Wednesday, September 21, 2016

What makes up the "Clinton Foundation"?

One thing I have noticed in discussions of the Clinton family's charities is a lot of disagreement about what is meant when people say the "Clinton Foundation".  As it turns out, there isn't such a single organization.  Typically, the group of charities that bear the Clinton name can be split into two pieces: (1) the Clinton Family Foundation, a private foundation that disburses the family's own charitable giving; and (2) what is typically labeled as the "Clinton Foundation", which consists of the Bill, Hillary, & Chelsea Clinton Foundation, a public charity, as well as its controlled affiliates.  Here is a depiction of the organizations and their relationships.
As it turns out, much of the confusion about the Clinton charities can be attributed to people incorrectly treating one (or more) of these individual pieces as the Clinton Foundation.  The fact that some pieces file separately with the IRS (form 990) doesn't help with such confusion.  For this reason, it's important to look at the (audited) GAAP financial statements, which consolidate the related entities together.

Tuesday, August 16, 2016

A look at the 2015 Wounded Warrior Project Financial Statements

Since this blog previously discussed what can (and what cannot) be gleaned from the Wounded Warrior Project (WWP) financial statements from 2015, I figured I would revisit the question now that they have been publicly released.  The five things to look for were:

If you want to see how the crisis affected donations or changed WWP's spending approach, you’ll need to wait another year for it to show up in the financials.
As mentioned before, these financials cover the period prior to the fallout from media scrutiny, so there are not any operational changes here to note.  One feature worth noting, however, is that the disclosure on subsequent events does mention a reorganization planned for September 2016 to address concerns that have been raised.

If you want a complete picture, you will need to look at the consolidated GAAP (audited) financial statements.
As discussed before, the main reason GAAP financials are more informative for WWP than the IRS Form 990 is that they consolidate the activities of WWP and its controlled entity, the Wounded Warrior Project Long Term Support Trust (WWPLTST).  For 2015, this matters because WWP transferred $54,000,000 to WWPLTST, an amount that didn't register as an expense in the GAAP financials since they consolidate the two entities.  Surprisingly, the organization has decided to make a shift toward highlighting the results from the WWP Form 990, which lists this $54,000,000 as an expenditure devoted to programs.  This is perplexing, since it is hard to argue that shifting money from one of your organizations to another is spending money on veterans programs (that money shouldn't be viewed as spent until it is disbursed from WWPLTST).  I am not sure why the organization made this shift in focus, but I continue to stress that the Form 990 is misleading in this case and interested readers should stick to the GAAP financials.

Check the audited financials to see who conducted the audit and if they offer any mention of the developments in 2016.
Nothing earth shattering to report here.  Grant Thornton once again served as the auditor and provided an unqualified opinion on the financial statements.  As discussed above, the developments are described briefly as a subsequent event but there is no mention of a material consequence of them.  That said, Jim Ulvog noted the interesting tidbit that the audit report was issued by the Atlanta office in 2014 but switched to the New York office in 2015.

Examine the consolidated net asset balance to see how much of a financial cushion the organization built before the controversy.
As of September 30, 2014, the organization had accumulated over $283 million in unrestricted net assets (up from $173 million just one year prior). This number increased another $86 million in 2015 to $369 million.

Check to see if the organization chose to be more conservative in its accounting choices. 
The short story on this is it appears the organization largely continued its accounting choices from previous years, relying heavily on joint cost allocation and treating donated public service announcements as entirely program-related.  This remained a material aspect of their financials, with donated media, advertising, postage & mailing, and direct response efforts making up 50% of all of the organization's expenses; of that amount, 73% was recorded as program-related.

Tuesday, August 2, 2016

If He Did It: The Question of Charitable Donations by Donald Trump

One interesting subplot of the presidential campaign that has brought the nonprofit world into play is the question of Donald Trump’s personal charitable giving.  After repeated claims of Mr. Trump’s philanthropic largesse by his supporters, many have questioned the extent of such giving.  Gifts of conservation easements, free golf rounds, and the like by Trump-controlled companies have been well-documented, but personal giving by the candidate himself was, until recently, largely uncharted territory.  This is where the extensive work of David Fahrenthold of the Washington Post comes in.  While the Washington Post examination itself has yielded several fascinating stories, it has found little evidence of substantial personal giving by Mr. Trump.  However, in my mind, there is one large gap in the investigation that will be hard to bridge.  To elaborate, here are what I see as the three most plausible sources of personal giving by Mr. Trump:

1. Donations to the Donald J. Trump Foundation.  This would seem like the obvious recipient of Mr. Trump’s personal giving.  After all, he established this charity as a private foundation, and that is what private foundations are for.  Yet, it turns out that little of the giving to the Donald J. Trump foundation comes from Mr. Trump himself; instead, the organization acts more like a public charity.

