Monday, April 25, 2016

Nonprofit Tanning

As another semester of nonprofit accounting comes to a close, I can't help but note the aspect of the Form 990 that seems to most perplex accounting students.  Is it the application of SOP 98-2?  The proper treatment of donor benefits for special events?  The reporting of pass-through funds?  No, it is this little gem on page 5 of the form:


A requirement to report payments for indoor tanning services does seem out of place.  What is its origin?  The PPACA included a 10% excise tax on indoor tanning services, and nonprofits are not typically exempt from the tax.  To facilitate compliance, this question nudges nonprofits to consider their obligation.  Naturally, many wonder whether this is really necessary; after all, how many nonprofits sell indoor tanning services?  Peter Olsen-Phillips of the Chronicle of Philanthropy has our answer – in 2013, there were 26 who answered yes to question 14a.  

This leads us to a bonus question, a nonprofit scavenger hunt of sorts: can you identify any of these 26 nonprofit tanning organizations?

Monday, March 14, 2016

Four Unsolicited Suggestions for the Wounded Warrior Project Board

When it comes to popular charities, I am of the opinion that the general public largely believes they can do no wrong, but once the public feels they have done something wrong it’s almost as if they can do no right.  This is the environment the Wounded Warrior Project (WWP) board finds itself in as it attempts to turn the tide of public opinion after recent controversy surrounding their spending practices.  Their actions began with a change in leadership, but signs point to more changes on the horizon.  With this in mind, I offer the following suggestions for the board to consider.

1. Be clear about spending on advertising, mailing, and promotions
If the board believes the past levels of advertising, mailing, and promotions are consistent with donor intentions, then clearly stating this should help their case.  If they believe the approach runs counter to donor intentions, all the more reason to make it clear that it has been, but will no longer be, the spending approach of the organization.
2. Discuss how much advertising and promotional items are donated
One feature that may placate donors concerned about spending practices is the amount of such spending that has come from corporate or other donors in the form of advertising, promotional items, etc.  It is one thing for donors to believe their donated cash is being used for these purposes; it is an entirely different thing for them to believe that these things are being donated by others and donated cash is actually being employed elsewhere.  As far as I can tell, these expenditures have so far been simply lumped together, leaving the impression that all spending represents donor cash.  A close look at the financials, however, reveals that many of the advertising expenditures represent donated advertising, something that the organization would be wise to explain.
3. Define and enforce a systematic process for approving expenditures
Let's presume that the organization has established processes for approving spending, and sufficient controls are (or will be) in place.  Given the current public skepticism, though, it will be worth the organization’s time to make these processes public and further strengthen them.  While the anecdotes of excess spending on plane tickets, alcohol, and the like have made for big headlines, other spending choices suggest that the concerns go beyond flashy headlines and may cast doubt on the level of controls in place to ensure that spending and grants have a direct connection to the organization’s stated mission.  Efforts to shore up such controls that are communicated to the general public would go a long way to restoring faith that donor dollars are being directed where donors expect them to be.
4. Identify and clearly follow spending priorities
Related to the previous point, the organization’s size presents a double-edged sword.  WWP engages in a wide variety of programs.  The current perception among critics, however, is that many of those programs entail fun events, distributing promotional items, boosting public awareness, etc., while job placement, counseling, and physical support for veterans may now just seem like a small part of programming efforts (whether this perception is fair or not).  To vault the more hands-on efforts to help wounded veterans to the front of public opinion, the board should clearly define which programs are its top priority and ensure that spending is consistent with these priorities.  On more than one occasion, I have had students researching WWP for class projects note they found it odd that the organization’s listing of core values (captured by the acronym FILIS) places fun first and service last.  While this ordering may only reflect the desire for a cute acronym, its runs the risk of communicating much more.  The public needs assurance that fun takes a back seat to service.

