One Attorney General’s Response to “Creative” Nonprofit Accounting

by Ruth McCambridge

A familiar pattern of “creative” nonprofit accounting was referenced in an article in the Orlando Sun Sentinel which reported that a Florida organization called Food for the Poor has been ordered to cease and desist by California Attorney General Xavier Becerra, who is also looking to have the organization’s registration revoked for overreporting its revenue.

Why would a nonprofit want to do such a thing, you might ask? It makes them look larger and more legitimate, and it makes their overhead ratios look better. The way this is done is by taking in in-kind gifts and overvaluing them. This is a pattern that seems to appear most often in organizations donating abroad, something NPQ and others have been reporting on since 2012.

In Food for the Poor’s case, the in-kind donations are largely pharmaceuticals, which made up 54-71 percent of its revenue over the three-year period between 2012 and 2015. (In 2015, it listed its income at almost $1.6 billion, according to Becerra.) These particular pharmaceuticals were prohibited from being sold in the United States because they are close to their expiration dates; even in the countries to which they were shipped, they would be sold at a fraction of their original price. This, Becerra asserts, means that the value of the donation must be figured according to those foreign market prices rather than the “very high US market prices.”

To illustrate the difference, Becerra cited a shipment of the cholesterol medication Simvastatin to Nicaragua in 2012. It could have been bought there for $5,000, but the charity valued it at $924,671.

“The appropriate international market prices for most of the pharmaceuticals at issue were a fraction of the values Food for the Poor reported,” the order says. “Had Food for the Poor used appropriate international market prices to value its pharmaceutical donations, its reported revenue and program expense figures would have been markedly decreased.”

Why should Becerra care about what this Florida organization was doing? Read more…