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Discussions and Resources

Conversations regarding current and relative accounting issues in today's nonprofit sector.

Cindy Cumfer, Attorney at Law, is the coauthor of The Oregon Nonprofit Corporation Handbook.  For those of you who don't know Cindy, her practice is dedicated entirely to helping nonprofit organizations.  She recently launched a website where she provides useful information for any nonprofit.  One of her recent topics covers the rise of fraud and embezzlement in the nonprofit sector.  Please check out her article here for a few quick but extremely important steps you can follow to help prevent fraud and embezzlement in your organization.  She also offers some excellent sample forms and policies on her website.

If you would like additional sample policies, please contact us.

A few days ago Blue Avocado (a nonprofit digital magazine that provides resources and articles for the nonprofit community) published an article titled "Get the Most Value from Your Audit".  As many of you know, audits are an investment and they can be expensive.  The reason why I am highlighting this article is because  it echoes one of our values at SMJ & Associates.  Exceptional bookkeeping, audits, and fiscal controls are not just musts, they are also valuable tools that can help an organization develop strong financial oversight and result in a more robust and sustainable institution.

A few highlights from the article include a list of the benefits of a good audit relationship, and two check lists - "Is our auditor doing a good job for us?" and "Are we doing a good job managing our audit?".  Both necessary questions for any nonprofit that receives an independent audit.  Besides just providing checklists, the article helps you assess your answers, and dive deeper into what your current audit relationship means for you. 

Blue Avocado - Get the Most Value from Your Audit

If you missed Kay Sohl's presentations this year at Nonprofit Association of Oregon on funding admin and overhead costs, check out part 5 of her Indirect Cost Series on the NAO website.  Also, if you are interested in consulting services around indirect allocation methods, creating internal fully-loaded allocation spreadsheets, or other nonprofit specific acc... Read More | Comments (0)

In the last blog post I wrote about the issues that arise when funders or donors evaluate a nonprofit solely based on the indirect costs to program costs ratio.  Last Friday, Rick Wartzman (the executive director of the Drucker Institute at Claremont Graduate University), published a relevant article in Businessweek.

Wartzman’s article, The Charitable Challenge, emphasizes the ongoing need for donors to go further than just looking at this ratio when considering which nonprofit to support.  Wartzman cites several interesting resources, and gives a list from Give Smart (a guide for philanthropists) of questions that donors should engage to evaluate their relationships with nonprofits that they support.  The fourth question, “What will it take to get the job done?” is the central theme of the article. 

This brings up an important point that I didn’t address in my last post, mainly, that nonprofits should employ measurement internally to assess the outcomes of their programs and campaigns, and to develop plans for future endeavors based on this knowledge.  For smaller nonprofits, this might mean feeling comfortable with financial statements, and using them to access current and historic trends to get a handle on the organization’s financial position and health.  For larger nonprofits, this could be strategic and scenario planning, or connecting with other successful or innovative organizations in the field for perspective and communication.

 Since our clients range from volunteer-based organizations to organizations with $5 million operational budgets, look forward to a blog on tools to access your financial position, and a tutorial on reading and analyzing financial statements.  In the meantime, here’s a link to Wartzman’s article: The Charitable Challenge.

Is the overhead to program ratio a more important measure of an organization's effectiveness than its accomplishments and outcomes?  A study referenced in The Nonprofit Starvation Cycle (an excellent article produced by the Stanford Innovation Review) found that individual donors consider this ratio a more important factor in determining whether to give to a charity than the success of the organization's programs.  But if you attended Kay Sohl's workshop on "Funding Indirect and Overhead Costs" at the Nonprofit Association of Oregon, you could already begin to unravel the graver issues at hand.  Specifically, what are we even talking about when we say "overhead", and what substance lies beneath the numbers?  If we as a sector and a community routinely fail to grasp the definition of overhead, administration, indirect, and shared costs, how can the public make investment decisions based on these terms?

Two situations:

Nonprofit A, riddled with the many issues brought on by underfunding administrative and indirect costs, fails to efficiently serve its beneficiaries, but reports very low (or perhaps misrepresents its costs and reports close to zero) administrative costs.  

Nonprofit B decides to invest in new computers, higher-level administrative services, and other infrastructure building expenses.  While Nonprofit B’s actions improve their sustainability and effectiveness in serving their beneficiaries, spending on these necessary capacity building expenditures raises their administrative and indirect cost ratios.  

The first scenario is dire yet common.  The second is inspiring yet rare.  Why would any funder or individual congratulate Nonprofit A and admonish Nonprofit B?

Perhaps, at first glance, it's easier to evaluate a percentage than to understand that the very percentage evaluated, without a narrative, tells no story, and provides little information about the works and benefits of a nonprofit.  As accountants, we believe that an organization's financial statements communicate information about financial health and activities.  Internally, they can help Executives, Program Managers, and Boards make decisions about direction, growth, and other key issues that affect their beneficiaries.  But as long as donors, the media, and other stakeholders continue to weigh an arbitrary percentage higher than outcomes, the nonprofit sector and the people they serve are bound to suffer.

Reading List:

"The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit.  At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations.  At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they under report their expenditures on tax forms and in fundraising materials."  -  The Nonprofit Starvation Cycle, Stanford Social Innovation Review

"There’s a growing agreement between high-powered academics, the U.S. Government Accountability Office (GAO), and down-to-earth nonprofit leaders that underinvestment in infrastructure poses a serious threat to the effectiveness of nonprofit organizations." - Starving Infrastructure Damages Effectiveness & Sustainability, Kay Sohl

"Nonprofits fund indirect costs with a variety of...funding sources, and when indirect cost reimbursement is less than the amount of indirect costs nonprofits determine they have incurred, most take steps to bridge the gap. They may reduce the population served or the scope of services offered, and may forgo or delay physical infrastructure and technology improvements and staffing needs. Because many nonprofits view cuts in clients served or services offered as unpalatable, they reported that they often compromise vital 'back-office' functions, which over time can affect their ability to meet their missions." - Government Accountability Office