Monday, October 5, 2015

Why Accounting Students Should Care About Nonprofits

I often talk here about how accounting can inform nonprofits and those who evaluate them, but have said little about how accountants can play a better role in this.  The Accounting Path recently gave me an opportunity to do just that, and plug nonprofit accounting to current and potential accounting students in the process. Here is the outcome of that interview.

Monday, September 28, 2015

Why Doesn’t Carly Fiorina Tout her Leadership of Good360?

During Carly Fiorina’s rise to the top tier of GOP Presidential candidates, much discussion has centered on her time at the helm of HP and whether that tumultuous experience was an example of success or failure as a leader.  Given all of this discussion, I have been perplexed as to why she has done little to tout her role as board chair at Good360, particularly given the organization’s size and solid reputation.

For the uninitiated, Good360 is a nonprofit organization focused on facilitating corporate donations of goods to charities.  In a sense it is a middleman, but it serves a particular role by developing corporate partnerships and helping direct corporate donations to operating nonprofits whose needs match the goods provided by corporations.  The focused mission is an admirable one that has seen substantial success.  In numbers terms, the over $319 million in program expenses and a program expense ratio above 99% in its most recent financials are equally impressive.

With all of this to brag about, why haven’t we heard much from the candidate on this leadership role?  A look at the financials reveals a few possible reasons.
  • Despite a strong revenue stream and success in demonstrating program spending, the Fiorina years do not reflect growth but, if anything, stagnation.  Below are the average revenues and program expenses for Good360 in the five years prior to Fiorina taking over as board chair as well as the two since then (as reported in the organization’s Form 990; the 2014 financials have not yet been released).

  • The organization’s financial cushion (reflected in the “net asset” balance) has also shrunk since Fiorina took center stage.  Though there are good reasons (much of their net assets reflect as-of-yet-received pledges rather than investment funds), the trend nonetheless makes it hard to tell a story of a leader emphasizing financial conservatism.

  • Last but surely not least, the Good360 financial filings indicate that in her role as board chair, Fiorina devoted about 2 hours a week.  While also easily explained by those aware of the operations of nonprofits, this figure makes it hard to reconcile with any claims of hands-on leadership.  The numbers instead suggest that the CEO, who herself dedicates 45 hours a week, is more likely to be one to be deserving of such credit.
Am I saying that the evidence indicates a failure of leadership? No. What I am saying is that if one wants to tout Fiorina's leadership success at Good360, it will require a look beyond baseline metrics – a deep dive into the organization's operations and its nuances – something not particularly well-suited for a political campaign.

Thursday, August 13, 2015

The Clinton Foundation Accounting Issue that Remains under the Radar

In recent months, we have seen many criticisms of the Clinton Foundation and its finances. For various reasons, many of them have failed to stick. However, there is one issue (highlighted here by Jonathan Allen of Reuters) that has potential to linger even though it has thus far largely escaped the public eye. That issue is how the foundation has chosen to account for funds received and spent through the Clinton Health Access Initiative (CHAI) in partnership with UNITAID.

The Issue
First, some background on the issue at hand. When a nonprofit receives funds (or, alternatively, inventory) that it then subsequently sends along to another organization, there is a question as to whether those funds are revenues when received and then expenses when sent along or whether they are just temporary holdings not to be reflected on the nonprofit’s statement of activities. This distinction matters because if the funds are treated as revenues and then expenses, the organization’s reported program expenses (and thus its program expense ratio) are higher, and the organization appears both larger and more efficient. The rule governing this treatment boils down to a question of whether the nonprofit receiving the funds retains any discretion over what to do with them (“variance power”) or whether they are merely serving as an agent of the ultimate recipient. In the former case, they are recorded as revenues and then expenses when passed along, whereas in the latter they merely sit as liabilities until distributed.

Manifestation in the Clinton Foundation
CHAI is a controlled affiliate of the Clinton Foundation that (among other things) partners with UNITAID to procure pharmaceuticals at discounted prices and distribute them to beneficiary countries. In this activity, CHAI receives funds from UNITAID, procures pharmaceuticals, and distributes them to the chosen recipients. The key question is: are these funds revenues and expenses for CHAI or are they merely funds held as an agent?

The question is surely a nuanced one, but CHAI and Clinton Foundation present a unique case of a public disagreement. CHAI and its auditors have concluded that these are agency funds and do not record them as revenues/expenses. However, the Clinton Foundation and its auditors, when compiling consolidated financial statements, have concluded the opposite and reclassify these funds as revenues/expenses.

Before one dismisses this as just an esoteric point, note that these amounts accounted for over $28 million of the Clinton Foundation’s expenses in 2013, which is over 14% of their reported program expenses. The distinction was even more critical in 2012 and 2011, when these expenses were over $67 million and $108 million, respectively (making up over 33% and 46% of program expenses, respectively).

In short, the decision of how to treat these pass-through funds is an important one for the Clinton Foundation. And, while the treatment choice is a judgment call, the fact that it has played out as a public spat between the auditors of CHAI and the Clinton Foundation means this accounting disagreement may have staying power.