2. Donations to individual operating charities.  This is the most popular choice for the average donor, so it seems like the natural next place to look.  And, this is precisely what Mr. Fahrenthold has done – seeking out nonprofits that have had some affiliation Mr. Trump, have been recipients of funds from the Donald J. Trump Foundation, or have otherwise been mentioned in conjunction with the candidate.  Though plagued by many nonprofits’ opting for “no comment”, this avenue of investigation has yielded little evidence of donations.

3. Donations to Donor Advised Funds (DAFs).  Though donations to individual operating charities seems like a reasonable path for investigation, it is actually not a particularly wise way to go for a high-wealth individual.  Instead, I would argue that the second-most plausible giving outlet is through donor advised funds.
Why are DAFs an avenue to consider? For one, there are strong tax incentives to give appreciated investments rather than cash to charity, and donor advised funds (at least those with commercial sponsors) are typically better equipped to take and convert such donations to cash.  Second, using donor advised funds helps separate the tax benefit of giving from the decisions of which operating charity will get funds and when.  Finally, donor advised funds permit giving to individual operating charities while preserving privacy of the donor.
What would this entail? The donor gives money (or, more likely, investments) to the DAF and then later directs the DAF about which operating charity should receive the cash.
Would Mr. Trump use DAFs?  Normally, I would say no, that having a private foundation is strong evidence that the individual intends to use the private foundation for his/her giving and not a DAF.  In this case, however, if there is substantial giving, we already know the private foundation is not the source.  More circumstantial evidence to this end is that Mr. Trump’s private foundation itself has granted funds to DAFs, so there are some natural recipients.

The problem presented by DAFs is that if they are a possible source of Mr. Trump’s personal giving, it is unlikely that these organizations will comment on the presence or extent of Mr. Trump's use of them without him asking them to. How can we know then?  The only sure way is if the candidate releases tax returns, or at least the portion that details his charitable contributions.  Until that happens, we are left with an incomplete picture.  In the mean time, we can all enjoy David Fahrenthold's valiant attempts to piece together the puzzle.

Tuesday, June 21, 2016

What to Look for in the Next Wounded Warrior Project Financial Statements

Nearly five months has passed since the CBS News and New York Times investigations of the Wounded Warrior Project (WWP) generated a crisis of confidence surrounding the organization's spending practices. During that time, we have seen long-serving executives removed and new executives hired, an external review initiated by the organization, questioning by Senator Chuck Grassley, and a vow to bring in new board members, but no new financial information.  However, since the previous financials were released in the spring of 2015, new financials are sure to be in the offing.  Here are a few tips for reviewing the financials when they are released.

If you want to see how the crisis affected donations or changed WWP's spending approach, you’ll need to wait another year for it to show up in the financials.
Believe it or not, the current financials only cover October 1, 2013 – September 30, 2014, so the new financials, when released, will cover October 1, 2014 – September 30, 2015.  Thus, the time period covered by the new financials ends nearly four months before the crisis so won't reflect the fallout.

If you want a complete picture, you will need to look at the consolidated GAAP (audited) financial statements.
In 2013, WWP established the Wounded Warrior Project Long Term Support Trust (WWPLTST), to house funds that will support veterans' long-term needs. Since then, WWP has been increasingly transferring funds to WWPLTST to invest.  The two organizations, though closely intertwined, file separate form 990 financial statements, meaning those transfers from WWP to WWPLTST will appear as grants made by WWP even if they remain invested at WWPLTST.  Such transfers between related parties are eliminated in GAAP financial statements, which will instead consolidate the two entities and thereby provide a more complete picture of their combined activities.

Check the audited financials to see who conducted the audit and if they offer any mention of the developments in 2016.
Though shocking revelations in audit opinions are rare, it is possible the auditor’s report or financial statements will offer some language discussing the controversy at the organization in the form of a footnote on subsequent events and their potential impact on the organization.  Further, WWP in particular has the interesting feature of having three different auditors over the past three years (LBA Group in 2011-2012; BDO in 2012-2013; and Grant Thornton in 2013-2014).  To have yet another auditor change for 2014-2015 would be notable.

