Unsettled Accounts

New bookkeeping standards intended to stop charities from understating fund-raising expenses are drawing sharp criticism

In an effort to stop non-profit groups from overstating the percentage of their budgets that they spend on good works, an influential accounting organization has revised the standards by which most charities keep their books.

But instead of settling the debate over which costs should be applied to fund-raising expenses and which to program or administrative expenses, the new rules have drawn widespread criticism from fund raisers and charity-watchdog organizations.

Issued by the American Institute of Certified Public Accountants, the rules replace ones that the organization released in 1987. But like the decade-old rules, the new standards are under fire from leaders in the non-profit world.

Regulators and groups that monitor charities say the revised policy is too lenient, allowing charities to hide some fund-raising costs in other accounting categories.

Some charity officials, on the other hand, say that the new rules are too strict and are biased against legitimate fund-raising activities.

And some observers say that despite the length of the new policy — 85 pages, compared with only 11 pages for the 1987 standards — the revised rules remain far too vague for many charities to follow.

Known in accounting circles as “joint-cost allocation,” the practices that the new standards seek to influence are important in shaping the public’s perception of a charity’s honesty, efficiency, and commitment to its core mission.

Because some solicitations do more than seek money — they may also try to educate the public about issues, for example — charities are allowed to charge some of the costs of conducting a fund- raising appeal to program services or administration.

But a charity that counts too much of its fund-raising expenses in other categories can create the false impression that it is using more donor dollars on good works than it really is.

An example is an anti-smoking charity that tells prospective donors at the top of a fund-raising letter to “stop smoking,” then counts the cost of the entire letter as an education, rather than a fund-raising, expense.

The accounting group said it revised the 1987 rules because they were “difficult to implement” and had been “applied inconsistently.” But the revision process, which began in 1992, was long and slow. Five years ago, the group released a draft version of the new rules, which drew more than 300 comment letters, almost all of them critical.

After other revisions, the accounting group decided that the rules were ready, despite calls for a new round of public comment.

The new rules were issued this month in a document called Statement of Position 98-2. They take effect in fiscal years beginning on or after December 15, 1998.

Under the rules, charities:

* Must count the cost of fund-raising appeals entirely as a fund-raising expense unless the charity proves that an appeal does more than just ask for contributions. The charity must demonstrate that the appeal meets criteria in three areas: its purpose, the people it is directed toward, and its content.

* Must count entirely as a fund-raising expense those appeals conducted by fund-raising consultants or charity staff members if a majority of their compensation is based on how much money is raised in those appeals.

* Must count entirely as a fund-raising expense those appeals that use slogans to encourage people to take action, such as to stop smoking, but do not clearly explain the need for or benefits of such action.

* Must disclose in their audited financial statements specific information about the kinds of activities that had joint costs and the total amounts allocated to fund-raising, program, or administrative expenses.

The new policy affects costs incurred through such solicitations as direct-mail campaigns, telemarketing calls, special events, and telethons. Charities are not legally bound to follow standards issued by the accounting group, but most groups do.

Richard F. Larkin, an accountant at Price Waterhouse who helped write the new guidelines, says the standards are only a modest refinement of the 1987 rules.

“The underlying concept is still the same,” he says. “The difference is only in the details. We were trying to close loopholes and minimize the opportunities to make an end run around the guidelines or slip through the cracks that we didn’t think of.”

But some observers say the new rules mark a profound change in the way charities must account for spending that serves both fund-raising and program purposes.

“What’s going to be needed here is a massive education program” for charities, says Lee M. Cassidy, executive director of the National Federation of Nonprofits in Washington.

Phyllis Freedman, associate executive director at the Paralyzed Veterans of America, says that her group already follows many of the new standards. But, she says, she still worries that the rules may force the organization to attribute more expenses to fund raising.

Last year the Washington-based veterans’ group raised about $90-million, she says, spending about one-third of that on fund-raising — done largely through direct-mail solicitations.

Ms. Freedman and other charity officials argue that too much attention is being paid to fund-raising expenses and the regulation of costs that cover more than one budget category.

Charities, they say, should not be judged on the proportion of income spent on attracting gifts. While such information may be useful to a charity’s managers, they say, it gives regulators, the news media, and the general public a false picture of a non-profit organization’s efficiency and integrity.

