Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Misbehavin’ clients. Misbehavin’ CPAs. Part 3.

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Image courtesy of DollarPhotoClub.com

Image courtesy of DollarPhotoClub.com

Previous two posts in this series looked at sanctions applied by the SEC against Grant Thornton and two of its partners and then 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 the discussion of the AG’s case by looking at the charity’s 990.

You can find a copy of the AG’s lawsuit here.

You can find the charity’s 990 for 2014 here.

Introduction to the AG’s suit and background on their complaint is explained in this post. Might want to read that intro before continuing with this discussion about the 990.

Detail in tax return

Take a look at page 10 of the 990 which has the Statement of Functional Expenses. Here are the column totals for the year ended 6/30/14:

  • 4,916,785 – program
  •    404,959 – general and administrative
  •    593,922 – fundraising
  • 5,915,666 – total expenses

Whether you classify the $1.7M of advertising as G&A or fundraising, those two categories in total are a few dollars under a million and thus are not large enough to hold all the advertising.

Here are the large expense items with line numbers in parentheses:

  • 990,736 – salaries (7) – all recorded in program category, with employee count of 41 disclosed on page 1
  • 123,329 – payroll taxes (10), with 10% in G&A when 100% of salary is program
  • 132,551 – other benefits (9), again with 10% in G&A
  • 1,246,616 – total salary & benefits
  • 295,714 – legal (11b), all in program
  •   33,276 – accounting (11c), all in G&A
  • 205,622 – depreciation (22)
  • 544,013 – sales & processing (24a), likely to fix up and sell the cars
  • 465,614 – IT (14), occupancy (16), and outside/temporary services (24b)
  • 2,790,855 – subtotal of above

Legal fees

As an aside, the legal fees were $46,719 in fiscal 2013 and $74,579 in 2012 according to the 990s for those years. I will guess that the increase in legal fees to $295,714 reflects the costs of addressing the AG’s investigation. As a further guess, the legal costs in 2015 will be comparable to 2014 or even higher. My guesses are based on previously monitoring the costs incurred by Food for the Hungry to deal with their IRS audit.

Advertising costs

I don’t see where there is room to include substantial advertising in those line items, even if the costs were misclassified.

That leaves $3,124,811 for other items, including advertising and grants to charities.

The two large remaining line items:

  • 2,050,928 – grants to US entities (1)
  •    593,922 – advertising (12), all in fundraising

The tax return indicates there are no costs allocated under what was formerly called the SOP 98-2 rules. See line 26.

Following the lead of the allegations in the AG’s complaint, let’s look at the $1,763,520 of advertising paid to two vendors, as disclosed in Part VII Section B on page 8.

With $593,922 of advertising on line 12, that would leave $1,169,598 of advertising to be reported elsewhere on the Statement of Functional Expenses. The California AG alleges in paragraph 26 that

“… of that $2 million in “grants”, over $1.5 million was reported as “indirect contributions” that were reportedly “distributed to” other charities.

So by my calculations of the numbers I can see on the 990, that means the AG would allege that the $1,169,598 just mentioned would presumably be classified as grants. Again, that misclassification is the AG’s allegation as described in their complaint.

Rephrased, of the total grants of $2,050,928, the AG alleges $1.5 million of that was not grants. See paragraph 26. Using the numbers reported on the charity’s 990 I cannot see where the remaining $1.2 million of advertising was reported.

Obviously, I don’t have access to the audit workpapers.  I may have missed something in the 990. Keeping in mind I may have missed something and based only on the 990, I don’t see where all the advertising is reported.

The Statement of Program Service Accomplishments on page 2 shows expenses of $2,050,928 on line 4b. This amount corresponds exactly to the grant expense on the Statement of Functional Expenses. The explanation for line 4b, adjusted from all caps to sentence case is:

“Distributed direct cash contributions ($495,221), indirect contributions ($1,527,726) and in-in-kind contributions ($27,981) to qualified charities designated by donors or approved by the Board of Directors.”

The $1.5M mentioned on line 4b would therefore be what the AG alleges was advertising and operational expenses.

Disclaimer

All I know about the case against the charity and the firm is what the Attorney General alleged in the lawsuit, what information is visible in the 990s as disclosed at the Registry of Charitable Trusts, the information available at the California Board of Accountancy website, and the visible information at the named firm’s website.

I know that lawsuits typically use very heavy-handed language.

I also know that all those heavy-handed accusations are merely accusations. Each one of them needs to be proved in court.

There is a distinct possibility the AG misunderstood or misinterpreted the RRF-1 and 990s. There is a distinct possibility that a large volume of information not apparent from reading the 990 could dramatically change the facts and circumstances of the above information.

Unlike the SEC case, for the action by the AG I have not mentioned the firm name or partner name. Since the suit was filed three days ago there is no time for any subsequent filings so I won’t look for any additional online documents. Since the firm is obviously still sorting through the filing, I will not yet contact them for any comment.

What that means is we don’t have any idea how the charity looks at this and we have no hint as to what the CPA firm perspective might be. Someday I hope to hear their perspectives. There are often two sides to a story and we have no hint or even the merest whiff of what the other side might be.

What do you think?

Did I miss something? Misunderstand something?

If so, let me know.

I will approve all comments that are professional. (As you know, since this is my blog that means I decide what is professional.)

A few of the lessons for CPAs

  • It is possible to get in serious trouble with the California Attorney General. The path back to your audit consists of the AG complaining about the RRF-1, which leads to complaining about the 990, which will lead directly to a subpoena for your audit workpapers.
  • Even if the AG is completely off base, there will be serious time and serious dollars involved in addressing their lawsuit.
  • From the GT case, we are reminded to not ignore 10 foot tall flashing neon lights in your workpapers.
  • Do good work and make sure your work is very well documented.

On blogging – Sometimes I chuckle at myself. Initially I was planning to combine all the discussion on this immediate topic in one post. Realized that would be too long so I broke it into a series. Good thing, because with one more part still to go, this series has grown to about 3,400 words. Probably should have broken it into 7 posts instead of just 4!

Written by Jim Ulvog

December 8, 2015, 8:16 am at 8:16 am

Posted in Accounting, Audits

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