Donation Nation

The surging nonprofit sector has enormous potential to do good. When it comes to accounting, though, it could do better.

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The charity business is booming. Thanks to the Internet, which permits easy donation by credit card, and to personal videos, which brought such horrors as Katrina and the 2004 Asian tsunami right into our living rooms, public donations have soared in recent years. Add to this the massive contributions from the great wave of retiring billionaires, and it’s little wonder nonprofits have emerged as the hot sector of the decade. Between 1996 and 2004, the number of nonprofit organizations grew by nearly 29 percent. In years when overall employment in the United States fell, employment in nonprofits grew by more than 5 percent. Ten percent of the country’s workforce now work for these entities — and 10 percent more volunteer. Overall, the sector boasts $1.4 trillion in revenues and $3 trillion in assets.

If nonprofits traded on public markets, you’d be buying. But if you did, you would be taking a very big risk. Because well intentioned as most of these organizations are, their accounting practices are often questionable.

At CFO, we’ve heard rumblings about problems with nonprofit accounting for many years. We’ve received countless letters from finance executives at nonprofits asking us to write about the issue. We have heard funny stories about Ph.D. staffers who think margins refer to either the left- or right-hand border of the paper.

To be fair, many nonprofits practice a form of activity-based costing (which even for-profits find difficult) in order to show where they spend their money. Furthermore, the metrics by which donors usually judge nonprofits offer an incentive to misreport fund-raising costs. Nonprofits argue that they don’t have the resources to improve accounting. But as departments editor Joseph McCafferty argues in “Misgivings,” scale demands accountability: at this point, the sector is just too big to afford slipshod reporting.

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