Relief International CEO Farshad Restegar also admits that he spends time on fund-raising but doesn't track the cost of it. He says the organization did not break out fund-raising costs in 2004, because it did not have a development staff, which it is now assembling, and did not conduct any fund-raisers. "In most cases, individuals and companies send us money without us asking for it," says Restegar. In 2004, Relief International received more than $7 million in government grants. Restegar says the cost of writing grant proposals in 2004 was accounted for either as programs or administration costs, depending on the main function of the staffers who wrote them. (A partner at a national accounting firm says grant-writing activities typically should not be expensed to programs.) Both RBC and Relief International say they expect to report fund-raising costs in the future.

Hold the Phone
Besides reporting zero fund-raising costs, nonprofits commonly misreport what they spend on professional fund-raisers. Since the advent of the national do-not-call registry, which barred for-profit companies from calling those on the list but exempted nonprofits, professional telemarketers have aggressively marketed their services to nonprofits. While there are plenty of reputable fund-raisers, the firms are notorious for returning just a small portion of what they raise to the charities that hire them.

For example, a 2004 fund-raising campaign conducted by Reese Teleservices Inc. for the National Caregiving Foundation netted more than $2 million. But the telemarketer returned just $364,000, or 18 percent, to the foundation. A campaign conducted in the same year by the Civic Development Group LLC on behalf of the Cancer Fund of America raised $3.6 million, but returned just under $450,000 (12.5 percent) to the charity.

The rules clearly state that nonprofits should report the net proceeds as income and the portion that wasn't returned as an expense, on a line designated for professional fund-raising costs. The two organizations above reported the fund-raising expense correctly, but plenty of organizations don't, since the low returns can wreak havoc on efficiency and fund-raising ratios. Thanks to professional fund-raising, the Cancer Fund of America, for one, spent more than 55 percent of its $17 million budget in 2005 on fund-raising, earning it just one star of a possible four from Charity Navigator, an online watchdog group that evaluates nonprofit finances.

According to a 2006 study by researchers from Harvard University, Boston College, and George Mason University, 26 percent of nonprofits that use professional fund-raisers understate the cost of fund-raising by reporting net proceeds rather than the total cost of the campaign as required. Questionable filings are not always easy to find, said the researchers, since only some states require professional fund-raisers to report the results of each telemarketing campaign conducted in the state. But reports from states that do can be easily cross-checked with what individual charities report. For example, according to New York State's most recent report, Telecomp Inc., a professional fund-raising firm, collected $724,945 for New York and Presbyterian Hospital in 2004 and returned just $222,595 to the hospital. However, New York and Presbyterian didn't report the difference — $502,350 — as fund-raising, since it reported no fund-raising costs that year. The hospital says the amount was immaterial.

The study also found that an additional 14 percent of nonprofits improperly allocate some of the fund-raising costs to programs. The results likely understate the frequency of misreporting, since not all states provide the professional fund-raising data, says Elizabeth Keating, lead author of the study and senior research fellow at Harvard's Hauser Center for Nonprofit Organizations. "When in doubt, the impulse is always to allocate it to programs," says Keating.

Ends Justify Means
Meanwhile, it's not just fund-raising that's being fudged. The Center on Philanthropy/Urban Institute study also found that 13 percent of nonprofits report zero management and general expenses. Seven percent charged all accounting fees to programs and another 20 percent split them across more than one category, despite IRS guidelines that suggest that accounting fees should be considered management and general expenses.

The fund-raising expense numbers that charities do report are calculated using a variety of methods. For example, organizations use different approaches to determine how portions of a staff member's or executive's time — and therefore compensation — are attributed to different functions. That can be a difficult proposition, because the culture at most nonprofits is such that everyone pitches in on many different activities. The CFO, for example, might work in administration, but will often conduct some fund-raising and even help out on a program event.

"Some [nonprofits] use detailed time sheets and others just estimate, so the numbers are already squishy," says Elizabeth Boris, director of the Center on Nonprofits and Philanthropy at the Urban Institute. Boris says some nonprofits use just salaries to determine fund-raising costs, while others use salaries, benefits, and a portion of administrative costs. She says there needs to be more uniformity in reporting standards.

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