Archive | Charity Watchdogs RSS feed for this section

The Overhead Myth and the Bridge to Nowhere

26 Jun

The AICPA (American Institute of Certified Public Accountants) held its annual National Not-for-Profit Industry Conference last week in Washington, DC.  About 2,000 accountants from around the country selected from among approximately 60 sessions during the two-day conference.

In the afternoon of the second day there was a 75 minute session titled “What the Watchdogs are Watching.”  The featured speakers were Ken Berger from Charity Navigator and Art Taylor from BBB Wise Giving.

The timing of this session and the appearance of Berger and Taylor was fortuitous as it came just days after the release of their already infamous joint letter, written with Guidestar, entitled “The Overhead Myth.”  This letter is the latest salvo in the war against so-called overhead ratios to determine the effectiveness of nonprofit organizations.

There is much wrong with overhead ratios that I am not going to get into here.  Readers of my blog already know where I stand on this issue.  By chance, I posted my blog entitled “WHEN COMMON SENSE IS NOT SO COMMON: How misusing accounting data can lead one astray” just one day before The Overhead Myth letter was released.

In terms of full disclosure I should say that Dan Pallotta’s book, “Uncharitable,” is required reading for our staff and a copy is given to every new hire.  The book is also required reading for a class I teach at the Fels Institute of Government at the University of Pennsylvania.

What I found particularly interesting at the AICPA conference was not anything that Berger and Taylor had to say in their session (I don’t think they said anything that was not already in the public domain).  What was striking to me was the dearth of discussion during the rest of the two-day AICPA conference about what the overhead myth implies for the accounting community and the relevance of accounting standards for the nonprofit world.

To be clear, several of the conference sessions I attended during the conference mentioned The Overhead Myth letter.  I would say that the accounting community, or at least the session presenters, was by and large very familiar with the letter’s release.

But while the letter was mentioned and briefly discussed at several sessions, what was missing was any recognition (at least in the sessions I attended) of what the letter implies for the accounting world.

Specifically:  if overhead percentages are, in the words of the overhead myth letter, “a poor measure of a charity’s performance,” what does this imply about the countless hours of work spent by accountants at nonprofits everywhere, every day, developing the functional expense numbers that the ratios are based on?

If the information is a poor measure of a charity’s performance, are we all wasting our time developing poor information?

Are GAAP and IRS rules that require the reporting of functional expense information (i.e. program, fundraising, and management expenses)  irrelevant at best, and, at worst, not only a waste of time, but a misleading means by which to allocate scarce public resources among nonprofit organizations?

To put it another way, if accountants are building a bridge to nowhere, what does this imply about the time, money, and effort spent to build the bridge, and what does it portend for the travelers forced onto the bridge only to find it is leading them astray?

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

WHEN COMMON SENSE IS NOT SO COMMON: How misusing accounting data can lead one astray

16 Jun

I’m an accountant. Yet, I would be among the first to admit that standard accounting tools for measuring the performance of nonprofit organizations don’t always make sense.

Here is an example.

Suppose I told you that I have an investment with a 20% rate of return. Would you be interested?

As I write this, with interest rates in the very low single digit zone, I would be happy just to find a solid dividend paying stock yielding 5%, so 20% would certainly get my attention.

A 20% rate of return means that for every $1 that I spend, I get back $1.20 (my original $1 plus an additional $.20). Not a bad return, right?

Suppose I now tell you that I have an investment with a 100% rate of return? I spend $1 and I get back $2 (my original dollar plus an additional dollar). You would probably think this is too good to be true and that I was either lying or simply nuts.

Let’s stretch this point one more time. Imagine that I now tell you that I have an investment that returns 1,000%!!! I spend $1 and I get back $10. This would be so incredibly good that it must be outside the realm of all possibility. Certainly if we could find a person or organization that could achieve this big a return on a large scale we would reward this person or organization with the highest accolades. Such a person or organization would appear on the front page of Time Magazine, Forbes, and, hopefully, the Chronicle of Philanthropy. The CEO would be lauded for their outstanding success.

Yet, in the nonprofit world, this organization would be downgraded.

Consider the rating of organizations done by Charity Navigator, one of the larger charity “watchdogs.”

Charity Navigator attempts to rate the effectiveness of nonprofit organizations using a variety of different metrics. To do this they rely primarily on publicly available information on the Form 990.

I don’t fault Charity Navigator for attempting to rate nonprofits, or for using the 990. However, one needs to apply some common sense to whatever analysis one attempts to do.

One of the measures Charity Navigator uses is a statistic they call “Fundraising Efficiency.” They define this on their website as:

“The amount spent to raise $1 in charitable contributions. To calculate a charity’s fundraising efficiency, we divide its fundraising expenses by the total contributions it receives.”

Once an organization hits a 10% “fundraising efficiency” (they spend $1 to raise $10), Charity Navigator starts deducting points from the organization’s score. Once they hit 20%, more points are deducted, and so on.

So how could a 1,000% rate of return (spend $1 and get back $10) in the for-profit world be so outstanding, while in the nonprofit world an organization has points deducted from their evaluation score?

Has common sense been suspended?

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

%d bloggers like this: