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.

Monday, January 25, 2016

Three Pressing Issues in the Nonprofit Sector that Need Accounting Input

A multi-year effort to revise accounting standards for nonprofits culminated in an exposure draft that instituted a variety of changes to nonprofit financial statements.  The modest nature of the changes shows the careful and deliberate approach of standard setters but also reveals the rift between changes accountants are willing to make and the drastic shifts under way in the sector.  As I see it, there are three major issues surrounding performance measurement that desperately need the expertise and involvement of accountants:

(1) 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?


(2) 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.  The consequence is that an organization may report substantial grants and little "overhead", but this means nothing if the grant recipients are themselves bloated with overhead.

(3) The development of alternative metrics of performance.
This issue goes one step beyond the money trail.  For many years, the public has relied on accounting measures of how money was spent to evaluate nonprofits. The percent of funds going toward programs has had substantial staying power as a performance measure, but a seismic shift moving beyond where the money went to examine what the money accomplished is no doubt underway.  The question is whether accountants will enter the fray and, if so, what other measures of performance can be developed that maintain consistency, comparability, and verifiability, key hallmarks of accounting.

In the coming weeks, I will elaborate more on each of these issues. While I don't think answers are apparent, I do hope to highlight the importance of considering them.

Wednesday, December 23, 2015

Favorite Nonprofit Reads of 2015

This year we have seen many key issues of the nonprofit sector come to center stage, and have seen a wealth of great research and writing on these subjects. Below I provide a summary of my favorites.

Red Cross
The ongoing examination of the Red Cross, its operations, its leadership, and its finances by ProPublica and NPR has been incredible. While some have sought to critique the perspective it has brought, there is no doubt it has had a large impact on public perceptions and will surely impact the organization going forward.

Chan/Zuckerberg Pledge
The pledge by Priscilla Chan and Mark Zuckerberg of 99% of their Facebook holdings toward charitable causes sent shock waves through the nonprofit sector, both for the scale of the pledge and its nontraditional form. Initial reactions were extreme, either heavy criticism or heavy praise (my roundup is here).  Amidst such extreme reactions was a well-informed and nuanced piece by Gillian White in The Atlantic that told the big picture story.

Donor Advised Funds
Debates over regulation of donor advised funds (DAFs) took hold in 2015, rightly so given the continued growth and prominence of DAFs as a philanthropic tool.  There were excellent perspectives among critics such as Ray Madoff and Alan Cantor, and supporters such as Howard Husock and Jack Shakely.  One piece in particular that stood out to me was Alan Cantor's look at the structure of Fidelity Charitable and its ties to Fidelity Investments.  The perspective was unique, pointed, and gutsy.

FEGS
You would think the sudden fall of an enormous nonprofit service provider would garner more attention than it did.  Beyond the initial headlines, few dove into the details.  An excellent exception to this is the continuing coverage by Josh Nathan-Kazis. His thorough look into the leadership failures, financial troubles, and risky choices at FEGS was an eye-opener.

Rick Cohen
It's hard to discuss excellent nonprofit writing without thinking of Rick Cohen and his impact.  In Rick Cohen, the nonprofit sector lost an incredible advocate and excellent writer.  The thing about him is that he was both unbelievably prolific (just take a peek at his writing this year for Nonprofit Quarterly) and extremely careful.  The breadth and depth of his knowledge and coverage are hard to overstate, and highlighting one piece does not to him justice.  But, if I must do so, this one comes to mind as an exemplar.  It brings together his perspectives on housing, inequality, politics, nonprofits, and advocacy, and also shows his willingness to examine issues at the local level.

Thursday, December 10, 2015

Proposed Nonprofit Onion Headlines 2015

As "America's Finest News Source," The Onion needs to boost its coverage of nonprofits and issues facing the nonprofit sector. In an effort to nudge such coverage, and despite a complete lack of popular demand, below is a compilation of proposed nonprofit headlines for 2015 offered up free of charge to The Onion. Feel free to add your own in the comments.
  • Skeptical Public Relieved to Find their Donations Used to Raise Awareness
  • Local Child's Lemonade Stand Fundraiser Closed after Criticism for Excessive Spending on Sandwich Board
  • Nonprofit Leaders Worry that Plan to Solve World's Ills Will Lead to Changes in the Charitable Deduction
  • Nonprofit Leader Inspired by Twitter Feed Filled with Airline Complaints & Baseball Updates
  • Tech Mogul Not Entirely Confident his Silicon Valley Approach could Transform Philanthropy
  • Inspired by Dan Pallotta TED Talk, Draft Kings Executives Set Out to Change the World With Advertising

UPDATED:
Thanks to The Whiny Donor, Tony Martignetti, and some anonymous contributors, we have many great additions to the list:

  • Nonprofit Leaders Urge Congress to Simplify Private Foundation Excise Taxes and Payout Requirements by Eliminating Them
  • Donor Advised Fund Sponsors Rush Madly at Year-End to Ensure that Charitable Donations Do Not Go to Charity
  • IRS Demands DNA Swab to Prove Your Charitable Deduction
  • Philanthropist Donates to Charity CEO Excessive Compensation Fund
  • Research Shows that Most Donors Respond Poorly to Good Stewardship
  • IRS Mulls Plan to Call April 15 Giving Friday
  • After New IRS Ruling Charity Leaders Eager to Sell their Donors' Social Security Numbers to Each Other
  • Giving Tuesday Sets New Record for Number of Email Solicitations Sent to Spam Folders
  • Unknown Donor Gives Major Gift to Athletic Department to Name New Stadium "Anonymous Field"

Monday, December 7, 2015

Nonprofit Writing Roundup: Zuckerberg/Chan Edition


With the news of the $45 billion Zuckerberg/Chan pledge came a wealth of writing and opinions. Here's a roundup of some that stood out in my view.

  • Best Debate: Many opposing views arose about the intentions and potential impact of the pledge, but the debate I found most informative was between Felix Salmon and Jesse Eisinger. Two polar views arose, but its clear both were seeking understanding in forming and conveying them.
  • Oops Award: The pledge brought much quick speculation and incorrect assertions, particularly about taxation and the LLC formation of the Chan Zuckerberg Initiative, but this one in Daily Beast stood out for me.
  • To a Hammer Everything is a Nail: The news of the pledge also brought many who saw the event as an opportunity to inconspicuously promote their ingrained views. This by Dan Pallotta deserves credit for doing so most conspicuously.
  • Best in Show: For my tastes, the best piece to accurately portray the facts and provide needed nuance is this Atlantic piece by Gillian White, summarizing where things stand as "it's too early to criticize the Chan Zuckerberg Initiative – just as it's too early to praise it."

Monday, November 30, 2015

Giving Tuesday Deals for Central Ohio


Giving Tuesday has now cemented its place (along with Black Friday, Small Business Saturday, and Cyber Monday) as an important post-Thanksgiving spending day. Unlike the other days, however, Giving Tuesday has seen little attention paid to deals that help stretch the dollars of those participating. In this spirit, below I have collected a list of "deals" in Central Ohio that help donors make their charitable dollars go further.

Matching Gifts:

Gifts for Giving:

Reduced Credit Card Fees:

Know other deals? Please share them in the comments.