Misgivings

Recent studies raise an uncharitable question: Is nonprofit accounting off track?

Relief International, a Los Angeles–based nonprofit that provides disaster-recovery services around the world, reported that it had collected more than $11 million in grants and contributions for 2005. Yet the organization claims in its audited financial statements that it didn’t spend a dime on fund-raising that year. Likewise, RBC Ministries, a nondenominational religious nonprofit based in Grand Rapids, raised more than $29 million in 2004 without reporting any fund-raising costs.

On paper, at least, these organizations appear to be able to raise millions without incurring any costs. And they are not alone. A joint study by Indiana University’s Center on Philanthropy and the Urban Institute found that one-fourth of nonprofits with at least $1 million to $5 million in contributions report zero fund-raising costs, while nearly a fifth of those that took in more than $5 million claim that it cost nothing to do so. Overall, 37 percent of nonprofits that raised at least $50,000 in contributions report no fund-raising costs.

To call these results suspect would be an understatement. “It’s almost impossible to raise that kind of money without incurring at least some costs, whether it’s printed materials, staff time, or something else,” says Patrick Rooney, director of research at the Center on Philanthropy. Moreover, the study found that a number of organizations report no overhead costs or use incorrect methods to compute expenses. Some nonprofits may simply be getting their accounting wrong, but Rooney suggests that many are deliberately manipulating the numbers.

Why are nonprofits so concerned about minimizing costs? Charitable giving is at an all-time high, spurred by disaster relief for Hurricane Katrina and the Indian Ocean tsunami — and so is the number of nonprofits competing for that money. Giving USA estimates that Americans gave $260 billion to more than 1 million charities in 2005, the latest year for which data is available. And donors are becoming increasingly discerning about how charities spend their contributions, thanks to the growing availability of information about nonprofits on the Internet.

In particular, donors are looking at two metrics. One is the efficiency ratio, which compares how much a nonprofit spends on fulfilling its mission (known as its programs) with what it spends on overhead and fund-raising. The other is the fund-raising ratio, which compares fund-raising costs as a percentage of contributions. The higher a nonprofit’s efficiency ratio and the lower its fund-raising percentage, the more comfortable donors will feel about giving money, knowing that most of it will be spent on programs.

The stepped-up scrutiny creates intense pressure on nonprofits to cut their overhead and fund-raising costs — or to improve their ratios by fudging their accounting, allocating more and more costs to programs. Indeed, a number of experts charge that nonprofit accounting is fraught with faulty bookkeeping and willful manipulations. “The numbers are highly unreliable,” says Christine L. Manor, a CPA who conducts accounting for a number of small and midsize nonprofits. “Sometimes it’s deliberate, sometimes it’s not, but much of the accounting [in the nonprofit world] is appalling.”

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