February 10, 2012 | Read Time: 3 minutes
Amid mounting criticism of aid groups’ accounting practices, Charity Navigator, which assesses nonprofits, is asking for feedback on how to rate humanitarian organizations that have recorded a big drop in their revenue.
Some international charities saw their revenues plummet last year after they changed the way they value deworming pills and other drugs. A few groups went from valuing the pills at $10.64 a tablet to $1.54 per pill. They said the move was in response to new guidelines from the Financial Accounting Standards Board that clarified how organizations ought to value noncash donations.
Charity Navigator has circulated a draft letter among humanitarian membership groups, proposing that charities be given the chance to submit revised financial statements for the last four years. The aim is to avoid penalizing aid organizations whose revenues dropped because of accounting changes, rather than a decline in their donations, says Ken Berger, Charity Navigator’s president.
Charity Navigator’s rating system typically punishes organizations whose revenues shrink over time.
But some aid officials have concerns about the watchdog group’s request. They say that the Financial Accounting Standards Board’s new guidelines didn’t fundamentally change how nonprofits ought to value medicines like the deworming pills and that only groups that have long exaggerated the value of certain pills had to record a drop in their revenues.
Some accountants also say the watchdog group’s proposal, which asks that auditors give the green light to the revised financials, seems impractical.
“I applaud Charity Navigator for their intentions, but in reality it would be very difficult to do,” says Brian O’Brien, who leads the audit practice at the accounting firm Schneider Downs. “You’re not going to find an auditor to sign off on that. It would take a lot of work to go back and establish fair value at a certain point in time, and I don’t know if a group would have the reference points to do that.”
Mr. Berger says the proposal is a draft and that he is open to taking a different approach.
Seeking Information
Meanwhile, another charity-evaluation organization, the BBB Wise Giving Alliance, is questioning aid charities about their valuation practices. The watchdog sent a letter last month to 70 relief organizations asking them to supply information on how many deworming pills they distribute and how they value the drug.
As The Chronicle reported this fall, one type of deworming pill, called mebendazole, has been Exhibit A in a growing controversy over allegedly inflated medicine values. Some nonprofits have been paying suppliers 2 cents a pill for the drugs and then recording them as donations worth $10.64 or even $16.25 a tablet. Groups that recently changed the way they value the drugs are now recording them at rates between 35 cents and $1.74.
The aid groups say those practices follow accounting rules. Some say drug suppliers only charge handling fees and that the pills themselves are donated.
The Internal Revenue Service takes a harsh view of those arguments. In a letter last month, the IRS levied a fine against Food for the Hungry, saying the organization purposefully misled donors when it claimed $46.4-million worth of revenue from deworming pills. The IRS says the drugs were purchased and should not have been considered a donation.
Food for the Hungry says it did nothing wrong. The group has hired a lawyer to help contest the IRS’s claims.
