Prepared: October Presentation prepared by: YOUR PART-TIME CONTROLLER, LLC Washington Philadelphia New York City

Transcription

1 Prepared: October 2013 Presentation prepared by: YOUR PART-TIME CONTROLLER, LLC Washington Philadelphia New York City

2 The time has passed when donors invest or make contributions because it s the right thing to do They want to see their investment yield results. [Emphasis added] Rebecca Rimel, President and CEO The Pew Charitable Trusts As quoted by the Philadelphia Inquirer September 29, Your Part-Time Controller, LLC Slide 2

3 HOW DO WE MEASURE RESULTS??? 2013 Your Part-Time Controller, LLC Slide 3

4 We all want RESULTS! Who is not in favor of having higher performing, more effective nonprofits? But how do we measure the effectiveness of our nonprofits? How do we measure results? See Eric Fraint s blog: In Search of the Holy Grail of the Nonprofit World at: 2013 Your Part-Time Controller, LLC Slide 4

5 While we are all grappling with this question of measuring results, a new group of organizations have sprung up to try to answer this question. Generally referred to as watchdogs or charity watchdogs THEY ARE EVALUATING AND RATING NONPROFIT ORGANIZATIONS AND THEY ARE MAKING THOSE RATINGS PUBLIC Donors, at least some, are looking at these ratings IF YOU ARE NOT PROACTIVE, THEY WILL BE DECIDING, NOT YOU, HOW THE PUBLIC VIEWS YOU 2013 Your Part-Time Controller, LLC Slide 5

6 Are you being rated? Are their ratings of you fair? If not, what can you do about it? THE STAKES ARE HIGH: GET A BAD RATING, AND YOU RISK LOSING SOME PHILANTHROPIC SUPPORT. YOU RISK LOSING DONORS! 2013 Your Part-Time Controller, LLC Slide 6

7 How did this situation develop? A brief history Who are these charity watchdogs? How are these charity watchdogs rating you? What are they looking at? What are they measuring? The Overhead Myth letter and the limits of overhead ratios What can you do to put your organization s best foot forward? 2013 Your Part-Time Controller, LLC Slide 7

8 How did this situation develop? A brief history lesson Your Part-Time Controller, LLC Slide 8

9 I. The growth of outcomes and the need to measure results II. IRS 990 and the infamous 3 columns III. FASB 117 and the accountants IV. Guidestar makes the data available V. The charity watchdogs emerge 2013 Your Part-Time Controller, LLC Slide 9

10 In 1997 renowned Harvard social analyst Lisbeth Schorr was already writing in her book Common Purpose that: The nations ability to know whether programs, policies, and tax dollars are achieving their intended purpose is in the midst of a revolution. [Emphasis added] The new attention to results signals a profound shift Since the mid-1980s accountability for results [has emerged] Your Part-Time Controller, LLC Slide 10

11 Foundations, governments, and donors begin to seek more and better information about the outcomes nonprofit organizations are achieving with their donations The need to better measure results grows Is there a single measure, or a group of measures, that exists for all organizations? 2013 Your Part-Time Controller, LLC Slide 11

12 Statement of Functional Expenses and the infamous 3 columns (plus a Total Expense column): 2013 Your Part-Time Controller, LLC Slide 12

13 Let s focus on these columns: It is these columns that are at the center of the controversy and provide much of the financial data used by the watchdogs: 2013 Your Part-Time Controller, LLC Slide 13

14 Instructions printed on the requested: Describe what was achieved in carrying out your exempt purposes. Fully describe the services provided; the number of persons benefited; or other relevant information for each program title. PROGRAM SERVICE ACCOMPLISHMENTS 2013 Your Part-Time Controller, LLC Slide 14

15 Accounting rules FASB 117 issued in 1993, along with FASB 116 Requires functional expense breakdown Program services versus supporting activities Supporting Activities: Fundraising Management & General Membership Strives to measure and assess an organization s Service efforts 2013 Your Part-Time Controller, LLC Slide 15

16 History: Founded September 6, 1994 July 1996 publishes full or partial reports on 42,000 charities on CD October 1996 launches website For the first time, 990 s are readily available for public scrutiny 2013 Your Part-Time Controller, LLC Slide 16

