Misbehavin’ clients. Misbehavin’ CPAs. Part 2.
First post in this series looked at sanctions applied by the SEC against Grant Thornton and two of its partners and looked at a lawsuit filed by the California AG against a charity. The AG also named the charity’s auditing firm and lead partner as defendants.
This post continues explanation of the AG’s case in California by looking at the accounting issue they allege and then looking at the charity’s 990.
You can find a copy of the AG’s lawsuit here.
I will skip a large portion of the alleged issues where the AG claims to have a problem with the charity. Let’s go to the accounting issue.
Paragraph 24 indicates the organization spent a significant amount of money on advertising.
Paragraph 25 describes the organizations public claims in which they
“… told donors that between 70 and 90 percent of the net proceeds of donated vehicles would go directly to the donor’s chosen charity. This was false.”
I have not looked at the charity’s web site, but if they made such a claim, the numbers disclosed by the charity on the 990 suggest a lower percentage existed in 2014.
Both the program service accomplishments and functional allocation suggest a lower number. My comment is based on disclosed revenue of $5.0M and disclosed grants of $2.1M (page 10 line 1) for 2014. The AG alleges the actual number is even lower than the 990 shows. Based on comments in the following paragraph, the AG asserts and alleges $1.5M of the reported grant amount was not actually grants. If you have a calculator handy and are that interested, you can calculate for yourself the percentages from the 990 and as alleged by the AG.
Paragraph 26 explains the AG’s perception and allegation of accounting impropriety:
“… defendants have deceptively reported C4C’s advertising and other operating costs as if they were donations made to other charities. This misrepresentation significantly overstated the proportion of donated funds to be forwarded to other charities and created the illusion that C4C spent donors’ money properly. For example, C4C’s IRS Form 990 for the reporting year 2013 reported that C4C received over $5 million in donated vehicles and distributed over $2 million as “grants” for the charities. However, of that $2 million in “grants”, over $1.5 million was reported as “indirect contributions” that were reportedly “distributed to” other charities. In truth, not one charity received a single penny of this money; the $1.5 million was spent on C4C’s fundraising and operating expenses.”
Boil that long paragraph down into non-accounting/non-legal language means the AG claims that advertising and other operating costs are allegedly reported as grant expense.
As an aside, that paragraph is obviously referring to the fiscal year ending June 30, 2014 because the tax return for that year shows about $5.0M of income for 2014 and about $7.1M of total revenue for the year ending June 30, 2013.
The accounting firm is specifically mentioned in the second cause of action, which is an allegation of aiding and abetting a breach of fiduciary duty. You can read this starting at paragraph 36.
The involvement here, as described in paragraph 38, asserts that the firm and the partner were allegedly
“… preparing and filing false and misleading reports with the IRS and the Attorney General’s Registry of Charitable Trust, and by causing the reports to be disseminated to the donating public. These defendants knew or should have known that the information in these returns was false and the filing of the returns was unlawful.”
That is a whole bunch of allegations, all of which are phrased harshly and all of which will need to be proved in court by clearing a fairly high standard of proof.
The reports to the AG mentioned would be the RRF-1. Attached to each RRF-1 filing is a copy of the 990. IRS reporting is obviously the 990.
CPAs, be forewarned yet again that it is possible to be sued by the AG for the RRF-1 you prepared for a client.
Let’s take a brief look at the tax returns.
You can find the charity’s filing at the Registry of Charitable Trust website on this link. As a general approach if you want to find filings for another charity, you can go to the AG site here and click on the registry search option on the right side of the page.
The 2014 990 is at the bottom of the page and can be found here. That is a public document, by the way.
Let’s dive into the details.
Contributions on page 9 are $5,019,601, all of which are disclosed as non-cash. Schedule M shows this consists of 6,484 donations of cars & other vehicles and 95 donations of boats & planes. Valuation is based on “sales.”
Page 8 of the 990 reports $1,256,386 paid to one vendor for web advertising and $507,134 paid to another vendor for radio advertising. Counting only the disclosed advertising for independent contractors paid over $100,000, that is $1,763,520 of advertising. There are four more I/Cs paid over $100K whose names, services, and payments are not disclosed, which are in addition to the four listed.
Next post: Continued discussion of the 990, disclaimer, and lessons for CPAs.