Is Your Favorite Nonprofit Accurately Reporting its Fundraising Expenditure?
Nonprofit organizations like the one you support, work for, or hope to work for, play a vital role in addressing numerous social, cultural, and environmental issues. To achieve their mission and goals, these organizations need cash (proper word is funding) from various sources, including donations from individuals, grants from foundations, and government contracts. However, a recent study has found that too many nonprofit organizations (my quantifier not theirs) in the US under-report their fundraising expenditure, which can have significant implications for their financial transparency and accountability.
Fundraising expenditure is a critical component of any nonprofit organization's financial statement, as it reflects the amount spent on activities that generate revenue, such as soliciting donations, organizing fundraising events, and running marketing campaigns. According to the Generally Accepted Accounting Principles (GAAP), nonprofit organizations are required to report their fundraising expenditure in a separate category on their financial statement, along with other expenses such as program and administrative costs.
However, a study by the Better Business Bureau Wise Giving Alliance found that many nonprofit organizations in the US under-report their fundraising expenditure by excluding certain costs from their financial statements. For example, some organizations may categorize certain expenses as "program" or "administrative" costs instead of fundraising expenses, which can make their fundraising expenditure appear lower than it is. In other cases, organizations may use creative accounting techniques to inflate their revenue (for example using inflated Goods in Kind valuations) or reduce their expenses, which can make their financial statement appear more favorable to innocent donors and stakeholders.
There are several reasons why nonprofit organizations may under-report their fundraising expenditure. One reason is the pressure to maintain high levels of fundraising efficiency, which is often measured by the ratio of fundraising costs to the amount of revenue generated. Nonprofit organizations may feel compelled to minimize their fundraising expenditure in order to achieve a high fundraising efficiency ratio, which can make their organization more attractive to donors and stakeholders. However, this approach can be misleading, as it fails to account for the true cost of fundraising activities and may result in a distorted picture of the organization's financial health.
Another reason why nonprofit organizations may under-report their fundraising expenditure is the lack of clarity around what constitutes fundraising costs. GAAP provides general guidelines for reporting fundraising expenditure, but there is often room for interpretation and judgement, which can lead to inconsistencies in reporting across organizations. In addition, some fundraising activities may involve indirect costs, such as staff time or overhead expenses, which can be difficult to allocate accurately to specific categories.
The under-reporting of fundraising expenditure has significant implications for the transparency and accountability of nonprofit organizations. Donors and stakeholders rely on financial statements to make informed decisions about which organizations to support and how to allocate their resources (if you don’t do your homework before supporting an organization, stop it! Do your homework). If nonprofit organizations under-report their fundraising expenditure, donors may be misled about the true cost of supporting the organization, which can erode trust and confidence in the nonprofit sector. Moreover, the under-reporting of fundraising expenditure can obscure the true financial health of an organization, making it difficult to identify potential areas of inefficiency or waste.
The under-reporting of fundraising expenditure is a significant issue facing many nonprofit organizations in the US. To address this issue, nonprofit organizations should strive to report their fundraising expenditure accurately and transparently, following GAAP guidelines and providing clear explanations of what is included in each category. To do this of course, they need to make sure they invest in a fit for purpose accounting team that implements industry best-practices across the organization.
Donors and stakeholders should be vigilant in reviewing financial statements and asking questions about how fundraising expenditure is calculated. In one 990 form I looked at recently, one organization that I know claimed to have spent less than $100,000 on fundraising, despite the fact they have a large fundraising team that travels all over the country raising money via grassroots efforts. By promoting transparency and accountability in fundraising expenditure reporting, nonprofit organizations can build trust and confidence with donors and stakeholders and ensure the sustainability of their mission and goals.
References:
Better Business Bureau Wise Giving Alliance. (2017). Charitable Solicitation and Nonprofit Fundraising Practices. Retrieved from https://www.give.org/docs/default-source/evaluation-tools/charity-practices-report-2017.pdf
Financial Accounting Standards Board. (2016). Accounting Standards Update 2016-14. Retrieved from https://www.fasb.org/cs/BlobServer?blobkey=id