Monday, March 7, 2016

Understanding the Disconnect Between The Wounded Warrior Project and Its Critics

As criticism of spending by the Wounded Warrior Project continues, so does a fundamental disconnect between what the organization views as direct spending on its mission and what many critics view as spending that helps veterans.  Though the CEO of the organization has thus far been silent, the Wounded Warrior Project has provided a consistent message in the media and social media, noting that audited financial statements confirm significant spending on veterans.  Refuting CBS claims that only 60% was spent on veterans, the organization has consistently noted "80.6 percent of total expenditures went to provide programs and services for wounded service members, their caregivers, and families."

Why the disconnect? The program expense component of the Wounded Warrior Project financials confirm that 80.6% was indeed spent on "program expenses".  However, this category is much broader than the average donor is likely to realize.  The following provides a breakdown of the expenditures that the Wounded Warrior Project classifies as those that "provide programs and services to wounded service members, their caregivers, and families."


Am I saying that the money should have been spent differently if they wanted to provide the maximum help to veterans?  No, it's not necessarily that simple - after all, if advertising is donated, there are few options of what can be done with it.  What I am saying is that what is revealed about Wounded Warrior Project spending practices in their financial statements is much more complicated than they have thus far been willing to admit.

Monday, February 29, 2016

Wounded Warrior Project Roundup

Starting with the one-two punch of critiques by CBS and The New York Times, the once pristine Wounded Warrior Project (WWP) has faced substantial scrutiny over the past month.  Now that the dust has somewhat settled on the accusations, I want to provide a brief summary of where things stand from my viewpoint.

What is the Position of Charity Watchdogs?

What is the True Spending Rate of WWP?
The area that has probably received the most attention in the reporting is the percentage of WWP spending that is on its programs.  Charity Navigator reports a number around 60%, and the resulting complaints of 40% overhead are prevalent.  On the other hand, WWP has actively disputed this reporting, claiming a program spending rate of 80%.  Long story short, neither is “lying” – they are relying on different accounting treatments.  If you want the long story, I provide a detailed reconciliation from the previous year’s figures here.

What was the weakest critique of WWP?
To me, the clear “winner” here is the implication that the organization spent $26 million on conferences for employees.  This number reflects the spending on all conferences and events, not just those for its employees.  And, as WWP points out, many of these events were for wounded veterans, not a particularly concerning use of funds.

What was the most damaging critique of WWP?
While much of the focus thus far has been on overall spending rates, I view the revelation that WWP gave a grant of $150,000 to the Charity Defense Council (an organization focused on defending charity spending on overhead and executive pay) as the most objectively harmful one.  This is not a judgement about the Charity Defense Council or its mission, but I cannot imagine any circumstances under which such a grant is consistent with the intent of donors to WWP or could be considered consistent with its mission.  True, the grant itself is a tiny part of the organization’s annual budget.  However, the fact that it was permitted raises questions about both the decision making and oversight processes at the organization.

Monday, February 15, 2016

Developing Alternative Metrics of Performance

Amidst a sector-wide pushback against the ubiquitous use of “overhead” as a metric of performance, there is clearly a desire for additional means of measuring performance.  Though the release of the draft of new accounting standards was initially met with enthusiasm for its introduction of an intermediate measure of performance, this measure is best seen as providing details about whether funds received (or spent) arose from regular operations or are better viewed as transitory in nature.  That is, the new performance metric may provide better forecasting of future financial performance, but it does not address, nor was it intended to address, the need for new ways in which donors can better assess how effectively their funds are spent.

There is no doubt that pressure to measure effectiveness and impact rather than just financial efficiency will continue.  We see varied attempts at providing more measures of effectiveness outside of the accounting function, typically at the individual organization level; this will create further pressure for accounting standard setters to join the fray.  And, with the emphasis on developing comparable and auditable measures, accounting seems well-suited to develop such measures in a way that will encourage more widespread adoption.  Thus far, however, accounting standards have remained silent on the issue.

A modest first step would be to provide more detail on the types of program spending, disentangling grants and hands-on programming from awareness and public education.  Such a split is a modest change, but one that maintains the spirit of auditability that permeates accounting standards.

