Outcome measures – On the other hand…

Moving to outcome measures won’t make things perfect in terms of evaluating charities.

There are some downsides to consider, as mentioned by Nonprofit QuarterlyWant Charities to be Evaluated Based on Impact? Be Careful What You Wish For.

The article raises three concerns, all of which we need to think about very carefully. I will mention the three issues and comment on each.

First, (more…)

Guest post – GIK Valuation: The issues not being discussed

The following is a guest post submitted to me from a reader. As I read the article, it became obvious that the author is familiar with the issues of the relief and development organizations.  Whether the author is an outside auditor, accountant inside an NPO, or even a medical vendor does not matter. Obviously the comments reflect the author’s opinion and not those of his/her employer.  This also does not reflect my opinion.

Agree or disagree as you wish, here are ideas deserving your careful consideration:

GIK Valuation:  The issues not being discussed

While there are many, if not dozens, of misconceptions and false information floating around pharmaceutical values, GIK values, and NPOs supposed conspiracy to inflate revenues to improve their Charity Navigator rating, I thought I would point out a few things to try to bring the conversation around to the big picture rather than focusing on the quite narrow discussion around non-FDA approved, 500mg mebendazole.

500mg mebendazole is a red herring


“If We Want Our Funding to Change the World…”

Great video explaining it takes more than the fun, visible program costs to change the world. If We Want Our Funding to Change the World…


I’ll mention just two sentences from the video by Donors Forum:

The true list of what it takes to run a nonprofit’s mission and not just their program is long. If you want success you must pay what it costs to succeed.

Check out their suggested reading list. There are links to lots of good stuff.

Overhead ratios are the wrong way to look at charities

Dan Pallotta has a superb TED Talk explaining the fallacies of using overhead as a measure for charities: The way we think about charities is dead wrong.

[ted id=1688]

Just a few highlights to share along with my observations (comments in italics are my paraphrase of his points):

We have created different rules for the for-profit world and the charity world. There are five areas of discrimination: (more…)

World Help reduces 2011 revenue by 92.8%

World Help has released their 2012 audited financial statements which you can find on their website at this link.

The total revenue initially reported in the audited financial statements for the 2011 fiscal year was $239.3M (audit opinion dated 3/12/12). In the most recent financial statements, the total revenue for 2011 is $17.3M (audit opinion dated 4/10/13).

That is a reduction of $222.0M, or 92.8% of the amount initially reported.

Contributions of GIK were initially reported at $223.66M for 2011 (3/12/12) and currently reported at $1.62M (audit report date 4/10/13). That is a decline of $222.04M, or 99.3% of the initial amount.


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.


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?


Charity Navigators reallocates joint costs on a selective basis

I visited with the staff of Charity Navigator and learned they are reallocating joint costs from program to fundraising on a selective basis, not across the board.

There website suggests they reallocate all joint costs that go into the program category. See their page How Do We Rate Charities’ Financial Health? which says:

Joint Cost Allocation Adjustment

Generally Accepted Accounting Principles (GAAP) allow for organizations that follow SOP 98-2 or ASC 958-720-45 to report their specific joint costs from combined educational campaigns and fundraising solicitations and the IRS requires organizations to disclose this on the Form 990. In most cases, charities utilizing this technique allocate a small percentage of their solicitation costs to program expenses from fundraising expenses. However, we believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it, nor does Charity Navigator. Therefore, as an advisor and advocate for donors, with rare exception, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising.

Blog post from WV staff asks are joint costs valid?

Writing at the NFP Audit and Accounting blog, ejwcpa takes exception to Charity Navigator’s position – are join costs valid?


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:


Article on joint cost allocation in Chronicle of Philanthropy

My post today will have lots of accounting shorthand.  This week’s print edition of the Chronicle of Philanthropy has a major article by Suzanne Perry on allocation of joint costs – Watchdog Cracks Down on Misleading Statements on Fundraising Costs.

Article is not yet visible on their website.

I have two observations.


Two more cautions on how to interpret overhead ratios

Came across two more articles reminding us to be careful in how we use overhead ratios to assess nonprofits. The functional allocation is a useful tool but needs to used and interpreted carefully.

Meaningless Fractions is a guest post at AidSpeak from Fredrick.

His concern is that the way overhead ratios are emphasized creates confusion between inputs and outputs. Overhead is one of many inputs. Delivering aid requires a wide range of inputs. In addition to infrastructure, an organization needs skilled people in the right locations at the right time, corporate knowledge of how to deliver effective aid, and dozens of other inputs.


Another article on donated meds and overhead ratios – the impact of substitution on our thinking process

An Op-Ed in the Los Angles Times by Jack Shakely, president emeritus of the California Community Foundation, discusses the impact of donated medicines on the functional allocation:  The worst way to judge a charity.

A friend of his was grouching about another NPO buying meds for $0.10 a pill and booking them as GIK revenue at $7.00.  Mr. Shakely looked at the organization’s web site and found they claim 90% of the contributions go to program, with 5% to G&A. That leaves 5% for fundraising.

He then wonders why we are putting so much emphasis on the functional allocation as the main measure of an NPO.


Q: Are overhead ratios the perfect measure of NPO efficiency and effectiveness?

A: No way.

This is the conclusion of Saundra Schimmelpfennig in her e-book, Lies, White Lies, and Accounting Practices; Why nonprofit overhead doesn’t mean what you think it means

Many people believe that the ratio of supporting services to total expenses is the ideal way to measure the efficiency of a nonprofit organization.

Even at a conceptual level, that is a flawed idea.

At a practical level, Ms. Schimmelpfennig explains it is so easy to play games with the functional allocation that the overhead ratios should be viewed skeptically.


Aircraft carrier as illustration of “overhead” needed to get something done

4,100 people work so 200 can fly.

In August, my wife and I toured the USS Midway aircraft carrier museum in San Diego. Quite a treat if you enjoy either airplanes or naval ships.

One narrative plaque really caught my attention. It quoted someone as saying that 4,100 people are hard at work onboard so 200 can fly airplanes. Since the purpose of the carrier is to put planes in the air, everyone else on board is in a ‘supporting’ function.

Seems to me that this is a good illustration of the concept of overhead or functional allocation that we work with in the nonprofit world.


“Nonprofit Starvation Cycle”

Stanford Social Innovation Review has a superb article on the cycle many NPOs have of starving themselves of critical infrastructure they need to be effective in their mission.

Superb summary: “The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. (more…)