17 Charity Navigator, the largest, rates almost 7,000 organizations Plans to rate more Nonprofit Says that its website had over 6.2 million visits in 2012 and impacts approximately $10 billion of charitable donations each year. Founded in 2001 with the mission to guide intelligent giving. According to their November 30, 2012 audit and their website (as of September 2013): Total expenses of about $1.2M 12 employees 2013 Your Part-Time Controller, LLC Slide 17

18 BBB Wise Giving Alliance Provides over 1,200 reports on national charities. Plus, over 10,000 reports produced by local Better Business Bureaus GuideStar Does not publish ratings per se, but awards 1 to 4 boxes depending on the completeness of information posted. Most organizations view this as a type of rating CharityWatch Provides a letter grade on the financial performance of approximately 600 major American charities GreatNonprofits Givewell.org American Institute of Philanthropy Philanthropedia (acquired by GuideStar in 2011) 2013 Your Part-Time Controller, LLC Slide 18

19 How did this situation develop? A brief history Who are these charity watchdogs? How are these charity watchdogs rating you? What are they looking at? What are they measuring? The Overhead Myth letter and the limits of overhead ratios What can you do to put your organization s best foot forward? 2013 Your Part-Time Controller, LLC Slide 19

20 How are they rating you? We will start with and spend most of our time considering Charity Navigator 2013 Your Part-Time Controller, LLC Slide 20

21 Their tagline is: Your Guide To Intelligent Giving Who do they rate? 501(c)(3) public support to be more than $500,000 and total revenue more $1,000,000 4 years of Forms 990 How many organizations do they rate? Almost 7, Your Part-Time Controller, LLC Slide 21

22 Charity Navigator (CN) rates organizations using, what they describe, as two broad areas of performance; their Financial Health and their Accountability & Transparency. Financial Health 7 metrics maximum total 70 points Accountability & Transparency 17 metrics maximum total 70 points 2013 Your Part-Time Controller, LLC Slide 22

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24 They use 7 Financial Efficiency Performance Metrics taken from the 990: Metric 1: Program Expenses (ratio max 10 points) Adjusted down for deficits Metric 2: Administrative Expenses (ratio max 10 points) Metric 3: Fundraising Expenses (ratio max 10 points) Metric 4: Fundraising Efficiency (ratio max 10 points) Metric 5: Primary Revenue Growth (calc max 10 points) Metric 6: Program Expenses Growth (calc-10 points) Metric 7: Working Capital Ratio (ratio max 10 points) 2013 Your Part-Time Controller, LLC Slide 24

25 Indirect Cost Allocation Adjustment Factored out unless documentation provided Joint Cost Allocation Adjustment Program costs added back to fundraising 2013 Your Part-Time Controller, LLC Slide 25

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30 START WITH 70 POINTS, THEN DEDUCT FOR FAILING TO MEET METRICS Data from form 990: 1. Independent Board (deduct 15 points) 2. Material diversion of assets (7 or 15 pts) 3. Audited financials prepared by independent accountant with an audit oversight committee (7 or 15 pts) 4. Loan(s) to or from related parties (4 pts) 5. Documents Board meeting minutes (4 pts) 6. Provided copy of Form 990 to organization's governing body in advance of filing (4 pts) 7. No Conflict of interest policy (4 pts) 8. No Whistleblower policy (4 pts) 9. No Records retention and destruction policy (4 pts) 10. CEO listed with salary not properly reported (4 pts) 11. Process for determining CEO compensation (4 pts) 12. Board Listed / Board Members Not Compensated (4 pts) 2013 Your Part-Time Controller, LLC Slide 30

31 Data from charity s website: 13. Does not list board members (4 pts) 14. Does not list senior staff (4 pts) 15. Does not publish audited financials (4 pts) 16. Does not publish Form 990 (4 pts) 17. Privacy Policy (3 or 4 pts) 2013 Your Part-Time Controller, LLC Slide 31

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36 This organization fell down in these 5 areas: 2013 Your Part-Time Controller, LLC Slide 36

