Meeting Standards Related to Expenses

Transcription

1 BBB Standards for Charity Accountability Meeting Standards Related to Expenses Luana K. Lewis Senior Vice President, Programs and Services BBB Serving Metropolitan New York, Senior Vice Presidentgrams and Services, BBB Serving Metropolitan New Bennett M. Weiner Chief Operating Officer BBB Wise Giving Alliance Not-for-Profit Leadership Summit XI Monday, May 6, 2013

2 BBB Charity Reporting: Brief Overview Why? Because donors and businesses asked for it Standards-based reports Goals - Encourage informed giving - Strengthen charities

3 It s been going on for quite a while 1920s BBB s began national & local charity reporting 1954 Metro NY BBB began charity reporting 1987 current NY BBB charity review program was founded 2001 national program merged with NCIB, renamed as BBB Wise Giving Alliance

4 What is involved? BBB Standards: 20 Standards for Charity Accountability BBB Reports: on publicly soliciting charities - about 11,000 across BBB system (796 Metro NY BBB reports)

5 What is the benefit? Donors: BBB Reports - free, quick way to check if charities meet high standards BBB Seal - widely recognized, valued charity trust mark

6 What is the benefit? Charities: Standards key practices BBB Accreditation no cost. Charity that meets all 20 Standards is Accredited. BBB Seal Optional licensing program, only for BBB Accredited Charities

7 BBB Accredited Charity Seal Optional seal, only for charities that meet all 20 BBB Charity Standards License agreement & sliding-scale seal fee based on charity size

8 BBB Standards for Charity Accountability Governance & Oversight Reporting on Effectiveness Finances Solicitations & Informational Materials

9 How do BBB Charity Standards address expenses and related financial issues?

10 Guiding Concepts for BBB Standards Standards for key practices, not ratings Audited financial statement is preferred reference. IRS Form 990 is not sufficient alone. Generally Accepted Accounting Principles (GAAP) Accuracy of expense reporting Accountability is more than financials

11 11 Charity Expense Tips Eleven tips showing how meeting BBB Standards related to expenses can benefit your charity

12 The Buck Stops with the Board Is there adequate board oversight? Voting board member oversees all finances, including expenses (e.g., Treasurer) Formally approves budget Receives & reviews: - IRS Form Financial statements - Auditor s management letter - Written fundraising contracts

13 The Buck Stops with the Board Why is this important? A board that is not well-informed about expense issues can expose the charity to increased risk of accountability troubles.

14 Spend at Least 65% on Program Expenses Spend at least 65% of total expenses on program activities. Be able to show that expenses are truly program-related.

15 Spend No More Than 35% on Fundraising Expenses Fundraising expenses should not be more than 35% of related contributions. Be accurate when stating fundraising costs.

16 Monitor Your Expense Ratios Why is this important? How do you look to others? Less than 7% of BBB-evaluated charities cannot meet program & fundraising ratio standards. Media, government, and donor interest in expense ratios is very high even though ratios do not tell the whole story. BBB can consider extenuating circumstances when applying ratio standards. But exceptions are rare.

17 Limit or Disclose: Unrestricted Funds Unrestricted net assets should not exceed 3x the size of past year s total expenses or current budget, whichever is higher. This BBB Standard can be met by making disclosures in appeals & on website.

18 Limit or Disclose: Accumulating, Unrestricted Funds Why is this important? Unless informed otherwise, donors expect that their contributions will be spent on current programs. This has been confirmed in public survey research. Full disclosure ensures that donors will not be misled.

19 GAAP Financial Statements Make available to all, on request, complete annual financial statements prepared in accordance with GAAP (Generally Accepted Accounting Principles). When total income > $250,000 in New York State statements should be audited.

20 GAAP Financial Statements Why is this important? GAAP financial statements provide more consistent, comparable, and reliable information. IRS Form 990 is publicly accessible but not intended to follow GAAP. Example: (1) unrealized gains and losses on investments and (2) donated services and facility use not recognized in 990 income or expenses.

21 Detailed functional breakdown of expenses Program Program Fund Admin A B Raising Salaries $100,000 $50,000 $30,000 $20,000 Travel 15,000 14,000 9,000 5,000 Postage 3,000 2,000 20,000 1,000 Etc. Financial statements should include a breakdown of expenses that will show amounts allocated to programs, fundraising and administration.

