Court filings in California AG’s cease and desist order against three charities

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I’m reading through the filings for the AG’s cease and desist order against MAP International, Catholic Medical Mission Board, and Food for the Poor. The hearing on the order is underway this week. It will continue for the next two weeks, according to the schedule.

Although the filings are public information, they are not available on the Internet. Instead, they must be obtained directly from the state. It took several phone calls, and getting forwarded to another office, but I did reach the person responsible for responding to media requests. When I finally reached the right person, she was extremely helpful and very prompt.

So, I now have a huge amount of reading to do.

As time is available over the next few days and weeks I will comment on different things visible in the filings.

 

A few preliminary thoughts.

This is a major battle. The charities are responding accordingly.

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Hearings start tomorrow on California AG’s Cease and Desist Orders against three charities

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Calendar at the Office of Administrative Hearing’s website still shows the appeal hearings on the AG’s Cease and Desist Order start tomorrow, November 27, at 10 a.m. in downtown Los Angeles. Hearings continue the next 14 days at 9 a.m.

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Comments in financial statements of three charities appealing California AG’s Cease and Desist Order. Part 3 of 3.

Appeals of the AG’s C&D Order will be heard by an administrative law judge. Image courtesy of Adobe Stock.

There are a number of pieces of information of public interest in the most recent financial statements for the three charities who received cease and desist orders from the California Attorney General. The appeal hearings start in a week, on November 27, 2018.

Part 1 of this series provided background, an executive summary, and a short discussion of Catholic Medical Mission Board’s disclosed accounting policy. Part 2 discussed the Food for the Poor financials.

This post will discuss the MAP International financials. Might want to get a fresh cup of coffee since this is a long read because it quotes the accounting policy in 2017 and 2016 along with a transition comment from the 2014 financials.

Previous post discussed the 12/31/16 financials for FftP, 9/30/17 financials for CMMB, and 9/30/16 financials for MAP.  FftP and MAP have since issued their next year’s report; CMMB has not.

MAP International

The 9/30/16 financials were available for issue on February 2, 2017, about 4 months after year-end.

The audited financials for the year ending September 30, 2017 have a date on the audit report of September 27, 2018. That means the 9/30/17 financials were released, or available for issue, on 9/27/18, about twelve months after the fiscal year-end. Audit report is from the Lawrenceville, Georgia office of Capin Crouse.

This means the 2017 financials were prepared with knowledge of the AG’s allegations and known status of the case as of September 2018.

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Comments in financial statements of three charities appealing California AG’s Cease and Desist Order. Part 2.

At issue in the AG’s claim: how should pallets of donated meds be valued if restricted by donor for distribution overseas? Image courtesy of Adobe Stock.

There are a number of pieces of information of public interest in the most recent financial statements for the three charities who received cease and desist orders from the California Attorney General. The appeal hearings start in about a week, on November 27, 2018.

Part 1 of this series provided background, an executive summary, and a short discussion of CMMB’s financials. This post discusses the Food for the Poor (FftP) financials. Part 3 will discuss the MAP financials.

Previous post discussed the 12/31/16 financials for FftP, 9/30/17 financials for CMMB, and 9/30/16 financials for MAP.  FftP and MAP have since issued their next year’s report; CMMB has not.

Food for the Poor

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Comments in financial statements of three charities appealing California AG’s Cease and Desist Order. Part 1 of 3.

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Just checked on the most recent financial statements for the three charities who received cease and desist orders from the California Attorney General. The appeal hearings start in a week, on November 27, 2018.

Found a number of pieces of information in the financials that are of public interest to this developing story. Will point out some of the information now. Later on, as time allows, I’ll provide some commentary on the disclosures.

Previous post discussed the 12/31/16 financials for FftP, 9/30/17 financials for CMMB, and 9/30/16 financials for MAP.  FftP and MAP have since issued their next year’s report; CMMB has not.

This discussion will be in three parts.

Executive Summary

All three charities disclose they use wholesale acquisition cost (WAC) to value donated medicine.

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Appeal of three Cease and Desist Orders from California AG set for hearing before an administrative law judge.

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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:

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Assessment of allocating cost of speakers in Food For the Poor’s financial statements.

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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.