37 With just a few action steps by the organization, they could have raised their overall score from to 57.88, taking them from two stars to three Your Part-Time Controller, LLC Slide 37

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39 BBB Wise Giving Alliance (BBB) states in its 2012 Annual Report that its mission is helping donors find charities they can trust. BBB produces reports on more than 1,200 nationally soliciting charitable organizations, and local Better Business Bureaus report on another 10,000 local and regional charities Your Part-Time Controller, LLC Slide 39

40 BBB has a list of 20 standards broken down into four groups: Governance 5 standards Effectiveness 2 standards Finances 7 standards Fundraising and other information 6 standards 2013 Your Part-Time Controller, LLC Slide 40

41 For each standard, BBB provides one of four symbols indicating: Meets Standards Standards Not Met Did Not Disclose Review in Progress Unable to Verify In order for an organization to get an overall checkmark, it must meet all 20 standards 2013 Your Part-Time Controller, LLC Slide 41

42 Name of Organization Here is a sample organization that did not meet the standard of Donor Privacy, so the organization did not get a check mark. Organization Address and website 2013 Your Part-Time Controller, LLC Slide 42

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45 1 Box GuideStar BMF (GuideStar Business Master File) Data 2 Boxes GuideStar BMF Data Forms Boxes GuideStar BMF Data Forms 990 Self-Reported Information 4 Boxes GuideStar BMF Data Forms 990 Self-Reported Information Letter of Determination Audited Financial Information 2013 Your Part-Time Controller, LLC Slide 45

46 Getting all four boxes is not difficult, all you need to do is submit all of the following These first one is automatic: GuideStar BMF Data The second is also automatic, provided you are filing your 990 s on a timely basis Forms 990 Submit these next three and you will get all four boxes Self-Reported Information Letter of Determination Audited Financial Information 2013 Your Part-Time Controller, LLC Slide 46

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49 How did this situation develop? A brief history Who are these charity watchdogs? How are these charity watchdogs rating you? What are they looking at? What are they measuring? The Overhead Myth letter and the limits of overhead ratios What can you do to put your organization s best foot forward? 2013 Your Part-Time Controller, LLC Slide 49

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51 Recently, on Monday June 17, 2013, three nonprofit organizations released a letter they titled The Overhead Myth The three organizations, sometimes individually or collectively referred to as charity watchdogs are: Charity Navigator BBB Wise Giving Alliance GuideStar 2013 Your Part-Time Controller, LLC Slide 51

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53 The experts have spoken: the percent of charity expenses that goes to administrative costs commonly referred to as overhead is a poor measure of a charity s performance. In a historic move, the leaders of the country s three leading sources of information on nonprofits-guidestar, Charity Navigator, and BBB Wise Giving Alliance penned an open letter to the donors of America denouncing the overhead ratio as a valid indicator of nonprofit performance. The nonprofit sector has too often erroneously focused on overhead over the past few decades Source: Overheadmyth.com (run by GuideStar) 2013 Your Part-Time Controller, LLC Slide 53

54 Organizations, both for-profit and nonprofit, that provide ratings of one sort or another is nothing new Moody s and Standard & Poors rate the credit worthiness of bond issuing corporations and governments Film critics rate movies and book critics review books Brokerage firms rate stocks Consumer Reports rates just about everything else Etc. Name the area of human endeavor or area of commerce, and there is likely someone, or some website, out there giving ratings So it should not strike anyone as being unusual that we have those who try to evaluate and rate nonprofits 2013 Your Part-Time Controller, LLC Slide 54

55 As it turns out there are a number of problems: The reality is that the measurement of overhead expense is inherently subjective and can vary dramatically based as much or more on the accounting methods an organization uses as on its actual efficiency. In many cases, the accounting methods used need only be reasonable and consistently applied Your Part-Time Controller, LLC Slide 55

56 The basic premise that attempting to record expenses as either program, fundraising, or administrative, is flawed. The mere notion that investments in infrastructure and in spending in more mundane operating areas are necessarily bad belies all logic of the things that an effective organization needs in order to operate its programs. In the words of the letter, overhead is: a poor measure of a charity s performance and focusing on overhead without considering other critical dimensions of a charity s financial and organizational performance does more damage than good Your Part-Time Controller, LLC Slide 56