Examine the consolidated net asset balance to see how much of a financial cushion the organization built before the controversy.
As of September 30, 2014, the organization had accumulated over $283 million in unrestricted net assets (up from $173 million just one year prior). How high did this number get by September 30, 2015?

Check to see if the organization chose to be more conservative in its accounting choices. 
Though activities after the crisis are not covered in the financial statements, many of the accounting choices that underlie the statements could have been made after the crisis (after all, the financial statements are not being released until well after year-end).  In particular:
  • The organization’s largest expense item in 2013-2014 was donated media ad value, representing over 23% of all expenses. The entire amount of this line item was recorded as a program expense. Did this practice of treating the ads as only a programming-related expense continue?
  • Beyond donated media ad value, the organization recorded another $51.6 million (17% of all expenses) for postage, mailing, and other advertising-related expense items in 2013-2014. Among these costs, over 62% were treated as related to programming. Did the organization continue to treat such a large percentage of advertising and mailing costs as programming?
In short, though the new financial statements for Wounded Warrior Project will not tell us everything, particularly about the organization's future direction, they can nonetheless be informative if viewed with care.

Wednesday, June 15, 2016

Sizing up the NRA

As gun control debates once again resurface across the country, I want to provide some perspective on one small sliver of the discussion.  Though I have little to offer to the main areas of contention, I do think it is worth revisiting the pervasive view that the National Rifle Association (NRA) is an unstoppable financial behemoth.  (This view has even made its way to The Onion.)  Though it certainly may exercise influence on the discussion, the NRA's strength cannot be attributed solely to its financial backing.

To illustrate, consider the following national nonprofit membership organizations for comparison: AARP; American Chemical Society (ACS); National Association of Realtors (NAR); and the United States Golf Association (USGA).  These are clearly a diverse set of organizations – what they share is nonprofit status, a nationwide membership base, and a heavy reliance on membership dues and/or other programming fees for revenue (actually, AARP and NRA are the two which are also 501(c)(4) organizations so probably represent the most apples-to-apples comparison).

First, consider a comparison of annual revenues from the organizations' most recent financial filings.  This gives a sense of scale of annual operations.


Clearly, the NRA is far from small, with revenues over $300 million; yet, it also does not stand out as outsized relative to others.  In this vein, consider also the net assets of the organizations.  This gives a sense of retained wealth that the organization can use moving forward.


Thus, unlike some of the others, the NRA's finances are notably driven by year-to-year revenues rather than a built-up financial cushion or endowment.

Are we to interpret these facts as meaning the NRA's influence is overstated? Perhaps not, but it does indicate that the organization is not as large or flush with cash as critics and supporters alike seem to think it is.

Thursday, June 9, 2016

Observations from the Financials of the Donald J. Trump Foundation

Since I have covered developments in the finances of the Clinton Foundation here over the past few years, it only seems fair to take a look at the Donald J. Trump Foundation. A review of the financial filings of the Trump Foundation from the past five years led me to the following basic observations:

1. The Donald J. Trump Foundation is a private foundation but doesn't really behave like one.
The hallmark characteristics of a private foundation are that it (a) is primarily funded by the wealth of its founder or its founder's family; and (b) invests the endowed wealth (principal) and distributes only a percentage of assets each year (often approximating investment returns or the 5% minimum distribution requirement) so as to preserve the principal well into the future. The Trump Foundation doesn't exhibit either of these characteristics. 

In terms of funding sources, over the past five years the primary contributions received by the foundation came not from its founder but by others, with Comedy Central, NBC, a carpet wholesaler, and a sports marketing group leading the way.

As for its distributions, the typical private foundation model of spending near 5% of net assets in any given year is also upended with the Trump Foundation, which distributes much of what it receives rather than keeping a quasi-endowment. For illustration, consider how the spending of the Trump Foundation compares to the private foundations of a few other well-known individuals/families: the Bloomberg Family Foundation, the Charles Koch Foundation, the Perot Foundation, and the Walton Family Foundation.  The next chart details expenses as a percent of net assets for each in the most recent year.



2. The Donald J. Trump Foundation is a relatively small operation.
Though its founder is known for extravagance, the Trump Foundation doesn't have a huge footprint. Its most recent tax year is fairly representative of previous years, and shows just how small the operation is relative to other private foundations. Take the size of net assets under management, as shown in the following chart.


