Here are the hearing dates for the three charities accused by the California AG of overstating revenue and program expenses.
As you recall, the AG filed cease and desist orders against three charities. The charities have all appealed the order.
The calendar for the appeals can be tracked at the Office of Administrative Hearings website. On the right side of the page, third option from the top, is Calendar – General Jurisdiction.
Scheduling info is:
The Cease and Desist Order filed by the Michigan Attorney General on December 19, 2017 provides an analysis of the joint cost allocation methodology used by Food For the Poor. The Order can be found here.
FFP hires pastors from various denominations to make presentations at churches in the pastors’ denomination. FFP applies joint cost allocation accounting to classify a large portion of the speakers’ time as program services. The AG concluded the allocation methodology did not follow GAAP.
As mentioned previously, FFP settled the AG’s allegations by agreeing to pay the state $300,000 and revising its fundraising materials.
For general education of the nonprofit community, this post will quote the AG’s Cease and Desist Order at length on the joint cost allocation issue.
The authoritative explanation of what constitutes generally accepted accounting principles is found in FASB’s Accounting Standards Codification™ (ASC). I will add some citations from ASC to the AG’s Order. Will also add a few comments along the way.
A detailed look at the AG’s Order is valuable because it provides an in-depth analysis of a specific situation with a detailed comparison to authoritative GAAP.
You might want to get a fresh cup of coffee since this post is a long read, currently sitting at over 1,500 words. It is also quite technical.
On October 1, 2018, Mark Hrywna reports in Nonprofit Times that Food For the Poor Settles With Michigan AG. The settlement calls for FFP to pay the state $300,000 and to revise its fundraising appeals.
Action is based on 2015 financial data. The filed data shows 96.5% of all expenses are categorized as program services, according to the article. The AG asserts that if gifts-in-kind are excluded, program services would be about 67%.
The AG issued a cease and desist order in December 2017. More on that later in this post.
Might want to get a fresh cup of coffee. This will be a long read.
My summary of the numbers mentioned in Attorney General’s Cease and Desist Order:
| $ total expense | $program | $ supporting svc | prog % | |
| per filing | 1,157.5 | 1,117.0 | 40.5 | 96.5% |
| GIK | 1,033.3 | 1,033.3 | ||
| cash exp. | 124.2 | 83.7 | 40.5 | 67.4% |
One particular fundraising pitch is mentioned in the article. FFP conducted a “6 Cents Appeal”, in which it claimed, quoting the article quoting the campaign, that “It only takes 6 cents to provide a meal for a starving child.” The AG took exception to this campaign for multiple reasons. More later in this post.
Article says FFP denies the accusations which leaves us in the typical situation seen in such settlements: While denying the quite serious allegations, the charity will write a $300,000 check from donor funds to pay the state since they did nothing wrong and change their fundraising materials, all of which was actually fine, with both those actions done voluntarily since they didn’t do anything inappropriate.
Dropping the smart alack tone, I really do understand why such comments are absolutely necessary in negotiating a settlement, especially since the California AG still has a separate Cease and Desist Order under appeal. It still rubs me the wrong way, but that’s just me.
Press release from AG
Food For The Poor Executive Director Angel Aloma provided the following response to the post earlier today discussing several news articles. I am pleased to print the comments, with permission of FFP. For ease of reading, the comments will not be put in quotations.
FFP has another statement at their website which you can read here.
The FFP statement, which is in response to comments in the Boston Globe article:
Food For The Poor is troubled by recent news coverage suggesting that our non-profit organization is not transparent about how we operate. Nothing could be further from the truth.
The claim that we deliberately mislead donors is contradicted by the facts. The regulatory action brought by the California Attorney General does not suggest any wrongdoing on our part in the handling of donations or our daily operations. It is an accounting issue about how we value donated goods and we are challenging it.
The Attorney General’s office claims that we have over-valued our pharmaceuticals because we have used the United States as our principal market and have valued our pharmaceuticals at U.S. wholesale prices, rather than international prices related to the 17 countries we serve. However, almost all international nonprofit organizations that receive significant donated goods use the same industry-specific methodologies to value their donated pharmaceuticals in accordance with Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (FASB). In following those standards, we are required to value all of our donated goods in a fair and consistent manner and to declare that value as revenue in our financial statements.
Here are three more articles discussing the cease-and-desist orders issued by the California Attorney General against three large charities who have large amounts of donated medicine. Previous post discusses a few earlier articles.
Update: Food for the Poor has provided a response to the Boston Globe article, which you may read here.
5/30/18 – editorial in Sun Sentinel – Food for the Poor controversy reveals need for nonprofit transparency – Editorial highlights that using US pricing compared to international pricing increases apparent efficiency. The challenge, visible in the article, is that the charity claims 95% of all expenses are for program and the article says the California AG claims 66.7% of cash donations are used for program.
In a statement which should sober every accountant, CPA, auditor of NPOs, and staff of R&D charities, the editorial asks:
(S)uch accounting practices may be legal, and they may be the industry standard, but are they honest?
Let me paraphrase two questions embedded in that comment (yeah, CPAs actually talk that way – we look for embedded derivatives and embedded leases). The editorial is asking:
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
Of particular interest are new comments responsive to the challenge from the California AG over valuation of GIK. The 2017 and 2016 editions had minimal comments on GIK.
The 2018 edition has a new section, Gifts-in-Kind: Reporting Contributions of Nonfinancial Assets, in paragraphs .53 through .57, which describes the AICPA’s interpretation of GAAP.