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Food for the Poor settles allegations in Michigan AG’s Cease and Desist Order

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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

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Food for the Poor’s response to news articles

Clean water from a well – There are places in the world where that is a big deal; I’ve visited a few. Many charities, including those whose accounting is being criticized by the CA AG, are working to improve the lives of the least among us. Image courtesy of Adobe Stock.

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.

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More articles discussing the California AG’s enforcement actions over medical GIK

…What accounting rules sometime feel like.  Image courtesy of Adobe Stock.

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:

  • Is the industry standard consistent with GAAP?
  • Is either GAAP or the industry standard honest?

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Some additional news reports on the California AG’s enforcement actions

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There are a few recent articles discussing enforcement action by the California Attorney General regarding the accounting for donated medicine used by three national charities. Looks like the issue is beginning to get a bit wider attention than this teeny tiny little ol’ blog.

Inflated Expectations / What’s going on with foreign affairs nonprofit Food for the Poor? from Slate on May 10, 2018, provides a non-technical description of the issues raised by the California AG.

Good explanation of medicine valuation, near-term expiry, joint cost allocation, principal market, access, and materiality issues without ever using those words. Even hints at daisy chain and SFAS 136 agency transactions.

Let me suggest a couple of exercises for accountants in the audience.

First, read through the article another time identifying all the accounting issues touched upon. Think about that as an illustration of how to describe technical accounting issues without being technical. (Yeah, I know, what a crazy idea – explaining stuff so people will understand.)

Second exercise is to read through the article thinking about how non-accountants would respond to each of those ideas if it was the first time they had heard about it.

How many of those GAAP accounting treatments would actually make sense?

How many would seem flat-out silly to people who haven’t spent years working with accounting rules?

Description of one shipment

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Once again: The time left to clean up the valuation of GIK meds is running out.

Volunteer Fire Department Station” by SliceofNYC is licensed under CC BY 2.0

 

See that fire siren at the top of the city’s fire hall?

The whistle is so loud my ears hurt.

The fire is valuation of donated medicine.

The town is the non-profit community.

 

It is time to rerun my fire alarm commentary.

My previous post provided a technical description of regulators’ concerns over accounting for donated medicine in the not-for-profit world. This post provides a word picture of the current situation.

Originally posted way back on November 9, 2012, here is my six-year-old discussion with some minor changes:

 

 

There is a fire burning in the nonprofit community. The fire is the issue of valuing donated pharmaceuticals. Primarily issue is about mebendazole.  Albendazole and antibiotics are involved, but to a lesser degree. There are many alarm bells ringing. 

The loudest fire alarm went off yesterday.

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Regulators have serious problems with how the nonprofit community is accounting for donated medicine.

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There is a serious problem in the nonprofit community in terms of accounting for donated medicine. Three major enforcement actions by various regulators tell us that the regulators have serious reservations about how charities are dealing with gifts-in-kind.

Those of us working in the charity world need to ponder what could be making so many regulators so concerned.

50 Attorneys General

The rumors in the wind mentioned in my next post were discussed in 2012.  That turned into a major enforcement action by the Federal Trade Commission and all 50 state Attorneys General against 4 cancer charities. (See my posts under the tag FTC.) That was in 2015.

I’m not aware of any followup by that group and I’ll guess the reason is the complexity of coordinating a 50+ member committee.

For the FTC and all 50 Attorneys General to all be on the same page on an issue should serve as a warning they believe there is a serious problem.

IRS

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Some details in the appeals filed by 3 charities

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As mentioned previously, appeals have been filed by the three charities receiving cease & desist orders from the California A.G.

This discussion will highlight some comments in the appeals. Will have a few observation from an auditor perspective along the way. Might want to get a fresh cup of coffee before you dig in. This will be a long post.

Previous posts:

 

Catholic Medical Mission Board appeal

At seven pages, this appeal is a bit shorter than the others. The page count includes the proof of service and a cover sheet which is the page the AG provided to request an appeal.

In the appeal, CMMB denies all the factual allegations and conclusions of law (para 4). Specific assertions are listed for emphasis:

  • The AG is not properly interpreting GAAP.
  • Geographic restrictions on medicine do not make the US a prohibited market for valuation purposes.
  • Representations to California citizens are neither unfair nor deceptive.

In the appeal, CMMB requests:

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Three charities file appeal of California AG Cease and Desist order

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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:

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