Some thoughts for CPAs after reading the Tampa Bay Times, CIR, and CNN reporting on GIK shipments

The Tampa Bay Times has run the article they wrote with CNN and the Center for Investigative ResearchNo accounting for $40 million in charity shipped overseas. It looks to be the same text as in the CIR report, which I mentioned here.

(cross-posted from my other blog, Nonprofit Update, because this discussion especially applies to auditors.)

I have performed lots of audits over the years but don’t have any clients with the kind of GIK programs that have been in the news lately. That does two things. First, it frees me to pontificate and speculate because the independence rules don’t limit me in discussing an actual client situation.  Second, it gives me an auditor’s knowledge, experience, and intuition to apply to the news I read.

A few thoughts for CPAs after reading the article again…

Opinion shopping.

The quotes from a CPA about opinion shopping highlight the critical importance of following the professional rules that say a CPA needs to talk to the predecessor auditor.

From the article I’m guessing this was a repeat engagement, so it seems to me that information should have been revealed to the successor auditor. The memos for that conversation would be a fascinating read.

(For non-CPAs, it is a professional requirement for that conversation to have taken place and it is a professional requirement for the successor to document that required conversation. It would be extremely unwise for the predecessor auditor to not document the discussion.)

Variance authority.

The article says a for-profit company arranged the shipments, matching the goods with charities in return for a fee.

I don’t know what’s in the charities’ files (neither do CNN staff, nor CIR staff, nor Tampa Bay Times staff) and I don’t know what’s in their auditors’ workpapers.

With those disclaimers out of the way, let’s take a step back and start sniffing the air.

(Inside baseball explanation for non-CPA readers: auditors often do a ‘smell test’ to see if something makes sense at an overall level apart from the minutia of rules and low-level details of an issue.)

Reread these paragraphs:

The company lines up big quantities of donated goods, from medicines to coconut M&Ms. Then it finds nonprofits looking for a low-cost way to help people in need.

For a fee, Charity Services arranges everything, from finding the goods, to coordinating the shipping, to filling out paperwork required by a nonprofit’s auditor and the IRS.

Company records obtained by CNN show that in 2010, Charity Services handled at least 50 shipments valued at almost $110 million. Guatemala was the most popular destination.

Apply the smell test.  Again, I don’t know what’s in the files, but does it make sense to you that an intermediary could make the match upstream  & downstream, take care of all the details, and do all the paperwork needed for audit and tax purposes (am I stretching too far in wondering whether that reopens the valuation issue?) while leaving variance authority in place for multiple charities, possible several steps downstream?  That is an absolutely legitimate question to ponder when one overlays this article with the all the other reports in the last few years.

With your professional experience, please step outside the detailed workpapers of your audit: how does it rate on the smell test that 15 charities would independently exercise their variance authority to send lots of shipments to the same charity?

Professional skepticism

It is very likely that proper variance authority is in place and properly documented for all those shipments.

Simultaneously, a diligent auditor properly applying professional skepticism ought to be looking at transactions more carefully after reading all the reports in the news over the last year.

Charities don’t like to talk to reporters. I get it. Yet, if you were auditing an NPO when newspaper reporters with feet on the ground couldn’t actually find the recipient of your client’s aid shipments, would that give you pause? Would you be concerned if many NPOs in your client’s sector wouldn’t talk to reporters? Is your client getting media inquiries? Would any of that information affect your risk assessments?

‘Spose you might want to ask some more pointed questions in the next audit?

More reports on the way. The Tampa Bay Times article says CNN will have reports on Wednesday and Thursday. Because of the differences between print and TV, those televised reports won’t be able to go into as much detail as the print articles but will probably have an overall summary along with good video.

Time is running out.

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