Donors searching for information on charities they wish to support this holiday season may have difficulty determining how their contributions will be used because of the differences in financial reporting from one nonprofit organization to the next.
The Nonprofit Fundraising and Administrative Cost study, a project of the Center on Philanthropy at Indiana University and the Center on Nonprofits and Philanthropy at the Urban Institute, has found underreporting of such costs, which the public and donors frequently consult when making charitable giving decisions.
The study found that 37 percent of nonprofits with private contributions of $50,000 or more in 2000 reported no fundraising or special event costs. This included more than 18 percent of organizations raising $5 million or more that said they had no such costs. The study’s authors say it is implausible that so many nonprofits would have zero fundraising costs since organizations almost always must spend money to raise money.
The project’s case studies and survey data point to pervasive problems stemming from a misunderstanding of accounting rules, weak accounting and management infrastructure, and a structure of incentives that encourages poor reporting. Public and donor pressure to keep administrative and fundraising expenses low also may be leading nonprofit organizations to underreport such costs.
“Fundraising and administrative costs are real expenses needed to manage the nonprofit, evaluate performance, ensure legal compliance and develop new services,” said Thomas H. Pollak, study co-leader and senior research associate at the Urban Institute’s Center on Nonprofits and Philanthropy. “Yet many people automatically believe that the lower the costs are, the better the nonprofit uses donations. This misperception provides significant incentive to underreport costs or lump them into program expenses, which people are more willing to fund. That puts nonprofits that report accurately at a competitive disadvantage and means donors may be basing decisions on inaccurate information.”
The largest national study of these costs to date, the project was designed to aid the public in understanding charities’ expenses and fundraising methods and to help nonprofits better manage and report overhead (administrative and fundraising) costs. In coming weeks, additional findings will be released on various aspects of the study.
“Donors, policy makers, nonprofit managers, board members, and scholars all need accurate, comparable financial information. Yet, there has been little reliable data on what nonprofits’ costs really are, how they are reported, and how and why they vary from organization to organization,” said Patrick M. Rooney, project co-leader and director of research for the Center on Philanthropy at Indiana University.
The three-phase study combines analyses of data drawn from multiple sources, including an examination of Internal Revenue Service Forms 990 for nearly 127,000 nonprofits, an original survey of overhead costs and accounting practices of more than 1,500 randomly selected nonprofits broadly representing the entire sector and a small number of in-depth case studies.
The project’s survey of nonprofit accounting practices indicates that many organizations have only limited systems in place for tracking whether specific expenses are for program, administration or fundraising. Combined with the researchers’ analysis of information nonprofits reported on IRS Forms 990, this provides strong indications that a substantial proportion of nonprofits are not accurately reporting their fundraising and administrative costs.
The researchers said there can be credible reasons for reporting zero fundraising costs, including reliance on volunteer or board members’ fundraising or on related organizations, such as a United Way or a “Friends of” group.
“While some nonprofits undoubtedly refrain from reporting any fundraising expenses for these reasons, our analysis shows that those explanations account for maybe half of nonprofits reporting no such costs,” Pollak said.
Other possible reasons, the researchers said, are ignorance of or poor training in correct cost tracking, weak accounting and reporting procedures, failure to allocate staff time and other costs correctly across fundraising, administrative and program expense categories, or a desire to improve the organization’s public image by appearing to have lower costs. Some organizations also may net out expenses from contracts with outside fundraising firms altogether (although IRS instructions explicitly prohibit this), so that when an outside firm spends $100 to raise $100, zero is reported instead of the $100 that was actually spent.
Researchers believe the study results will lead to a dialogue grounded in research among nonprofit professionals, the accounting profession and regulators about how to ensure comparable and uniform reporting of fundraising and administrative costs.
“This project is especially significant in a shifting fundraising climate. Nonprofits can't control funding cuts from charitable foundations, the government and individuals, but they can control some of their costs if they have a clearer picture of what they really are,” said Elizabeth Boris, director of the Center on Nonprofits and Philanthropy at the Urban Institute. “The project’s findings will let nonprofits evaluate their costs and financial practices against similar organizations and develop internal benchmarks to guide their decision making.”
“There is a tendency among many donors and funders to resist paying for operating expenses,” said Eugene R. Tempel, executive director of the Center on Philanthropy at Indiana University. “The information and tools generated by this project will give nonprofits better ways to show their true, full cost of operating, average costs for organizations like theirs, and why donors who want quality programs should support reasonable fundraising and administrative costs needed to sustain them.”
The project received funding from The Atlantic Philanthropies (USA) Inc., the Ford Foundation, The David and Lucile Packard Foundation, the Rockefeller Brothers Fund, and the Charles Stewart Mott Foundation.
The Center on Nonprofits and Philanthropy, Urban Institute
The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance challenges facing the nation. Its Center on Nonprofits and Philanthropy studies the role and impact of nonprofit organizations in democratic societies, and analyzes trends in the operations and finances of U.S. charitable organizations through data developed and maintained by its National Center for Charitable Statistics (NCCS).
The Center on Philanthropy at Indiana University
The Center on Philanthropy at Indiana University is a leading academic center dedicated to increasing the understanding of philanthropy and improving its practice through research, teaching, public service and public affairs programs in philanthropy, fundraising, and management of nonprofit organizations. The Center conducts basic and applied research about contemporary and historical issues in philanthropy, nonprofit organizations, the nonprofit sector, giving, fundraising, voluntary action, and public policy issues linked to philanthropic activity.
More Information
Results from the Nonprofit Fundraising and Administrative Cost Project are available at http://www.coststudy.org.
