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The Chronicle of Philanthropy has published a lengthy article by Caroline Preston entitled “Multiple Methods of Valuing Drugs Create an Unclear Picture of Aid Totals”. It covers a number of important issues for both Canadian and US charities who either receive pharmaceutical donations or who purchase pharmaceuticals to use in developing nations.
Here are excerpts from the article “Multiple Methods of Valuing Drugs Create an Unclear Picture of Aid Totals”.
Ask a dozen international aid groups that deliver medicines to poor people overseas how they determine the value of those drugs for purposes of their financial statements and you’re likely to get 12 different answers—if you get an answer at all.
Medicines and other goods make up a significant share of many aid groups’ revenues, including the revenues of some of America’s largest and best-known charities. But the charities take such different approaches to valuing those medicines that watchdogs and nonprofit officials say it’s difficult to get an accurate picture of how much aid they truly provide.
In addition, unclear accounting rules and minimal oversight have fueled practices that critics say paint a deliberately misleading portrait. (See Page 1).
Adding to the complications is the fact that the standard by which most nonprofit aid groups have long been valuing their medicines—U.S. average wholesale prices—have come under criticism. Those numbers are reported by U.S. drug companies, and they are unverified. A joke among doctors and pharmacists is that AWP (average wholesale price) stands for “ain’t what’s paid.”
This spring, the global antipoverty group Feed the Children issued an announcement of the sort any charity would dread making: Its revenue had plummeted by half in a year.
Feed the Children blamed the precipitous drop—from $1.2-billion in 2009 to $525-million in 2010—not on the bad economy but on a change in accounting rules.
The charity said a new rule from the Financial Accounting Standards Board governing how businesses, nonprofits, and other organizations value goods and products required it to count medicine and other items it distributes to poor people not at U.S. prices, as it had done before, but at the prices they would fetch in markets abroad.
Virtually all of the decline in Feed the Children’s revenue was caused by changing the value of a single medicine: deworming pills the charity distributes overseas to fight a parasite that leaves hundreds of millions of children sick, tired, and less likely to attend school.
In the past, the charity valued the medicine, called mebendazole, at $9.07 per tablet; now it said the value was just 35 cents, or 3.9 percent of the old number. The aid group also received half as many pills in 2010 as it did in 2009.
Charity watchdogs and some accountants say the high values some groups record don’t make sense, whether under old accounting rules or new. They say nonprofit aid organizations ought to take another look at how they are valuing their medicines.
Daniel Borochoff, president of the watchdog group American Institute of Philanthropy, which published a recent report on the overvaluation of medicines and other goods, questions why groups were ever using U.S. wholesale rates for medicines like the deworming drug.
Worms aren’t a medical problem in the United States, Mr. Borochoff says, so that is why the U.S. prices would be higher.
What’s more, the drug can’t even be sold legally in the United States at the dosages at which charities deliver in their programs abroad because those doses are not approved by the Food and Drug Administration.
“They are making a mockery of financial statements,” he says. “If this was happening in business, could you imagine? The stock market would take a dive if it was uncovered that groups were inflating their income by these amounts.”
Mr. Borochoff also points to how little information charities are required by law to share about their medicines and other goods.
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.