The next step would be to develop a systematic way of measuring outcomes that permits comparability and generates objective measures.  This is a larger leap for sure, but one that is likely to be made by someone.  Efforts by Charity Navigator, ImpactMatters, and others are worth noting in this regard.

A final step would be to develop measures not just of what was achieved but instead "value added".  This would entail a comparison of outcomes achieved by an organization to the counterfactual of what would have been achieved absent the organization's involvement.  And, for added measure, a reflection of what else could have been achieved with the resources is a key benchmark as well.  This final step is also an ambitious one, but equally critical if we are to develop ways to examine organizations that achieve the most "bang for the buck".

Monday, February 8, 2016

Following the Money Trail through Multiple Organizations

Since nonprofits don't have owners, identifying the "consolidated" entity among intertwined organizations has dogged accountants of nonprofits for some time.  This problem isn't going away any time soon and actually forms the source of much confusion about reported spending by nonprofits.  Currently, accounting reports provide a snapshot of where one organization's funds are spent but do not go the extra step of reporting how recipients of these funds spend them, leaving a gap between what donors want to know and what they can learn from the financials.

A prominent example is the case of the Red Cross, which has been the subject of substantial criticism for its inability to disclose details of its grantees’ spending in Haiti due to confidentiality clauses.  Despite the intense focus on the Red Cross, this incident is best viewed as the tip of the iceberg.  After all, even if confidentiality clauses are somewhat rare, even more rare is a nonprofit voluntarily disclosing details of its grantees’ spending behavior.  This leaves donors with only a piece of the financial picture when it comes to where their donations go.

In the current environment, donors merely see how the recipients of their funds choose to spend the funds.  If that spending took the form of grants to others, that is essentially where the paper trail ends unless donors want to do extensive analysis of their own (which may or may not prove fruitful).  Recent research I have conducted with a colleague demonstrates that this feature of accounting, coupled with heavy donor reliance on reported program spending, may actually cultivate an environment where nonprofits are incentivized to shed their administrative burden on others in order to boost perceived efficiency; they do so with greater reliance on grant provision over direct service provision.  The end result of the proliferation of grant provision may actually be to increase layers of bureaucracy in the provision of charity.

For donors to gain a better perspective would require reporting not just on grant amounts but how such grants were spent.  There is no doubt that finding a way for a nonprofit to report not just how it spends funds but also how fund recipients do as well entails a trade-off between providing more information and limiting voluminous paperwork.  At this point, the desire to reduce the administrative burden of fully following the paper trail has won out, but the issue is unlikely to disappear and perhaps there will be a shift toward greater disclosure of grant recipient behavior.


Monday, February 1, 2016

Accounting for Impact Investments

Impact investing is a still nascent practice, but one sure to continue growth in the coming years. At its core, impact investing is about directing investment funds in a way that helps promote a mission objective in addition to returns (as opposed to a singular focus on maximizing returns).  The dual nature of impact investments presents an accounting conundrum: should these investments be treated as investments, program efforts, or both?

As of now, the answer is that for financial accounting purposes they are largely treated as investments.  As such, these investments likely will just look like investments with poor returns, and the full programming impact of an organization’s efforts will be understated.


If we want financial statements to reflect the totality of a nonprofit's activities, and to provide a reasonable split between the success of activities aimed at generating returns and the success of activities aimed at devoting resources toward the mission, the current approach is clearly suboptimal.


That said, the answer is a difficult one.  Theoretically, accounting standards could require organizations to report the return that could have been earned had the investment been free of programmatic goals, offset by an expense representing the sacrificed return from opting for a mission-oriented investment.  This would allow the “sacrificed” investment return to be properly reflected in program expenses.


Since accounting standards are reluctant to reflect opportunity costs, though, this may be a long time coming.  However, accounting standard setters in the for profit realm have not shied away from equally (if not more) difficult topics such as stock option expensing, accounting for pension liabilities, and tracking risks of derivative investments so there is still hope for bold action.