Accounting issues illustrated in 990 of a cancer charity – 1

“Little Money of Children’s Cancer Charity Goes to Main Programs” is a major article in Chronicle of Philanthropy by Caroline Preston discussing the accounting at Children’s Cancer Recovery Foundation.

Overview

I mentioned this article here. There is much in the article that can be discussed from an accounting perspective. I will touch on some of the ideas.

The Chronicle article is behind a paywall, so you need to use your online subscription to read it or grab the February 28, 2013 print edition.

This series of posts is going to be an inside-baseball discussion. More technical than usual with lots of accounting shorthand. Probably won’t be much fun unless you are already familiar with issues in the NPO world. Likely to be wordier than usual (as if I wasn’t wordy enough already!)

You can find the organization’s 990 for 2011 on their website here.

Why this discussion and why this organization?

There are a number of major issues in the NPO world being discussed by a variety of media sources. Those of us who work in the nonprofit world, and I include myself, need to pay attention to these conversations and learn from them.

These issues under discussion are present in a number of organizations but usually it is difficult to drill deep enough into publicly available financial data to tell the story clearly.

I have previously dived into the financial statements of particular organizations because there’s something distinctive about their financials that was very easy to show others.

Likewise in this case. The financial statements of Children’s Cancer Recovery Foundation show they are a relatively small player ($11.9M total income) compared to the other organizations that are getting much more publicity. However their 990 illustrates a number of accounting issues that are usually hidden in the financial statements of organizations 10 or 20 times larger.

So we can look at these financial statements to illustrate concepts that may not be readily visible in other organizations.

References to amounts

I will try something different in this post with a goal of making the numbers simpler. All references to amounts will be expressed as a percentage of total expenses. Let me know if you think it works.

Instead of saying that joint costs allocated to program and supporting services are $3,807,607 out of total expenses of $11,905,351, I will say that joint costs are 32.0% of total expenses.

Here’s what that looks like:

Joint costs of 32.0% are allocated 15.8% to program and 3.1% to general & administrative, with 13.0% to fundraising.  As you can see from that sentence, there may occasionally be rounding errors.  (The auditors in my audience can wonder what fundraisers are doing that provide general & administrative services equal to 3.1% of total expenses – that’s about 3/4^th of total G&A.)

When I mention dollar amounts, I’ll round. Instead of $3,807,607, I’ll say $3.8M.

Donated medicine

Accounting shorthand: issues discussed are existence and variance power. Valuation is not raised as an issue in this article. (Since the organization’s website says one shipment consisted of penicillin and other antibacterial meds, valuation of that shipment might be a topic for further investigation by an enterprising reporter.)

There are two shipments of donated medicine recorded in the 2011 990.

The first one, equal to 25.2% of total expenses, went to a ministry in Honduras. On the 990 this is described as cancer treatment drugs. As mentioned above, the website says it was penicillin and other antibacterial drugs.

The second of two shipments was equal to 34.8% of total expenses. This went to an organization in Ghana and consisted of Gardasil, a med used to prevent HPV.

According to the Chronicle’s article, here is the list of organization’s who aren’t familiar with CCRF’s involvement in the Gardasil shipment:

• Gardasil Access Program – the agency that handed the meds to the organization that did the distribution
• Catholic Medical Mission Board – agency that received the drugs from received the meds from the manufacturer and then reportedly gave the meds to World Help and gave them to Gardasil Access Program
• Merck – Gardasil manufacturer

See the article for further discussion on variance power. That is a continuation of a discussion of other organizations.

Sensitivity analysis of donated meds

The two shipments of GIK constitute 60.0% of total expenses. All of those costs drop into program expenses. This has a very significant impact on the functional allocation.

To evaluate the impact of two shipments, I calculated the total expenses by category with and without the GIK. Here is what the functional allocation looks like including the two shipments in program expenses and then backing the GIK out of expenses:

• With GIK – without GIK – functional area – delta (i.e. change)
• 81.44% – 53.44% – program – (28.0%)
• 04.91% – 12.33% – general & administration – +7.42%
• 13.65% – 34.23% – fundraising – +20.58%
• 18.56% – 46.56% – total supporting services – +28.0%

As I said, those two shipments have a big impact on the financials. This provides a clearer picture of the impact of GIK than you will usually see in an NPO. 

Thus, this set of 990s is an illustration of the impact of GIK and this post provides a tool to analyze the significance. This 990 also shows why the valuation issue is such a hot topic – if there were errors in the valuation, there would be a corresponding impact on the functional expenses.

The impact varies depending on size of the organization and the amount of GIK.  In this 990 the impact is larger than typical, thus a better illustration.

Updated for incorrect description of CMMB’s role.

Next post – joint cost allocation.