Nonprofit Accounting and the Deplorable Practice of Overvaluing

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September 8, 2012; Source: Tucscon Citizen

Two Arizona-based nonprofits are under scrutiny for their accounting practices. Food for the Hungry and the Breast Cancer Society (BCS) are among the largest nonprofits in Arizona. According to the Tucson Citizen, Internal Revenue Service (IRS) records document “$4.1 million in vaccines that the Breast Cancer Society says it gave to Ghana, Africa. The administrator of the Ghana program said Friday that the Breast Cancer Society has nothing to do with the vaccines.” The Breast Cancer Society claimed that it gave, according to the Tucson Citizen, “$38 million last year in grants, medicine and other supplies to deliver direct help to those suffering from the disease,” but the Better Business Bureau (BB) and the American Institute of Philanthropy say that the Breast Cancer Society uses in-kind donations, including medicines, to suggest to cash donors that it is financially efficient while most of the money it raises is, they say, devoted to administrative and fundraising costs.

One of the practices in question is the alleged paper transfer of donations from one charity to another with no goods physically changing hands. This ends up in the same goods being recorded as revenue and program expenditures in multiple agencies. As the Tucson Citizen explains, “In exchange for a shipping or processing fee, one charity will transfer the gifts-in-kind to another charity on paper. On paper, the gifts-in-kind are worth millions. The charities will book the entire value of the gifts-in-kind as revenue and then record it as a ‘donation’ when it is sent to another agency.” In this way, a charity could spend a paltry few thousand dollars but wind up looking like it “donated” millions of dollars of gifts-in-kind. Very often, there is no physical transfer of the gift. It is all done on paper. Why bother? The increases recorded in donations and program expenses end up bringing their administrative expenses into a ration that would pass muster with watchdog agencies. President James Reynolds II of the Breast Cancer Society reportedly wrote in e-mails Friday that BCS “strives for excellence in reporting our activities in accordance with generally accepted accounting principles.”

As for Food for the Hungry, the Tucson Citizen reports that it claims that it spent “$83 million in 2010 on disaster relief and long-term development projects.” But the IRS has found that Food for the Hungry overvalued the medicine it gave away “to mislead the public in order to raise more funds.” And it imposed a fine of $50,000 for that misrepresention. Food for the Hungry is disputing the audit findings. The alleged practice in question is the buying of medicines or other goods as program expenditures at a fraction of what one claims they are worth. According to this article, “Records also show that Food for the Hungry paid pennies apiece for pills that it once reported were worth more than $10 each. The charity now reports the pills are worth about $1.54 each. The non-profit’s own website indicates the pills can be purchased for 5 cents.”

Charity Navigator recently sent letters out warning nonprofits to report the value of gifts-in-kind differently if they don’t want to face the possiblility of a downgraded ranking. –Ruth McCambridge

  • Keith Oberg

    Such practices as Food for the Hungry and the Breast Cancer Society are reported to have done endanger the credibility and tax advantages of other non-profits handling in-kind donations. Bikes for the World carefully documents its donations of used bikes sampling receipts issued at donation points by volunteers and staff, which engage individual donors in valuing their widely-varying donations using written guidance on determining market value. Donors depart with a receipt containing a written estimate (for which they are responsible should they use for tax purposes), and Bikes for the World keeps copies for its records. The result is that Bikes for the World can calculate a statistically-valid average value for donations applicable to our entire “production” for a given year.

  • dclaudew

    This article is not new news. All you have to do is read most Form 990s to see the equivalency between nonprofit cash receipts and nonprofit administrative expenses. Take, for example, any nonprofit that flies sick kids to once-in-a-lifetime vacations. The airline tickets and hotel rooms are in-kind donations. The remainder, the cash donations, will almost exactly equal the fancy office building, the salaries, and the corporate retreats. Don’t give cash donations to any charity that shows equivalency between its cash intake and its admin expenses, as you will just be enabling larger salaries.

  • Paul Fischette

    This scandal is a reminder that in-kind donations must ALWAYS be accounted for at Estimated Fair Market Value.
    There will always be some subjectivity in trying to determine Fair Market Value. Nonprofits SHOULD ALWAYS find a neutral third party. When I was Finance Manager for a Rochester, NY nonprofit, we received an in-kind donation of a mixed use residential and commercial building from a local business man. We obtained all necessary closing documents, prior property tax bills and documentation from the City of Rochester. The City noted on its tax bills that the property had an Assessed Value of $55,000. The attorneys whom we worked with consulted a local property appraisal firm. The appraisal firm estimated that the Fair Market Value of the property was $73,000. We booked the value of the property based on the $73,000 estimated Fair Market Value from the appraiser. Figures don’t lie, but liars figure!

  • Barry Gardner

    This article is very unfortunate, as the facts are very different than what is portrayed here.

    The genesis of this whole matter was an IRS audit termed “routine” that started in May 2011. After Food for the Hungry (FH) turned over 850 megabytes of data–a response the IRS subsequently termed “thorough, accurate and complete”–the IRS wrote its “initial findings” memo on Jan 6, 2012. This document was subsequently leaked to the Chronicle of Philanthropy and Forbes magazine later in January. The initial findings memo was used by the IRS as leverage to induce our signing a voluntary extension of the statute of limitations. It therefore listed every possible bad consequence that could possibly befall FH if it failed to cooperate. Subsequent meetings with the IRS have now narrowed its focus to a single issue: the correct valuation for de-worming meds classified as gifts-in-kind. It never levied a $50,000 fine on FH but merely threatened to do so. FH has now voluntarily extended the IRS’ statute of limitations to May 2014—sufficient time to argue our case and appeal it if necessary.

    On Sept 9, 2012, the AZ Republic re-wrote the Chronicle story and presented it as if it were a new story. In fact, there was no new news. This story was picked up by the Tucson Citizen and now the Nonprofit Quarterly with neither new data nor comprehensive knowledge of the real nature of the issues. This looks like the media dog is chasing its tail.

    FH was never accused of daisy-chaining to bulk up its revenue. Critics of gift-in-kind accounting quoted in the AZ Republic should direct their objections to those who set accounting standards rather than those who follow those standards.

    FH received a “clean” opinion for its financial statements for the year in question. Its CPA firm and its tax counsel continue to believe the statements were accurate. Treasury rulings and generally accepted accounting principles support our treatment of the revenue issues being discussed. FH looks forward to the eventual dismissal of any and all charges of improper accounting.

    Barry Gardner, Chief Financial Officer, Food for the Hungry

  • Valerie Mattingly

    I had the best experience imagined at the warehouse. I felt like a kid in a candy shop. Thank you- thank you from the bottom of my heart for everything you do.. –