Lest one conclude that the only take-away here is that three foundations are much smaller than the other two, let's zoom in on the three smallest.


With just over $1 million in net assets, the Trump Foundation is just a blip compared to the others. One reason for this may just be that the organization doesn't maintain a quasi-endowment like the others.  However, a similar comparison also plays out when it comes to annual expenses, which were $596,700 for the Trump Foundation in the most recent tax filing.



3. The Donald J. Trump Foundation's grants are not politically focused. Actually, they're not really focused at all.
Over the past five years, the foundation has given grants to a wide variety of organizations, from more conservative ones like Citizens United and the American Conservative Union Foundation to those that would be considered left-of-center like GLSEN (a group advocating for LGBT youth in schools) and Protect Our Winters (a climate change advocacy group). Most grants, however, were to organizations without a connection to political causes. Recipient organizations run the gamut from locally-focused (e.g., Long Island Sled Hockey) to nationally-recognized (e.g., Leukemia and Lymphoma Society), with causes ranging from international aid (e.g., Maestro Cares), to veterans (e.g., Green Beret Foundation) to health care (e.g., The Nicklaus Children's Health Care Foundation) to education (e.g., Columbia Grammar & Preparatory School). Many recipient organizations are themselves foundations of other celebrities (e.g., Magic Johnson Foundation; Tiger Woods Foundation; Mariano Rivera Foundation; Joe Torre Safe at Home Foundation), and there were even grants to the Eric Trump Foundation and donor advised funds at Fidelity Charitable and Schwab Charitable. Some organizations received grants in multiple years, whereas others were "one-off" grants. In short, the grant provision strategy of the foundation seems quite scattered.

Wednesday, May 18, 2016

The Fundamental Issue in the Wounded Warrior Project Inquiry

The recent letter released by Senator Chuck Grassley in his examination of the Wounded Warrior Project delves into, and seeks additional clarity on, the organization’s accounting practices, in particular those that give rise to its reported 80.6% program expense ratio.  As an accountant, I am tempted to delve into the details (Jim Ulvog does so deftly here).  However, I will instead focus on what I believe is the fundamental question being asked of the organization.

As noted here before and underscored in the letter from Sen. Grassley, much of the program costs that underlie the 80.6% figure are donated advertising as well as joint costs stemming from mailings, advertisements, and promotional items.  To this end, a pattern has clearly emerged when the organization’s spending decisions are questioned.  When critics accuse the organization of spending too little on meeting veterans’ needs, defenders quickly rush to note that over 80% of expenses are on programs for wounded veterans and their families.  Then, when questioned about a large portion of those costs consisting of advertising, mailing, and promotions, defenders often respond by noting the importance of such activities to grow an organization so it can scale to the size of the problems it confronts.

This brings us to the fundamental issue: growth is not a program.  If these activities are being treated as program costs, the defenders of these activities should be prepared to point out what was accomplished by them beyond raising funds or expanding the brand.  How did wounded veterans benefit from the advertisements and promotional items?  Was it money well spent or would veterans have benefited more from spending on different programs?  An alternative tack would be to state that fundraising is critical and that these are not current programs but rather efforts to raise money for future programs; this, however, would suggest the costs should be treated as fundraising, not program, expenses.  In short, the organization’s defenders can’t have their cake and eat it too – a clear and consistent answer seems necessary to move things forward.

In the coming weeks and months, we should expect some clarity on this fundamental issue, be it from additional communications by the organization itself, findings by the inquiry by Sen. Grassley, or both.

Tuesday, May 10, 2016

Fictional Charity Trivia

As a break from the norm, can you name the TV show or movie that gave birth to the following fictional charities?  To score above seven out of ten without the aid of Google, one will need to have the special gift of watching too much TV/movies and paying close attention to all things nonprofit...

  1. The Human Fund
  2. Springfieldians for Nonviolence, Understanding, and Helping
  3. Society for the Promotion of Elfish Welfare
  4. Royal Society for Putting Things on Top of Other Things
  5. Salvation Coast Guard
  6. Eastman Medical Center
  7. Sweetums Foundation
  8. Clean Water Initiative
  9. Lupus Awareness Awareness Foundation
  10. The Foundation for Law and Government
Answers next week.

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.

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.