CPA sanctioned by California Attorney General over audit of charity

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The California AG negotiated a settlement with a charity for their alleged overvaluation of medical GIK. I say alleged because the charity, three present or former board members, the charity’s insurance company, and the external auditor all deny in the settlement they did anything wrong.

The alleged scheme, according to the AG, was the charity used two other charities, which it formed, to buy medicine in the Netherlands and then donate it back to the ‘parent’, which then recognized GIK at US prices.

The AG asserts that over the course of 25 or more transactions, the purchase of about $225,000 of medicine by the two controlled charities generated gift-in-kind revenue of about $34,900,000 in the sanctioned charity.

Of note for readers of this blog is that the CPA providing an external audit was sanctioned as part of the negotiated settlement. She audited the charity and signed its 990s. She also audited one of the controlled charities and signed their 990s.

My Nonprofit Update blog discusses the settlement in two different posts:

After denying any wrongdoing, all the parties agreed to take specific action.

The charity’s insurer agreed to pay the state $400,000.

Three named individuals are to be removed from the board or removed from their current employment position.

One of the two controlled charities (which were both formed by the ‘parent’) agreed to dissolve itself.

The charity agreed:

  • it would not resume its medical GIK program,
  • it will restate 990s for five years, and
  • the restated 990s will exclude from revenue just about all of the medical GIK, if I read the settlement terms for what would be excluded from the 990 correctly.

Sanctions on external auditor

Here is the main point of this post. Look at the sanctions agreed to by the external auditor.

She agreed to:

  • Pay the state of California $3,000.
  • Not provide services for five years to charities operating in the state.
  • Before providing any services to charities after the five year ban expiration she will get CPE on auditing charities, preparation of 990s, and accounting for gifts-in-kind.

Oh, her name is visible on the ol’ internet as being associated with this case. Most likely, those articles will never disappear.

I’ll guess she may need to explain that to the state board, although that does not exactly fit the definition of a conviction or revocation of licensing. I’ll guess she will end up explaining this to her malpractice insurance provider, who will probably not be very happy.

Some way deep-inside-baseball stuff for CPAs. If you are really, reeeeally interested in this discussion, check out the last paragraph in the first post I wrote.  It will be worth your time to look at the financial statements.

CPAs, ponder that agencies other than the state board of accountancy might discipline you if you get into a big enough mess.

Think about that as you plan your next audit, or draft a set of financial statements, or argue with a client about fair presentation.

2 thoughts on “CPA sanctioned by California Attorney General over audit of charity”

    1. Hi Bill:

      I don’t think so, for two reasons.

      First, the visible role of the insurance company is to pay the charity’s penalty. The context suggests the four named individuals will be writing a personal check.

      Second, I don’t otherwise recognize the name of the carrier. Granted I don’t know who else is writing policies in California other than the two that are well known and I have no idea who all the subs are in the big companies, but I am not aware whether this company writes professional malpractice.

      Thanks for taking time to ask.

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