22 Detailed functional breakdown of expenses Why is this important? Critical management tool for staff & board Tells important financial story to funders & stakeholders GAAP required: health & welfare organizations IRS Form 990 (page 10) includes it COMMONLY MISSED STANDARD. BBB Standards call for all soliciting charities to have functional breakouts in financial statements.

23 Annual Reports: not fancy Elements to include: Mission Program Summary Board & Officers List Financial Summary - Total income, prior fiscal year - Expenses: program, fundraising, admin - Ending net assets

24 Annual Reports Why is this important? Essential for fundraising & transparency Tells your charity s story about how you use donations, in language donors can follow Can be a simple, printable document; need not be expensive or fancy COMMONLY MISSED STANDARD. BBB Standards call for all soliciting charities to have an annual report.

25 Website Disclosures Elements to include: Annual report basics Mailing address of charity Access to IRS Form 990 (clearly labeled) - via a PDF link - or link to GuideStar 990 with description Privacy Policy

26 Website Disclosures Why is this important? Shows transparency Helps create donor confidence in your charity & your website Make it easy for site visitors to see your financial & accountability facts so they need not leave to seek details elsewhere

27 Budgets Have a board-approved, annual budget for the current fiscal year, outlining projected expenses for major program activities, fund raising, and administration. The functional breakdown of expenses is often not included as part of the budget.

28 Budgets Why is this important? Board-approved budget plan for current or future expenses guides how resources will be used Some budgets show only natural expense totals Should specify projected expense amounts for programs, fundraising, and administration COMMONLY MISSED STANDARD. BBB Standards call for all soliciting charities to have functional breakouts in budgets.

29 Example of budget that will not meet BBB Standards Budget Item Expense Gross Wages 735,612 Payroll tax 62,527 Bank credit card 3,150 Board support 6,000 Capital depreciation 5,000 Copyright fees 90 Computer services 6,900 Equipment Expenses 12,700 ERISA 13,517 Field supplies 1,800 Insurance 99,928 Office supplies 21,200 Postage 26,300 Accounting fees 11,000 Rent 83,600 Staff Training 8,000 Subcontractors 120,000 Telephone 12,200 Utilities 12,620 TOTAL 1,242,144

30 Budget should also provide functional expense totals

31 Accurate Appeals Have solicitations and informational materials, distributed by any means, that are accurate, truthful and not misleading, both in whole and in part. This includes appeal accuracy issues involving financial references.

32 Accurate Appeals Examples of appeal accuracy issues: 100% of your donation Zero Fundraising Expenses Inadequate or inaccurate information about planned use of funds Incomplete or inaccurate representations about the financial state of organization

33 Accurate Appeals Why is this important? Appeal may be the only direct contact charity will have with donor Donor trust may lessen or be lost as a result of inaccurate solicitations Risk of potential government action if appeals are deemed misleading

34 Accurately Report Expenses in Financial Statements Examples of expense accuracy problems: Zero fundraising expenses Fundraising events expenses Improper joint cost allocations Inaccurate donated goods valuation Omission of donated services

35 Zero fundraising costs? Costs money to raise money Even if small ( 5%) disclose it Includes not just professional fundraising expense Also includes portion of staff time, travel, occupancy, etc. spent on fundraising

36 Fundraising events Sometimes can report fundraising event expense net of costs benefiting donor (e.g., meal, entertainment expenses) Expenses needed to market the event & raise money (invitations, ads, etc.) should be allocated to fundraising

37 Improper joint cost allocation Activity that combines fundraising with education/advocacy Key issues: intent, audience, content Content must include a call-to-action other than sending a donation (e.g., sign a petition, see doctor if symptoms, etc.) Should not exaggerate program allocation See: AICPA Statement of Position 98-2 (ASC 958)

38 Inaccurate donated goods valuation Make sure all in-kind goods are being properly valued See Statement of Financial Accounting Standards 157: Fair Value Measurement (ASC 820) Recent increased media scrutiny of in-kind donation (pharmaceuticals)

39 Omission of donated services Audit reports required to recognize donated services under certain conditions (often overlooked since not in IRS Form 990) Affiliated organization may be providing donated admin activities

40 Omission of donated services Donated Services Criteria (for audit reports): Charity would purchase if not donated Requires specialized skills Provided by individuals with those skills

41 Accurately Report Expenses in Financial Statements Why is this important? Strong donor interest in financial information May raise concerns about proper oversight Potential erosion of public trust Risk of exposure to government regulators

42 Want More Information? Metro NY Area Charities NY.Give.org Luana: Nationally Soliciting Charities Give.org Bennett:

43 Q&A