Years after the mebendazole issue has faded away, the second bullet point of paragraph .56 says that when GIK is sourced outside the U.S. and is not approved for distribution in the U.S., the meds should be valued at international prices. (If you have been following this issue for years, you realize the concession made by that comment.)
With a deadline of April 11 to appeal cease and desist orders from the California Attorney General, MAP International, Food for the Poor, and Catholic Medical Mission Board each filed their appeal on the 10th or 11th.
You may find a PDF copy of the appeals and cease and desist orders at the AG’s website.
The individual appeals may be found at:
As I’ve mentioned here and here, I have reread my notes from several continuing education classes this year. Thought I would share a variety of stray ideas.
Probably need to note again that I have not gone back and read the original pronouncements supporting each idea and therefore I do not have a specific citation for you. (Reading three of the documents is the next step for my writing project.)
I should probably throw in a disclaimer. All of the comments I’m mentioning were the opinion of the presenter, not the agency from whom the person was drawing a paycheck. That is why I’m not mentioning the names of the presenters, or even the CPE event. In addition, the rephrasing of their comments is my interpretation, not their words.
Here are some tidbits you might enjoy:
More interest in Financial Reporting Framework for Small- and Medium-sized Entities (FRF-SME)?
The FRF-SME framework is a non-GAAP alternative to GAAP. It is dramatically less complicated with the promise it will not be revised more often every three years.
As mentioned in the previous post, I’ve reread my notes from several continuing education classes this year. Thought I would share a variety of stray ideas.
For what it is worth here are some tidbits you might enjoy:
Presentation of not-for-profit financials – ASU 2016-14
Presenter said that if an organization wanted to break out the with restriction column into more detail there is nothing to resented been broken into two or three columns. Perhaps it could be columns for:
Another possibility to present more detail would be to present multiple lines within the with donor restriction column, such as contributions to donor endowment, various purpose restrictions, time restriction, and a subtotal.
As part of working on a big writing project, I’ve reread my notes from several continuing education classes this year. (More details later and a link to the published material much later.) Thought I would share a variety of stray ideas. Here are a few tidbits from the classes.
Probably need to note that I have not gone back and read the original pronouncements supporting each idea and therefore I do not have a specific citation for you. (Reading three of the documents is the next step for my writing project.)
For what it is worth here are some tidbits you might enjoy:
Leases – ASU 2016-02.
One of the key on/off switches is whether a particular transaction or document is a lease. That will require an assessment of each transaction.
Right of use assets (the new description) resulting from operating and financing leases need to be listed separately on the statement of financial position. Those two categories (operating right of use and financing right of use) will be presented separately from fixed assets.
The 2017 risk alert for non-profits is available from the AICPA.
Highlighted updates this year include:
If you don’t feel overwhelmed, you haven’t been paying close enough attention to recent pronouncements. If so, the risk alert will help you catch up.
If you are feeling overwhelmed, the risk alert is a great first step in getting comfortable.
…places a hold on the new rules regarding…
A federal judge in Texas issued an injunction putting on hold the new Department of Labor rule increasing the threshold for paying overtime. The judge concluded there was a reasonable likelihood (I don’t quite appreciate the technical description so will use casual wording) that the lawsuit by 21 states and a lot of businesses would succeed. He also concluded the rule could cause irreparable financial harm. Thus, he issued the injunction, which applies nationwide.
(Cross post from my other blog, Attestation Update. I usually post comments on accounting theory there. This issues carries over directly to the nonprofit community. Consider the ongoing discussion on the mis-focus on ‘overhead’ and the need for some sort of outcome measures for the charity world and you can see how this applies.)
Consider this idea: perhaps GAAP-based accounting numbers aren’t giving stock investors all the information they need.
What is wrong with this picture?
In April, Netflix announced their earnings fell short of analysts’ expectations. Usually that would drop the stock price. What happened?
Nexflix stock jumped 18%.
Huh?
What could cause that? The market supposedly has incorporated the consensus into the price. Missing the expectation should drop the price.
Consider this: At the same time, Netflix announced their new-subscribers were 4.9 million instead of the expectation of 4.0M.
That means they will have stronger earnings for the next several quarters than was expected the day before the announcement. Thus, the stock price rose.
Investors looked at the new subscriber tally as a better indicator of future earnings and thus future stock price than this quarter’s GAAP net income. New subscribers is more important than EPS.
If you wonder are wondering why GAAP EPS isn’t the driving force in that story, here is a brain stretcher for you:
“The End of Accounting”
Professors Baruch Lev and Feng Gu point to The End of Accounting and the Path Forward for Investors and Managers in their June 21 Wall Street Journal article.
You can find the book at Amazon here. It is a bit steep, $32 in hardback and $26 in Kindle format, which is really high for an e-book. I already have a copy on my e-reader. Started reading it yesterday.
The professors suggest that reported earnings under GAAP are losing relevance for investors as we move further and further away from an industrial economy. When know-how, processes, patents, using the internet, and other intangibles are the source of income, GAAP doesn’t report useful information for figuring out future earnings.
By the way, keep in mind that providing historical information to readers of the financial statements to allow them to make estimates of future earnings and cash flows of the company is, like, sorta’, kinda’, the purpose of GAAP financial statements.
The problem with GAAP
Some drawbacks in looking at GAAP numbers, according to the professors:
Oops. Sorry. I posted this without a title.
Reposted it, but with a title. You can find the article here. Sorry for the confusion.
I’ve dropped the prices for the print copies of my books available at Amazon, Barnes & Noble, and iTunes store.
Here is what you can find on-line:
Tragedy of Fraud – Insider Trading Edition
Story of Scott London’s fall from regional audit partner at KPMG to prison inmate because of his insider trading.