Nonprofit finance, accounting, and tax news. Other tidbits of interest to the charity community.
The Evangelical Council for Financial Accountability (ECFA) requires their members to submit annual financial statements as a condition of membership. A CPA is required to be involved with those financials.
ECFA has announced two changes to their requirement: the cutoff for a compilation and clarifying an independence requirement.
Before you make any changes, check with your funders to see if they will accept a change in the level of services provided by your CPA.
Two great opinion pieces in the Chronicle of Philanthropy that are worth your time, both dealing with the ‘overhead’ issue. At first glance they seem to have opposing views. I think they are both correct with many good points, which illustrates the complexity of the issues.
I just published my short book, “Once Upon Internal Control” at Smashwords, which means it is now available in several formats:
You can preview 30% of the book for free.
What’s this book about? (more…)
I’m adding a new category of good stuff, which will be called “impact” for the time being.
Here are some more articles worth attention but I don’t have enough time to comment in a full post. Here are the headlines, with links and a brief comment below:
Impact
William Barrett points out there was some missing disclosure in the JofA article on GIK in his post Seattle-area charity scores P.R. coup from lack of disclosure.
I discussed the JofA article here.
The missing information is that World Vision is one of the biggest players in the GIK valuation issue getting so much attention today.
The JofA article contains no mention that World Vision has been criticized heavily for their accounting of GIK.
The debate around what is happening in the NPO sector is a good and healthy.
For some serious pushback against the critique of the charity sector by Mr. Dan Pallotta (which I’ve mentioned here and here), check out the article by Mr. Phil Buchanan at Huffington Post: Getting the Facts Straight About the Nonprofit Sector.
If you have been following the conversations in the NPO community, you really ought to check out Mr. Buchanan’s article.
Here are my brief thoughts on three of his four critiques of the critique:
First, Pallotta says the sector has failed because we haven’t “ended” homelessness or poverty.
Mr. Buchanan wonders that if that’s the standard, then perhaps the NPO community should get full credit for improved infant mortality.
A moment of background, which I know is the completely wrong way to start a blog post – The Journal of Accountancy is one of the major publications in the accounting world. It is the lead magazine of the American Institute of Certified Public Accountants, the largest trade association for CPAs. The AICPA also has significant self-regulatory authority for large parts of the CPA profession.
You might want to get a fresh cup of coffee – this will be a long post.
In its August 2013 edition, the JofA published a major article on valuing donated goods: Gifts-in-kind: What are they worth? How to avoid pitfalls of GIK valuation. The article is by Jennifer Brenner,
…an associate director for financial accounting and operations for World Vision, a relief, development, and advocacy organization that works to fight poverty.
She blogs here. She is speaking on her own behalf, not as a representative of her employer.
General comments
I have two general comments before I get into discussing specific ideas mentioned in the article.
First, the article is superb. It provides a very good description of the accounting rules regarding GIK valuation. It uses precise, technical wording while providing a great explanation. If you want to understand the rules for valuing GIK, please study the article.
Second, the article addresses most of the issues that are getting attention in the NPO community. If you want to learn the accounting words you can use to criticize the valuations currently in use, you would do well to study the article. The ironic thing is this article provides a superb path to frame up criticisms of the valuations used today and in the past.
Mr. Jeff Beaumont is a CPA working for a firm that focuses on serving the nonprofit community. His opinions are his own and do not reflect the opinions or positions of his firm in any way. Because he speaks for himself, I won’t identify him or his firm in any more detail. He doesn’t speak for me either. especially when he posts spreadsheets.
He has about seven years experience as an auditor working on the issues discussed on this blog. This is the final post in a five-part series.
By Jeff Beaumont, CPA
For those that would find it helpful to have a spreadsheet demonstration of how to venture your luck at forecasting a church’s revenue, I am uploading the model I use. It has dummy numbers and information, of course.
My goal in it is to help others by providing a resource that they can
If you find it helpful—great!
Some more articles that are worth attention but I don’t have enough time to comment in a full post. Not a lot going on that I’ve been reading until I saw two articles in two days.
Here’s a few articles exploring the challenges of outcome measures, whether NPOs are spending enough on infrastructure, possible regulatory revisions in Florida, and is anyone criticizing the practices in the “worst charities” articles?
Previous lists of good stuff here and here.
“Overhead ratio”
If you want to see an example of how to analyze the financial statements of a charity that has lots of GIK or lots of telemarketing costs or lots of publicity, check out Brian Mittendorf’s illustration at Counting on Charity: When Summary Accounting Metrics Fall Short: The Case of Breast Cancer Charities of America.
In that post he analyzes the financial statements of that charity. Using that post as an example, here’s a few steps you can take:
Start with total revenue, total expenses, and total program costs.
Look at the GIK, especially if it is going places or has uses other than what otherwise would seem to be the core programs. Subtract that from revenue and expenses. That exact same amount also comes out of program costs.
Check out post from Colette Kamps, CPA for a great summary of the rules for recording donated services: To Record or Not Record Donated Services.
There are specific rules for when an NPO can record revenue for services that have been donated. It is not optional. If the specific requirements are met, then the donated services must be recorded.
“Gifts-in-kind: What are they worth? How to avoid pitfalls of GIK valuation” discusses the difficulties in valuing GIKs. The article is available online from the Journal of Accountancy.
The author is Jennifer Brenner, CPA, who is the associate director for financial accounting and operations for World Vision.
I heartily recommend the article to you.
I’ll wait a few days before posting my comments.
Mr. Jeff Beaumont is a CPA working for a firm that focuses on serving the nonprofit community. His opinions are his own and do not reflect the opinions or positions of his firm in any way. Because he speaks for himself, I won’t identify him or his firm in any more detail. He doesn’t speak for me either.
He has about seven years experience as an auditor working on the issues discussed on this blog. Here is Jeff’s second guest post:
By Jeff Beaumont, CPA
Valuing gifts-in-kind is not an easy task. Nor is it quick.
There are not-for-profit organizations that appear to be aggressive with GIKs valuations – a quick internet search will reveal that truth. Not convinced? Ask the IRS for their opinion. Then there are others that take whatever value they can find because they lack the capability – they don’t have the know-how.
This post was written with smaller organizations in mind as they usually do not have the expertise, capacity, and staffing to the extent of their larger brethren.
To record GIKs, it seems there are three choices for management (and, by extension, the auditors) on reporting values: (more…)
In previous post, I said we need more examples to illustrate that charities can accelerate their revenue through a major, sustained telemarketing campaign beyond what they would have done otherwise.
I mentioned one anonymous illustration supporting the idea and three weak counter illustrations.
Three more counter-examples
I’ve looked at the American’s Worst Charities data quite a few times. Each time I get the impression that these long-running telemarketing campaigns are not doing what such efforts are supposed to be doing, specifically, generating a lot of new money over a long-term horizon.
After thinking about the previous two articles together, I decided to do a little analysis.
My small sample confirmed my previous observation – the campaigns are generating small amounts of new funds.
I picked a haphazard starting point, #10 on the list, and pulled data for the next three charities.
Here’s what I see.
One of the reasons cited for charities to make heavy use of telemarketing in spite of the high cost is that with a sustained campaign a charity will grow substantially more than it would otherwise. By incurring heavy costs up front, the charity will have far more money for mission in a few years.
As a concept, I agree.
However, it is time for more than one or five anecdotes.
One anonymous example supporting the concept