Working on overhead. Photo courtesy of DollarPhotoClub.com. Yeah, I know that is a poor joke.
A running debate in the donor and nonprofit community is whether the ‘overhead ratio’ is a good tool to measure the effectiveness of a charity. There seems to be more discussion of the issue lately. Wounded Warrior Project is the focal point for recent discussion. A few articles of interest along with some background:
(Cross-posted from my other blog, Nonprofit Update, because this issue is likely of interest to many readers of this blog.)
1/27 – New York Times – Wounded Warrior Project Spends Lavishly on Itself, Insiders Say – Tell me your thoughts on the ongoing conversations in the nonprofit community about overhead ratios and I will tell you whether you will think this article is a balanced critique or a hit piece.
Cleaning up the numbers. Image courtesy of DollarPhotoClub.com
A couple of articles have caught my eye on Toshiba’s book-cooking fiasco.
Tiny lawsuit to recover damages
11/10 – Wall Street Journal – Toshiba Shares Fall After Loss, Lawsuits– Toshiba has sued three former presidents and two current executives. Goal is to recover ¥300M ($2.4M).
Claimed amount of the accounting fraud is still ¥155B ($1.26B) after tax. Previously mentioned the estimate in September was about $1.87B pretax and $1.29B after tax. Looks like the estimated of amount of book-cooking is holding firm.
Just as a completely wild guess, I’ll guess the $2.4M would not even cover the legal fees already incurred by Toshiba to deal with the mess created by the named executives.
Previously discussed a sanction of Grant Thornton and two of its partners by the SEC for two problem audits. This post provides some update on the partner on one of the audits.
Francine McKenna gives us much more detail on 12/6 as she explains Best Case Yet For Publishing Audit Partners Names: Grant Thornton’s Koeppel. She points out this illustrates the value of having the name of the audit partner easily available: if that info was readily accessible, it might be possible to get an early warning on a partner that has a long trail of problem audits.
Article points us to the SEC enforcement action. I have only browsed the document. Going Concern article mentioned in my earlier post gives much of the unpleasant error-by-error detail.
Ms. McKenna points out additional highlights from the SEC. If you are still paying attention to my series of posts, you will learn a lot from her full article.
Something I did not know is the national professional standards team at Grant Thornton has a monitoring list of audit partners who have “negative quality indicators.” Based on that, I would guess most of the large firms have such a list. A watchlist for lousy audit partners is actually a thing. I didn’t know that, but then I don’t get out much.
The partner on the ALC audit was on the watchlist. The firm knew there were some quality issues.
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.
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: …
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.
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: …
Wow, yesterday I read of a bunch of CPAs that are in some deep trouble.
First, a couple of partners of Grant Thornton and the firm itself were sanctioned by the SEC for some lousy audits. Second, I read of a local firm in California that was sued by the state Attorney General for allegedly helping their charity client allegedly deceive donors. The first situation is now admitted by the firm and partners, the second situation is merely alleged by the AG.
Wow.
The AG lawsuit was filed this week, on December 1, 2015.
Lesson to be learned by all CPAs is do a good job if you are an auditor. Don’t ignore massive red flags that are waving boldly in the brisk wind.
The caution to California CPAs is that it is actually possible for the AG to sue your firm and you personally. If you still thought that audits of charities are low risk, the mere filing of this case ought to change your mind.
This is a long discussion, so I will break it into three posts over three days.
By a 6-1 vote, on 11/11/15 FASB authorized their staff to prepare the final draft of the lease standard. When the final draft is ready, it will be routed to the board members for a final, written vote.
If you would like to compare the various definitions in play for materiality, then Emily Chasan has the article for you at the Wall Street Journal on 11/3: Definition of Materiality Depends Who You Ask.
The definition readers of this blog have incorporated deep into their brain is from FASB, as follows:
On October 28, 2015, FASB voted to split in two the exposure draft to overhaul presentation of not-for-profit financial statements. You can see their summary of the decision here, although that appears to be a dynamic link and the discussion will likely move soon. Extract of minutes on this issue on can be found here. That appears to be a link that will be in place a long time.
Reason for breaking this in two is that some components of the exposure draft received serious pushback. Those items will be considered in more detail and addressed at a later, yet-to-be-determined date.
The less contentious items will move forward “in the near term.” One article I read, but for which I don’t know how to provide a link, said FASB hopes to have what they call workstream one finished in mid-2016.
Previously mentioned FASB has released two exposure drafts to change the definitions of materiality. I am just beginning to understand the issue. Most of the significance plays out in the world of publicly traded companies, which is light years removed from my practice. Most readers of this blog likely stay far away from that world. Yet what goes in that distant galaxy will have a large impact on private companies.
Here are a few articles to fill you in on the implications and behind-the-scene issues. Will also touch on the current definitions of materiality and how to dispose of immaterial misstatements.
FASB has issued an exposure draft to modify the discussion of materiality in the conceptual framework along with a proposed ASU to add comments on materiality into the ASC.
I have only read a few articles on the exposure draft and only browsed through the text once. That means I’m not ready to make an extended comment.
For the moment, consider that the entire text of the change to the ASC can be found in these three sentences, which will eventually be found in sections 235-10-50-7 through -9:
Burning phoenix image courtesy of DollarPhotoClub.com
A group of CPAs in France believe there is so much value in the Andersen brand that they have formed a new consulting firm which claims worldwide rights to the name.
The firm will launch in 2016. They will do consulting but no audit or tax work.
FASB has released three in a series of FAQs about the exposure draft that will drastically change accounting for all nonprofit organizations.
The first Q&A provides background and general discussion. One of the main goals of the exposure draft is to improve reporting and disclosures about liquidity. The FAQ links to the exposure draft and a May 2015 webcast discussion.
The second Q&A goes into some detail on specific issues.
The third Q&A explains some alternatives available within the exposure draft.
This discussion is cross-posted from my other blog, Nonprofit Update. Although the context of my discussion is how this issue applies to charities, the issues are of even more importance to for-profit businesses.
In response to the rapid growth of what is called the “gig economy” or freelancers, the Department of Labor has issued an interpretation which tightens the definition of who is an employee.
I think it would be wise for the finance team and leadership of charities to look at this issue.
While this is aimed at companies like Lyft, Uber, Airbnb, and any other tech company that pays freelancers on an ad hoc job-by-job basis, it clearly applies to traditional businesses. This applies to charities.
It might be wise to think about how your charity is handling the independent contractor issue.
The WSJ article explains that DOL believes many independent contractors should be moved to employee status. The DOL believes the definition of employee is far broader not only than what many employers believe but is even broader than what many courts have ruled.
