Study Will Examine Fund-Raising Costs at Charities

To the Editor:

The Chronicle’s article, “Charities’ Zero-Sum Filing Game” (May 18), highlights a serious problem for the non-profit sector and the fund-raising profession: Some non-profits are reporting their fund-raising costs inaccurately, or, in many cases, not at all.

Inconsistent, spotty reporting of fund-raising costs, intentional or not, and a lack of clear, comparable information on how non-profits calculate and report such costs confuse the public, arguably turn off potential donors, and call into question the credibility of the whole non-profit sector.

Unfortunately, up until now there have been no reliable data that would allow donors, funders, policy makers, and others to determine what non-profits’ costs are, whether they are indeed comparable, and whether organizations are consistently and accurately reporting them.

That is why the Urban Institute’s Center on Nonprofits and Philanthropy and the Center on Philanthropy at Indiana University are launching a comprehensive new study to better understand non-profit cost measurement and reporting.

Our goal is to help the non-profit sector move toward more accurate and consistent reporting of fund-raising and overhead costs. We plan to use the research findings to initiate a dialogue among non-profit practitioners, policy makers, regulators, and the accounting profession about how to ensure comparable and uniform reporting of such costs.

Some may worry that we are opening a Pandora’s box. But we believe that a fact-based dialogue grounded in unbiased research and focused on enhancing the credibility and accountability of the non-profit sector will benefit both the sector and the general public.

How? The public, government officials, donors, and others will benefit from greater transparency of both individual organizations and the sector as a whole. They will be better equipped to make fully informed decisions about their current and potential involvement with non-profit organizations.

Non-profits will benefit from increased donor confidence, which is critical to increasing financial support and building positive long-term relationships with new and existing donors. Consistent, comparable measurement and reporting will also allow all non-profits to compete for contributions fairly, on a level playing field.

To help ensure that the playing field is level, the cost study will examine how cost measurements and reporting vary by age, size, mission or type, geographical location, and fund-raising practices of various non-profit organizations. And we will develop a range of what typical expenses are, given those factors. Thus, we will be able to help the public better understand how these factors affect organizations’ need for support and why some types of organizations have expenses that are necessarily and justifiably greater than those of others.

Non-profits will benefit in one other important way as well — increased public, donor, and grant-maker awareness of the need for infrastructure and operating support. And non-profits will be able to build better administrative infrastructure for planning, administering, and evaluating their programs, as well as to engage in long-range donor-involvement and development activities.

Beyond those benefits, one of the principal goals of the study is to develop a range of products to meet the diverse needs of non-profits, donors, the media, policy makers, regulators, auditors, and accountants.

Voluntary reporting guidelines, software, and other management tools that will aid non-profits in more accurately and consistently reporting their costs and effectively managing fund-raising and administrative expenses will be produced.

We also plan to create materials that promote greater awareness and understanding, such as a “pocket guide” for understanding overhead costs, including explanations of how costs and performance can vary with an organization’s age, size, and type of activity or mission.

We intend to make the guide available via the World Wide Web and to distribute it broadly to state non-profit associations, other non-profit support and professional organizations, the Internal Revenue Service, and state charity officials. Versions with differing levels of detail are planned for donors, chief financial officers, bookkeepers in small non-profits, auditors, executive directors, and governing boards.

Working together, researchers and non-profit practitioners can improve cost measurement and reporting, thereby simultaneously building greater public trust in the non-profit sector and creating a better climate for more successful, ethical non-profit management and fund raising.

Elizabeth T. Boris
Director
Center on Nonprofits and Philanthropy
Urban Institute
Washington

Eugene R. Tempel
Executive Director
Center on Philanthropy
Indiana University
Indianapolis

To the Editor:

I believe that the lack of information about fund-raising costs often is fueled by something less damning than a lack of candor. It may be due in large part to the inability of non-profits, particularly medium-sized to large ones, to quantify the costs of fund raising. While such quantification may seem to be a simple accounting task, a combination of past practice, rationalization, and bureaucratic inertia often would require changes on a revolutionary scale to arrive at a reasonable number. Because of this, I can see why the number of choice — indeed, of necessity — is $0.

Based upon my experience of several years in a fund-raising consulting firm, I believe if you were to poll the consulting community you would find their greatest challenges pertaining to client acquisition to be: 1) an institutional inability to quantify costs accurately (and thereby to consider consulting fees within a rational context), and 2) a pervasive single-minded focus on budget to the exclusion of income opportunities.

In my experience, it became clear to me that many non-profits just do not operate in an accounting and budgeting environment that gives them a good handle on their fund-raising costs.

And yes, of course, this should change. ¡Viva la Revolución!

James Hopkins
Director of Corporate and Foundation Relations
Stevens Institute of Technology
Castle Point on Hudson, Hoboken, N.J.

To The Editor:

It was disheartening to read “Charities’ Zero-Sum Filing Game.” As one who has followed and studied this issue for over 30 years, I was saddened to note that reporting on informational tax returns — called Forms 990 — has not improved much over the years. My own research on 990 reporting has given me cause for concern but I did not realize that the situation was this awful.

Your readers may find it interesting to learn that the reporting of expenses of non-profits in three separate categories — program services, management and general operations, and fund raising — was first instituted in the 1964 publication Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations — the so-called Black Book, now in its fourth edition (1998).

This was a voluntary effort initiated by the sector’s leadership to bring some order out of chaos in non-profit accounting and financial reporting — years before the American Institute for Certified Public Accountants (A.I.C.P.A.) got interested in promulgating generally accepted accounting principles (GAAP) for non-profits.

In 1974, A.I.C.P.A. incorporated the concept of functional accounting in the GAAP developed for voluntary health and welfare organizations, requiring these organizations to report expenses in the three separate categories, including fund raising. Twenty years later, the Financial Accounting Standards Board, with Statement of Financial Accounting Standards No. 117, made it mandatory for voluntary health and welfare organizations to provide a statement of functional expenses and encouraged other non-profits to follow their example.

The current 990 reporting clearly needs effective remedies. A massive educational effort is needed among C.P.A.’s and other public accountants and board treasurers. Also needed is more vigorous enforcement at state and federal government levels. But ultimately, non-profits themselves need to recognize the importance of accurate, truthful, and timely reporting on their 990’s if they wish to retain and strengthen public trust in America’s non-profit sector.

Russy D. Sumariwalla
Director, 990 in 2000 Project
CompassPoint Nonprofit Services
San Francisco