Charities Get Cease And Desist From California AG
March 22, 2018 Mark Hrywna
California Attorney General Xavier Becerra issued cease-and-desist orders against three charities that officials said were deceptive in fundraising solicitations. It is alleged the organizations portrayed program spending percentages as inaccurately high as a result of including noncash contributions. A fourth charity filed to dissolve a day after receiving notice from the state’s highest law enforcement office.
The three charities – Food For the Poor (FFTP) in Coconut Creek Fla.; Brunswick, Ga.-based MAP International, and Catholic Medical Mission Board (CMMB) in New York City – have until April 11, to appeal or face fines exceeding $1.65 million in addition to having their charitable registration revoked. Collectively, the three organizations reported revenues of almost $2 billion, much of it in the form of noncash contributions.
National Cancer Coalition (NCC) filed Mach 8 to dissolve a day after the attorney general’s office filed for a permanent injunction claiming unfair competition and misrepresentations in charitable solicitations. The AG’s office took issue with NCC’s claim that almost 98 percent of spending went to programming and barely 2 percent toward both administrative and fundraising expenses. “That claim was false,” the AG’s office said in the stipulated judgment, and when taking into account international prices for the coalition’s pharmaceutical shipments, actual program expenses were less than 60 percent.
In 2014, the National Cancer Coalition advertised on its website a “special project” with the Breast Cancer Relief Foundation (BCRF). For the fiscal year ending September 2014, the coalition reported total expenses of $17.8 million, including $15.5 million in program expenses, of which $15 million was for pharmaceutical donations internationally and $30,600 domestically. That left only $406,573 to pay for all other program expenses that the coalition reported: rent, program salaries, postage and shipping, and more. There were no expenses reported for mammograms, diagnostic tests, or direct assistance to cancer victims to help with the course of treatment.
“The solicitations for BCRF were patently false,” it was alleged in the complaint.
While none of the other three organizations are based in California, they do solicit donors in the state. California law requires charities that solicit in the state to follow Generally Accepted Accounting Principles (GAAP). Under GAAP, charities can only claim “fair market value” of gifts in kind (GIK), defined as the “price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The AG may assess a penalty of up to $1,000 for each act and issued a total penalty of $1.088 million to Food For the Poor, $409,575 to CMMB, and $158,725 to MAP International. Payment is due within 30 days of the March 12 filing unless a written appeal is filed by April 11.
In response to requests for comment, all three charities issued statements championing their accountability, transparency and integrity since their founding and that financial statements are prepared in accordance with GAAP, audited annually by independent accounting firms that certified they were in full compliance with accounting standards.
“We have the utmost confidence in the integrity of our practices and our compliance with all laws,” said Adrian Kerrigan, senior vice president for partnerships at CMMB, adding that they plan to appeal. He described it as a difference of opinion in how they value pharmaceuticals. “We’ve been following industry practice” and in compliance with IRS, AICPA and FASB, he added.
“We believe we have done nothing wrong and we are actively working to resolve the Attorney General’s concerns,” Food For The Poor Executive Director Angel Aloma said via a statement.
GAAP requires charities to use the “principal market” in valuing assets or, in the absence of a principal market, the “most advantageous market” for the asset. U.S pharmaceutical company donors to these charities prohibited the pharmaceuticals from being distributed and used in the U.S.
“It’s not across the board but lots of organizations are aggressive in how they report accounting numbers and how they convey those externally,” said Brian Mittendorf, chairman of the Department of Accounting and Management Information Systems at The Ohio State University’s Fischer College of Business. He hasn’t yet seen state regulators aggressively clamp down when charities push those boundaries.
GIK is “definitely a grey area,” Mittendorf said, and organizations have pushed what’s acceptable and for the most part haven’t been challenged. “Certainly it’s more than these three organizations. When you have a professional fundraiser pledging, often pharmaceuticals, that then get transferred elsewhere that never touch your organization physically, how acceptable is it to record as revenue and expenses, he said.
The AG’s office appears to be taking a black-and-white view specific to pharmaceutical donations on GAAP, according to Bob Mims, a former controller at Ducks Unlimited and now a nonprofit consultant. “I’m not sure I’d agree as valuations are subject to interpretation,” he said. The inference is these entities may not have had a documented policy that had been vetted by their board or benchmarked against other like-missioned nonprofits about how they value GIK specific to pharmaceutical donations, Mims said.
The main issue raised by the orders is the claim that the charities are “irresponsibly influencing donors, portraying themselves as more efficient than they really are,” said Mims, a former chairman of the not-for-profit advisory committee of the Financial Accounting Standards Board (FASB). The value of a pill in the United States might be $200 but if sold overseas it might be a nickel. There could be some type of compromise in the middle in determining the appropriate fair market value for GAAP reporting, Mims said. “A nickel might not be right but probably some other value because GAAP allows for valuation based upon ‘future economic benefit or service potential,’” he said, adding that it’s not just pharmaceuticals that are impacted by GIK issues but other noncash contributions like easements and food donations.
The AG’s office also claims that Food For The Poor made false representations on its tax form related to joint cost allocation, which allows organizations to classified expenses as fundraising and program when both are conducted together. The filing alleges that $23 million was improperly shifted as program expenses for 2012 through 2015. When only cash donations are taken into account, Food for the Poor used about 66 percent of cash donations for direct aid in 2013, the AG claims. In 2015, that figure was about 67 percent, instead of the 95 percent claimed in solicitations, according to the complaint.