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.