Joint Cost Allocation is drawing attention

Chronicle of Philanthropy has a major article out on joint cost allocation, written by Suzanne Perry – Watchdog Cracks Down on Misleading Statements on Fundraising Costs (behind paywall).

The issue is that under certain circumstances, the accounting rules allow allocating fundraising costs into the program category on the functional allocation of expenses. The million dollar question is whether the particular fundraising cost meets very specific conditions.

Here is the crux of the issue in four sentences:

But a look at the National Veterans Foundation, which operates a toll-free helpline for veterans and their families, highlights some of the issues that can arise when a nonprofit group allocates big chunks of its spending to joint costs.

The organization won three stars from Charity Navigator partly because it reported to the Internal Revenue Service in 2010 that 67 percent of its spending was allocated to programs, suggesting that most of a donor’s contribution would go directly to helping veterans.

However, most of that money—$6.8-million out of $7.7-million—actually paid for direct-mail fundraising appeals that the group said included educational messages. Exclude those costs, and the charity’s program spending plummets to 8 percent.

Focus of the article is on Charity Navigators reducing their rating of a number of charities because of the perceived incorrect accounting for fundraising costs.

They have reviewed the financials of about 3,000 NPOs, reduced the rating of about 50, and restored the rating for 11.

Check out the full article for an extended discussion of the problem.

I’m relieved to see that all the organization discussed in the article are outside the religious NPO community.

Based on just my audit experience in the NPO community, I think it is exquisitely rare that an organization’s fundraising efforts will meet the very specific criteria to qualify for joint cost allocation. Off the top of my head I recall seeing exactly one situation that qualified.

Here’s a thumbnail summary of the accounting rules: Reporting Fundraising Costs: the Basics

Check out the full article.

I previously mentioned it here.

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