Friday, May 15, 2015

Rose Colored Finances and the Fall of FEGS

The venerable New York City nonprofit, Federation Employment and Guidance Service (FEGS), abruptly closed its doors earlier this year and subsequently filed for bankruptcy. The move shocked many and has threatened to seriously disrupt social services throughout the city. Its bankruptcy filings, coupled with its most recent financial statements, provide a painful case study of an organization whose troubles were clouded by persistent growth and excessive optimism about revenues.
  • Though the organization now says its programs faced declining revenues in 2103 and 2014, its (consolidated) financials didn't show these trends thanks to continued growth in its portfolio of programs. In fact, overall program revenues and total revenues increased even in its most recent fiscal year (up 5.1% and 4.1%, respectively).
  • Not only did revenues grow, the organization even showed positive change in net assets (i.e., profits) in 2013. It wasn’t until 2014 that the losses finally appeared -- a staggering $21.4 million loss before considering one-time insurance proceeds and $19.4 million loss after considering the insurance proceeds.
  • In 2014, persistent growth caught up to the organization, with expenses rising drastically, most notably salaries (up 13.5%) and bad debt writeoffs (up 440.1%).
  • The bad debt writeoffs in 2014 ($7.7 million, up from $1.4 million in 2013), coupled with the disclosure of an audit that revealed it had received estimated overpayments of $20.7 million in previous years (through its subsidiary, Home Attendant), suggests in hindsight that the organization’s recorded revenues in previous years were overly optimistic. In other words, the problem that their operating costs exceeded their potential reimbursements may have been festering for a while, but it wasn’t until 2014 that this bubbled up in their financials.
  • In the end, the organization's problems led to mounting cash flow troubles, which ultimately forced its sudden closure. These cash flow troubles too were tied to the organization’s growth mentality. Their net loss in cash in over the two years 2013-2014 was not due to operating losses (they had increases in cash from operations of $4.7 million and $1.0 million in 2013 and 2014, respectively), but rather due to cash used up elsewhere including purchasing new fixed assets ($7.5 million and $4.9 million in 2013 and 2014, respectively). That is, it was persistent growth, not operations alone, that was eating into their cash balances.

Tuesday, May 12, 2015

About the Claim that the Clinton Foundation only Spends 10% on Charity

Legitimate concerns about the Clinton Foundation's reliance on funding from foreign governments and the organization's mixed record of disclosures have, in recent weeks, given way to more outlandish claims about the organization's failures. Most notable among these is the oft-repeated claim that only 10% of its money goes toward charity.

This claim reflects a fundamental misunderstanding about nonprofit accounting. Nonprofits disclose how much of their expenses are on the mission ("programs"), and how much are on fundraising and administration ("supporting services"). From the Clinton Foundation's most recent (consolidated) financial statements, a full 88% of its expenses are classified as program expenses, meaning 88% of spending can be attributed to current efforts to achieve its mission. The dichotomy between this and the claim that only 10% is spent on charity arises because only a small subset of the program expense figure represents grants to other charities – if only such grants are considered "program" expenses, then the figure drops from 88% to 13%. Since the Clinton Foundation is not primarily a grant provider but rather a direct service provider, however, the latter is hardly a figure worth noting.

To get some perspective, consider the Clinton Foundation's closest peer, the Carter Center. In its most recent financials, the Carter Center showed 91% of spending on programs and only 5% on grants.

The natural follow up question is if the organizations aren't spending the majority of the program costs on grants, where are they going? The next two charts reflect the breakdown of "program" expenses for the two organizations.

What does this tell us? By and large, the Clinton Foundation's limited grants are in line with what we should expect of a charity of its sort. The notable differences in Clinton Foundation spending are (i) the smaller share of costs that reflect donated medical supplies and (ii) the higher share of costs spent on personnel. As it turns out, both of these reflect broader trends of the organization.

In short, it is fair game to ask why donated medicines have taken on less importance in the Clinton Foundation’s work and why personnel costs have taken on more importance, but dismissing all program expenses that are not grants to others as waste fails to recognize the nuance of charitable activities.

Wednesday, April 29, 2015

The Proposed New Accounting Standards for Nonprofits

The Financial Accounting Standards Board has now released an exposure draft of proposed changes to accounting rules for nonprofit entities. Many in the nonprofit sector are wondering what it means for them but perhaps not enough to read the entire 261 pages. If that is your circumstance, I did my best to summarize what I see as the primary changes here for the Chronicle of Philanthropy.

Is the Clinton Foundation Leading the Pack in Transparency?

In response to critics of the Clinton Foundation, supporters have begun promoting it as ahead of the curve in terms of transparency. Leading the charge is a notable nonprofit voice, Tom Watson, who wrote in Forbes that "the Clinton Foundation is among the most forthcoming of major charities and nonprofit foundations – especially those headed by public figures." While I am of the view that the foundation has strengths that have been overlooked in the midst of political criticism, I don't think the evidence supports the perspective that it leads the way in disclosure. The reasons:
In short, though the Clinton Foundation may have the best of intentions with respect to financial disclosures, the evidence indicates the implementation has been spotty.