues.

I believe it is this specific med that is generating a disproportionate amount of GIK revenue. I perceive a very material portion of GIK revenue in the sector went away when this one med was revalued at the time SFAS 157 went into effect.  My guess is that a material portion of the remaining GIK revenue in the sector would go away if that one med were valued at something similar to the price on the international market.

I also think that talking about just one medicine allows us to see a host of other issues. If the NPO community can resolve the issue arising from a discussion of mebendazole, I think that most of the other issues regarding GIK valuation would fall into place.

Once we get beyond whether mebendazole is a red herring or a presenting problem, the author and I are in agreement on quite a few issues.

Issues for discussion


Guest post – GIK Valuation: The issues not being discussed

The following is a guest post submitted to me from a reader. As I read the article, it became obvious that the author is familiar with the issues of the relief and development organizations.  Whether the author is an outside auditor, accountant inside an NPO, or even a medical vendor does not matter. Obviously the comments reflect the author’s opinion and not those of his/her employer.  This also does not reflect my opinion.

Agree or disagree as you wish, here are ideas deserving your careful consideration:

GIK Valuation:  The issues not being discussed

While there are many, if not dozens, of misconceptions and false information floating around pharmaceutical values, GIK values, and NPOs supposed conspiracy to inflate revenues to improve their Charity Navigator rating, I thought I would point out a few things to try to bring the conversation around to the big picture rather than focusing on the quite narrow discussion around non-FDA approved, 500mg mebendazole.

500mg mebendazole is a red herring


Other disclosure issues for GIK medicine

Since starting to write about GIK valuation issues, I’ve noticed there are a few disclosure items that don’t seem to be visible in the financial statements of NPOs who receive large volumes of donated medicines. As I have time, I’ll start accumulating examples.

Concentrations – In general, if a line item of a financial statement contains a concentration, that concentration should be disclosed. The concept is one donor or lender or customer or vendor could go away. If loss of one counter-party would adversely impact an organization, the concentration should be visible. For example, if a huge portion of cash contributions come from just a couple of donors, that probably should be disclosed.

Concentration of revenue(more…)

Accounting ideas in World Help’s revised financial statements

There are some accounting concepts in the most recent financial statements released by World Help that warrant discussion. This post will walk through those items I noticed.

This will be a long post. You might want to get a fresh cup of coffee and settle in.

Efforts to reach out to World Help

I have been asking World Help for their comment for a week and a half. The only reply I have received was when the president’s assistant gave me the e-mail contact for the organization’s outside media consultant. I have sent e-mails to the president’s assistant and the contract media consultant several times and received no replies.

Proper accounting is a broader issue in the R&D community than has been discussed

The focus of conversation on accounting in the relief & development community has been variance power and the valuation of medicine, particularly 500 mg mebendazole.

I perceive there are issues involved in disclosures that haven’t yet been discussed.

In accounting shorthand, the matters I see that have not yet been addressed are disclosures of concentration of contributions, concentration of donors, and estimates with a reasonable possibility of change in the near-term.


An open letter to the CPAs who audit R&D charities receiving GIK meds

Dear colleagues:

If you would like some background on the GIK issues, please read my open letter to your clients.

The accounting is problematic for donated pharmaceuticals that you have been auditing for the last few years. 

If you have a budget of 100 or 300 hours, it might be wise to allocate a few hours to read beyond AICPA risk alerts and Accord position papers. You can browse my blog for  discussions, which contain links to other resources that also discuss the accounting and valuation issues.

It is my considered opinion that many of the valuations are not supportable under GAAP.  The timing of SFAS 157 isn’t the issue. 

The amount of scrutiny on your client’s valuation methodologies is high and increasing.


An open letter to the evangelical nonprofit community receiving GIK meds

Dear brothers and sisters in Christ:

The accounting for donated pharmaceuticals has been poor for a number of years. 

The valuations are not supportable by accounting rules either before or after SFAS 157 went into effect. 

Paying a handling fee roughly comparable to available open market price lists sure makes the donations look like purchases.  Fair value does not involve using a valuation in the U.S. for meds that can’t be legally sold here.  A reference book that is known to not reflect actual market prices is not a reasonable basis for determining fair value.  

People outside the evangelical NPO community are starting to notice.