Some charities, especially those that are new or not well known, they say, may have to spend heavily on fund raising because they do not have a pool of supporters they can count on for donations.

“It’s completely fatuous to say, ‘All we’re doing is setting accounting standards,’ ” says Mr. Cassidy, of the non-profit federation. “That’s ridiculous. It’s the way accounting standards are used that matters here. The reality is that charities are not created by numbers; charities are created for social problems.”

Mr. Cassidy adds that the new rules unfairly favor charities that receive government money or fees for services over charities that rely solely on direct mail, telephone solicitations, or special events to raise money. Charities with other sources of income besides contri butions, he says, have an easier time keeping fund-raising costs down.

Despite such concerns from charity advocates, watchdog groups rely on the fund-raising data to help them monitor how effectively charities are spending donors’ money. The watchdog groups criticize the new accounting rules for being too lenient.

“The bottom line is that contributors deserve better,” says James J. Bausch, president of the National Charities Information Bureau in New York.

The American Institute of Certified Public Accountants’ new document is vague and full of loopholes, Mr. Bausch asserts. “It’s still open to creative interpretation. For every door that’s closed, there’s a ‘however’ that opens it up again.”

The complexity of the new rules may be dangerous, says Bennett M. Weiner, director of the Philanthropic Advisory Service of the Council of Better Business Bureaus. If charities have trouble following the nuances of the new policy, he says, accountability in the non-profit world could be eroded.

Mr. Weiner also says that while the new policy does a better job of telling charities when costs can be allocated to program and administration categories, it fails to require charities to use a specific allocation method. As a result, Mr. Weiner says, “differences of opinion as to how much of a campaign should be recognized as a program expense as opposed to a fund-raising cost” may remain.

The most significant change under the new policy is in what charities must prove before they are allowed to classify any of the costs of a fund-raising appeal as a program or administrative expense.

The 1987 rules said a non-profit organization had to have “verifiable indications” that it conducted a real charitable program. Such indications included the appeal’s content and audience, and what action was requested of recipients. But the old rules offered only brief explanations of how those factors should be examined.

The new rules are much more explicit. They provide numerous examples of what can be counted as program expenses and what cannot. To count any part of the costs of a fund-raising solicitation as program or administration expenses, a charity must meet criteria in three areas:

Purpose. To assign costs to the program category, the charity must prove that through its mailings or other efforts it intended to call people to specific action to help accomplish the group’s mission.

For example, a charity that seeks to improve people’s physical health could send potential donors a brochure that urges them to stop smoking and also suggests specific methods, instructions, and resources that can be used to do so.

Audience. The charity must prove that a mailing or other communication is aimed at people clearly in need of the non-profit organization’s programs or who can help the charity accomplish its mission — not at people who were selected merely because of their presumed ability to contribute.

Content. The appeal must call for specific action by the recipient that will help fulfill the charity’s mission. “If the need for and benefits of the action are not clearly evident,” the policy states, “information describing the action and explaining the need for and benefits of the action” must be provided.

The charity must also demonstrate that the action it requests is useful. For example, a charity would not meet the policy’s requirements if it asked recipients of a mailing to return an enclosed questionnaire but then did not use the results to further its mission.

An appendix to the standards provides 17 examples that illustrate how the rules may be applied.

In one example, the cost of a door-to-door canvassing and fund-raising campaign is allowed to count toward both fund raising and program expenses even though a call-to-action message is made only implicitly. The example says that it is enough that canvassers merely imply that consumers should recycle when they tell them about environmental problems that result from not recycling.

Despite all the specifics about when charities may allocate costs, the standards do not state how charities ought to allocate those costs. They say only that charities should choose a “reasonable” method of allocation and apply it consistently. They also offer brief explanations of three “commonly used” allocation methods.

Whether the revised policy will end the longstanding debates over how to account for joint costs is still unclear. In the meantime, charities are scrambling to learn how to implement the new rules.

Mothers Against Drunk Driving in Irving, Tex., for example, plans to commission an accounting firm to study the standards and how the charity should keep its books.

Copies of the proposal may be obtained by calling A.I.C.P.A. at (800) 862-4272 and requesting product number 014887. Copies are $10.50 for members of the accounting group and $13 for non-members. An outline of the rules will be available by next month. on the group’s World-Wide Web site at http://www.aicpa.com.