The Nonprofit World Is Ripe for an Enron-Like Debacle

To the Editor:

The Enron debacle brings home the fact that we too have a few nonprofit Enrons and nonprofit Arthur Andersens among us. This remains a cause for concern.

Creative — if not outright fraudulent — accounting is not an exclusive province of for-profit corporations. Regrettably, nonprofits are not immune to the “Enron syndrome.” Some nonprofits do engage in creative accounting to make them look good to their grant makers. We do not know the extent of this problem, but I believe it is sufficiently widespread among those who are required by their grant makers to show higher program expenses and lower administrative and fund-raising expenses. In the past, voluntary watchdog groups and government regulators have played a major role in perpetuating the ideal of lowest possible administrative and fund-raising expenses and highest possible program expenses.

This is not intended as a blanket indictment of accounting firms that audit nonprofits. I know many highly conscientious CPA’s who go by the book and will not tolerate inappropriate cost-allocation practices. The blame rests at the feet of donors and donor-advisers who cannot fathom that it costs money to raise money and that it costs money to manage a nonprofit just as it costs money to manage a for-profit corporation.

In the final analysis, a fair way to evaluate a nonprofit’s performance is to examine its affairs in the context of the unique set of circumstances under which it operates. If cost comparison is used, it is more meaningful to compare, where available, per-unit cost of production (i.e., total expenses divided by total number of units produced). Unfortunately, the state of the art has not advanced sufficiently for most nonprofits to determine per-unit costs.

Russy D. Sumariwalla
Retired CEO of United Way International
St. Helena, Calif.