Net Allowances: Measurement and Misaccounting

So, how is nonprofit doing accounting wise after Sarbanes-Oxley? It's improving, yet not enough. (see Sarbox's Influence Seeps into Nonprofits)

Part of the reason is that there's not enough qualified professionals to handle complex accounting issues, especially for those small and medium sized organizations. In this sense, it's a good idea to provide specialized education, such as one provided by New York University's Stern School of Business. (see Not-for-Profit Accounting Goes to School)

On the other hand, I think it's more important to see whether nonprofit organizations intend to disguise their practice through a set of befogged accounting mirrors.

In particular, donors are looking at two metrics. One is the efficiency ratio, which compares how much a nonprofit spends on fulfilling its mission (known as its programs) with what it spends on overhead and fund-raising. The other is the fund-raising ratio, which compares fund-raising costs as a percentage of contributions. The higher a nonprofit's efficiency ratio and the lower its fund-raising percentage, the more comfortable donors will feel about giving money, knowing that most of it will be spent on programs. (Misgivings)

To duck any unwanted attention, organizations would move their fund raising activities around as supporting organizations. Just like special purpose entities did for Enron, it effectively obscured cost and shore up ratios.

Trent Stamp, president of Charity Navigator, an online nonprofit monitor, says supporting organizations are sometimes used to hide fund-raising costs, enabling nonprofits to conduct lavish fund-raising events without fear of criticism. Supporting organizations also provide charities with a means of keeping huge CEO compensation out of sight, asserts Stamp, with each organization reporting only a reasonable-looking portion of the compensation. (Misgivings)