Charities’ methods of valuing donations called into question
By Bill Zlatos
Published: Monday, October 8, 2012
Updated: Monday, October 8, 2012
A pill that kills parasitic worms in people living in Third World countries lies at the center of a scandal that rocked international relief agencies in North America.
A controversy over how to value non-cash gifts such as medicine brewed for four years and came to a head this year when the Internal Revenue Service fined Phoenix-based Food for the Hungry $50,000 for overvaluing medicines it distributes abroad.
The IRS won't discuss the fine but labels the misuse of non-cash gifts one of its “dirty dozen” tax scams of 2012.
Overvaluation of such gifts can mislead the public into thinking an agency does more good than it really does, and that its revenue is growing and its overhead is low, watchdogs caution.
The practice involves billions of dollars, said Luke Hingson, president of North Side-based Brother's Brother Foundation, which distributes medicine and other supplies overseas. He contends that “many billion dollars, over many years, of claimed higher value never existed.”
“The integrity of international charities is weakened by this,” said Hingson, whose charity voluntarily dropped the value of its pharmaceuticals by $19 million four years ago.
Barry Gardner, chief financial officer of Food for the Hungry, said the charity disputes the IRS fine.
“We had followed what was then the prevailing accounting guidance,” he said.
Indeed, until 2008, the Financial Accounting Standards Board let relief agencies and businesses value donated goods such as deworming pills at the average wholesale price — that is, how much the medicine costs in the United States. As a result, the Red Book — the bible assigning values to donated goods — listed the medicine at a dramatically higher price.
Then the board changed the standard to how much goods cost where they are distributed.
“The standard did not fundamentally change how nonprofits are required to value pharmaceuticals. It simply refocused attention on what pharmaceuticals are worth in the current market, which can vary widely” from the book values, said Christine L. Klimek, a spokeswoman for the Financial Accounting Foundation.
Some of the biggest relief agencies in the country receive pharmaceuticals.
“If you give your hard-earned money, you want it to accomplish as much as it can,” said Daniel Borochoff, president of Chicago-based CharityWatch. “(Inflating drug values) allows groups to do basically nothing to help anybody to look great.”
That criticism rankles Tony Sellars, a spokesman for Feed the Children in Oklahoma City. He said Feed the Children provides 350,000 meals a day in 10 countries and distributes deworming pills around the globe.
“(Borochoff) can sit back in his ivory tower making these proclamations, but I've never seen him helping someone in need, and our people do it every day,” Sellars said. In 2009, Feed the Children valued its 60 million deworming pills at $9.07 each on its financial statements, Sellars said. The next year, the agency reduced its program to 30 million pills and valued them at 35 cents apiece. Its revenue for that drug alone plummeted from $544.2 million to $10.5 million.
Agencies rely on rankings by groups such as those by Charity Navigator and The Chronicle of Philanthropy to make them more appealing to prospective donors. Critics such as Borochoff say charities followed the old valuation method to boost their rankings. The Chronicle measures cash and non-cash revenue of the nation's biggest charities; Charity Navigator awards as many as four stars to groups whose incomes rise dramatically.
“As a layperson with some experience in the philanthropic sector, my suspicion is that this behavior would qualify as some flavor of fraud,” Michael Hanlon, head of the health financing team at the University of Washington's Institute for Health Metrics and Evaluation, said of overvaluation. “For the long-term health of the philanthropic sector, it is crucial to root out and eliminate this practice.”
Charity Navigator, based in Glen Rock, N.J., in September posted an online advisory about Food for the Hungry's problems with the IRS. Yet Charity Navigator contends that overvaluation of non-cash gifts typically is an honest mistake.
“In this sector, there are those bad apples out there, but I don't think that applies across the board to every charity,” said Sandra Miniutti, vice president and chief financial officer of Charity Navigator. She noted that a million charities exist in the United States.
Gardner, of Food for the Hungry, said “critics of gift-in-kind accounting should complain to the standard-setters instead of picking on the charities.” Last year, Charity Navigator broadened the way it rates nonprofits, adding accountability and transparency as factors. In August, it gave groups that receive a lot of pharmaceuticals a chance to change data from previous years so that people consulting their financial statements could make fair comparisons.
Miniutti said Charity Navigator hasn't processed revised data that Food for the Hungry sent. World Vision intends to revise its numbers and Feed the Children might, she said.
“It's a face-saving measure on their part, because they look stupid not to question whatever the charities put on their tax form,” Borochoff said.
“This offer is just our attempt to be fair,” Miniutti replied. “We're not embarrassed.”
Bill Zlatos is a staff writer for Trib Total Media. He can be reached at 412-320-7828 or firstname.lastname@example.org.
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