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.

Monday, March 9, 2015

Charity Telemarketing Makes Strange Bedfellows

Attorney General reports about charity solicitation efforts by for-profit fundraisers never fail to disappoint. The latest of these is the 2014 Pennies for Charity report by the New York Attorney General. The report details a record level of telemarketing by for-profit fundraisers, totaling $302 million in 2013. On average, less then 50% of donations reached the intended charities (though this percentage increased from 37% to 48%, which is progress).

It is interesting to note that this report also brought together some unlikely kindred spirits. In the report's ranking of nonprofits based on the percent of funds received from professional solicitors I noticed this gem.

Where else are these groups all aligned? For the record, their gross fundraising receipts and percent reaching the nonprofit are:
  • Greenpeace, Inc: $ 363,782 (40.93%)
  • National Rifle Association of America: $ 12,002,317 (40.59%)
  • National Right to Life Committee Inc: $ 630,479 (40.52%)
  • Religious Coalition for Reproductive Choice Inc: $ 44,928 (40.06%)

As one moves further down the list, another unlikely pairing appears.

What brings the Tea Party Patriots and Planned Parenthood together? In this case, it's professional fundraising that yields a mere 31% to their organizations. In particular, the gross receipts and percent reaching the nonprofit are:
  • Tea Party Patriots, Inc: $ 1,650,488 (30.95%)
  • Planned Parenthood Federation of America Inc: $ 4,021,902 (30.62%)

Say what you want about professional telemarketing efforts, but you have to admit that the willingness to use telemarketers as part of nonprofit solicitation knows no political bounds.

Monday, February 23, 2015

Things You Can Learn about The Clinton Foundation from Its Financial Statements

As Hillary Clinton and her presidential aspirations begin to take center stage in political discussions, some of the attention has focused on the Clintons' family foundation – many are already speculating about whether the foundation will prove to be a political asset or liability for Secretary Clinton.  While I can't speak to the politics angle, I do think it's worth considering what one can learn about the foundation and its activities from its financial statements. The following observations come from a review of the Clinton Foundation's GAAP financial statements (that reflect a consolidation of the Bill, Hillary, & Chelsea Clinton Foundation and its controlled entity the Clinton Health Access Initiative).