BBB Standards for Charity Accountability Meeting … Standards for Charity Accountability Meeting Standards Related to Expenses Luana K. Lewis Senior Vice President, Programs and Services

BBB Standards for Charity Accountability

Meeting Standards

Related to Expenses

Luana K. LewisSenior Vice President, Programs and Services

BBB Serving Metropolitan New York, Senior VicePresidentgrams and Services, BBB Serving Metropolitan New

Bennett M. WeinerChief Operating Officer

BBB Wise Giving Alliance

Not-for-Profit Leadership Summit XI

Monday, May 6, 2013

BBB Charity Reporting: Brief Overview

• Why? Because donors and businesses asked for it

• Standards-based reports

• Goals- Encourage informed giving- Strengthen charities

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

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)

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

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…

BBB Accredited Charity SealBBB 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

BBB Standards for Charity AccountabilityBBB Standards for Charity Accountability

• Governance & Oversight

• Reporting on Effectiveness

• Finances

• Solicitations & Informational Materials

How do How do BBB Charity Standards BBB Charity Standards address address expensesexpenses and and related financial issues?related financial issues?

Guiding ConceptsGuiding Conceptsfor BBB Standardsfor 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 Charity Expense Tips11 Charity Expense Tips

Eleven tips showing how

meeting BBB Standards

related to expenses

can benefit your charity

Charity Expense Tips

The Buck Stops with the BoardIs there adequate board oversight?

• Voting board member oversees all finances, including expenses (e.g., Treasurer)

• Formally approves budget• Receives & reviews:

- IRS Form 990- Financial statements - Auditor’s management letter- Written fundraising contracts

The Buck Stops with the BoardWhy is this important?

A board that is not well-informed about expense issues can expose the charity to increased risk of accountability troubles.


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

Spend at Least 65% on Program Expenses



Fundraising expenses should not be more than 35% of related contributions. Be accurate when stating fundraising costs.

Spend No More Than 35% on Fundraising Expenses

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.


Monitor Your Expense RatiosWhy is this important?

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.

Limit or Disclose: Unrestricted Funds


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.

Limit or Disclose:Accumulating, Unrestricted FundsWhy is this important?


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.

GAAP Financial Statements


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.

GAAP Financial StatementsWhy is this important?


Detailed functional breakdown of expensesDetailed functional breakdown of expenses

Financial statements should include a breakdown of expenses that will show amounts allocated to programs, fundraising and administration.

Program Program Fund AdminA B Raising

Salaries $100,000 $50,000 $30,000 $20,000Travel 15,000 14,000 9,000 5,000Postage 3,000 2,000 20,000 1,000Etc.


Detailed functional breakdown of expensesDetailed functional breakdown of expensesWhy 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 allsoliciting charities to have functional breakouts in financial statements.


Elements to include:

• Mission• Program Summary• Board & Officers List• Financial Summary- Total income, prior fiscal year- Expenses: program, fundraising, admin- Ending net assets

Annual Reports: not fancy…


• 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 allsoliciting charities to have an annual report.

Annual ReportsWhy is this important?


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

Website Disclosures


• 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

Website DisclosuresWhy is this important?


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.

Budgets


• 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.

BudgetsWhy is this important?


Example of budget thatwill 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

Budget should also provide functional expense totals

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.

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

Accurate Appeals


• 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

Accurate AppealsWhy is this important?


Examples of expense accuracy problems:

• Zero fundraising expenses

• Fundraising events expenses

• Improper joint cost allocations

• Inaccurate donated goods valuation

• Omission of donated services

Accurately Report Expenses in Financial Statements


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


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


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)


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)


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


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


• Strong donor interest in financial information

• May raise concerns about proper oversight

• Potential erosion of public trust

• Risk of exposure to government regulators

Accurately Report Expenses in Financial StatementsWhy is this important?


Metro NY Area Charities

• NY.Give.org

• Luana: [email protected]

Nationally Soliciting Charities

• Give.org

• Bennett: [email protected]

Want More Information?

Q&A

Documents

BBB Standards for Charity Accountability Meeting … Standards for Charity Accountability Meeting Standards Related to Expenses Luana K. Lewis Senior Vice President, Programs and Services