57 Another disturbing fact that most insiders will privately admit, is that, where specific guidance exists, there is a high rate of error in how functional expenses are calculated. People don t know the GAAP and IRS rules. Even when people know the rules, there are differences of opinion among accountants and the watchdogs about the proper treatment for such things as valuing donated goods, the allocation of indirect costs, and the accounting for joint costs when a mailing has both a fundraising and program component 2013 Your Part-Time Controller, LLC Slide 57

58 Last but not least, because of the pressure on nonprofits to maximize program expenses while minimizing fundraising and administrative costs, where there is room for judgment, the bias is to classify expenses as program related Studying an organization s 990, while potentially very useful, tells the reader little, if anything, about how well an organization is able to deliver on its nonprofit mission 2013 Your Part-Time Controller, LLC Slide 58

59 None of the issues I ve recounted are new. What is new is the release of the letter, The Overhead Myth, by three leading organizations: two of which are actively rating nonprofits (Charity Navigator and BBB Wise Giving Alliance), and GuideStar (which is the enabler for these watchdogs by making 990 s readily available) What is truly remarkable is that the letter contradicts much of what the rating organizations have done for years, and continue to do today. By their own admission, they have been leading the charge to promote a poor measure of a charity s performance Your Part-Time Controller, LLC Slide 59

60 How did this situation develop? A brief history Who are these charity watchdogs? How are these charity watchdogs rating you? What are they looking at? What are they measuring? The Overhead Myth letter and the limits of overhead ratios What can you do to put your organization s best foot forward? 2013 Your Part-Time Controller, LLC Slide 60

61 Nevertheless, overhead ratios and the rating agencies that promote them, do not seem to be going away any time soon. Neither the IRS, or the accounting profession, to my knowledge, is giving any thought to eliminating functional expense reporting So, just like the inevitable death and taxes, it behooves nonprofit organizations everywhere to take the necessary precautionary steps to protect themselves 2013 Your Part-Time Controller, LLC Slide 61

62 First, know what the Charity Watchdogs are watching We ve given an introduction in this briefing Read their websites Next, understand the problems and limitations behind their methodology 2013 Your Part-Time Controller, LLC Slide 62

63 Here are some steps you should take to be sure that your organization puts its best foot forward Find out if your charity is rated by each of the watchdogs If your rating is not as high as you would like, find out why Understand how each watchdog determines their ratings Understand the GAAP and IRS rules. Find out whether the person, or persons, that prepared your functional expenses understand these rules Consult with a knowledgeable accountant or CPA Provide the rating agencies with the information they request If you think the rating agency made a mistake, or if you have some special situation that warrants special consideration, contact the rating agency 2013 Your Part-Time Controller, LLC Slide 63

64 Have your board enact improvements to its governance in keeping with the 990 questions For example: whistleblower polices, document retention, conflict of interest policies, etc. Post your audit and 990 on your website List your key staff and board members Adopt a privacy policy and stick to it 2013 Your Part-Time Controller, LLC Slide 64

65 Discuss with your auditors or other professionals what your options are, where you can exercise judgment, and what s appropriate and what s not Then develop reasonable and consistent polices for allocating your costs in a way that more fairly portrays your operations 2013 Your Part-Time Controller, LLC Slide 65

66 How did this situation develop? A brief history Who are these charity watchdogs? How are these charity watchdogs rating you? What are they looking at? What are they measuring? The Overhead Myth letter and the limits of overhead ratios What can you do to put your organization s best foot forward? 2013 Your Part-Time Controller, LLC Slide 66

67 When it comes to measuring the results, effectiveness, and impact of your organization, remember the following: Not everything that can be counted counts, and not everything that counts can be counted. (Attributed to various people) 2013 Your Part-Time Controller, LLC Slide 67

68 Washington Philadelphia - New York City Website: Read Eric s blog on nonprofit financial management best practices: Follow Eric on 2013 Your Part-Time Controller, LLC Slide 68

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