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.

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