The California Department of Justice consummated an Assurance of Voluntary Compliance to remedy fundraising problems. Specifically the organization used an accounting gimmick involving gifts-in-kind (GIK) to manipulate its books and, thus, hide poor “program service” percentages (i.e. how much of a donation goes to charitable program as opposed to fundraising and salaries). It is a primer on the problems of GIK and ensures that the directors and accountant responsible resign and/or not perform services of charities going forward.
SACRAMENTO – California Attorney General Xavier Becerra today announced a settlement with charitable organization Giving Children Hope (GCH) for filing misleading documents to increase the charity’s ranking and generate more donations. The settlement comes after an investigation by the Attorney General’s office found the charity engaged in a misleading reporting scheme to purposefully increase its Gift-in-Kind donations to mislead the public. Gift-in-Kind donations are noncash donations made to charities, such as clothing, pharmaceutical drugs, food, and medical supplies. As part of the settlement, the charity will pay $400,000 and stop providing misleading reports. The directors and officers of GCH – John Ditty, Sean Lawrence, V. William Barta and accountant Suzanne Bryant – will pay an additional $10,000. The additional money will be used for charitable law enforcement investigations.
“Today’s settlement should serve as a stern reminder to charities that lack transparency,” said Attorney General Becerra. “My office is committed to protecting California donors and honest charities from the harm caused by accounting gimmicks used to mislead the public.”
Giving Children Hope provides international assistance in the form of food, clothing, and medical supplies. The Attorney General’s investigation revealed that between July 1, 2012 and June 30, 2016, GCH inaccurately claimed, in its public financial reporting and on its website, that 99 percent of all contributions provided direct aid. This was misleading and the result of deceptive reporting of Gift-in-Kind donations. GCH created two subsidiaries, Giving Hope International and International Clinic Aid, which purchased pharmaceuticals from a wholesaler in the Netherlands for less than $225,000. The two subsidiaries then donated the same pharmaceuticals to GCH. GCH reported the total value for these pharmaceuticals as being over $34.9 million using U.S. prices of drugs rather than the actual purchase price paid by its affiliated charity. GCH should not have reported $34.9 million in revenue and donations when the pharmaceuticals cost less than $225,000. Also since GCH failed to submit any documentation showing that the pharmaceuticals were, in fact, distributed in furtherance of Giving Children Hope’s charitable purpose, the actual value for those pharmaceuticals should have been zero.
Charities are required by law to report their donations and program expenses, including information about how much support a charity received from the public or other sources, how the charity is spending the money, and its assets and liabilities. Inaccurate reports may increase charities’ rankings by charity watchdogs or be used to justify higher employee compensation. Inflated values for Gift-in-Kind donations make charities appear larger and more efficient than they really are, and thus more attractive to donors and rating organizations. As part of the agreement, GCH will not file any false reporting and will terminate its pharmaceutical Gift-in-Kind program.