Misgivings

Relief International, a Los Angeles–based nonprofit that provides disaster-recovery services around the world, reported that it had collected more than $11 million in grants and contributions for 2005. Yet the organization claims in its audited financial statements that it didn't spend a dime on fund-raising that year. Likewise, RBC Ministries, a nondenominational religious nonprofit based in Grand Rapids, raised more than $29 million in 2004 without reporting any fund-raising costs.

On paper, at least, these organizations appear to be able to raise millions without incurring any costs. And they are not alone. A joint study by Indiana University's Center on Philanthropy and the Urban Institute found that one-fourth of nonprofits with at least $1 million to $5 million in contributions report zero fund-raising costs, while nearly a fifth of those that took in more than $5 million claim that it cost nothing to do so. Overall, 37 percent of nonprofits that raised at least $50,000 in contributions report no fund-raising costs.

To call these results suspect would be an understatement. "It's almost impossible to raise that kind of money without incurring at least some costs, whether it's printed materials, staff time, or something else," says Patrick Rooney, director of research at the Center on Philanthropy. Moreover, the study found that a number of organizations report no overhead costs or use incorrect methods to compute expenses. Some nonprofits may simply be getting their accounting wrong, but Rooney suggests that many are deliberately manipulating the numbers.

Why are nonprofits so concerned about minimizing costs? Charitable giving is at an all-time high, spurred by disaster relief for Hurricane Katrina and the Indian Ocean tsunami — and so is the number of nonprofits competing for that money. Giving USA estimates that Americans gave $260 billion to more than 1 million charities in 2005, the latest year for which data is available. And donors are becoming increasingly discerning about how charities spend their contributions, thanks to the growing availability of information about nonprofits on the Internet.

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.

The stepped-up scrutiny creates intense pressure on nonprofits to cut their overhead and fund-raising costs — or to improve their ratios by fudging their accounting, allocating more and more costs to programs. Indeed, a number of experts charge that nonprofit accounting is fraught with faulty bookkeeping and willful manipulations. "The numbers are highly unreliable," says Christine L. Manor, a CPA who conducts accounting for a number of small and midsize nonprofits. "Sometimes it's deliberate, sometimes it's not, but much of the accounting [in the nonprofit world] is appalling."

Says Rooney: "This is potentially the next big area of accounting fraud."

Money for Nothing
Rooney and his colleagues reached this conclusion after the Center on Philanthropy/Urban Institute study found "serious and widespread" errors on the Form 990s that nonreligious nonprofits with more than $25,000 in revenue are required to file annually with the Internal Revenue Service. (Many Form 990s are now widely available to the public; GuideStar.org, a leading nonprofit-research Website, posts more than 1.5 million 990s.) Fund-raising is by far the biggest area of reporting that, according to a 2006 report on the study, "defies plausibility."

True, some nonprofits may use an entirely voluntary staff to collect donations, or say that their money was given in a lump sum by one foundation. But those circumstances don't account for most of the missing overhead.

When questioned, nonprofits shrug off the fund-raising issue. Take RBC Ministries. Its claim to have incurred no fund-raising costs on $29 million in contributions is especially surprising, considering that the nonprofit promises on its Website to mail a compact disk to those who donate. What's more, RBC Ministries Foundation, a separate nonprofit entity that runs RBC's endowment and made a direct grant of $2 million to RBC that year, raised nearly $3.2 million and also reported no fund-raising costs. The foundation also cited just $170 in management and general costs in 2004, the most recent reporting period available.

Yet, RBC CFO Max Smith stands by the claim of no fund-raising costs. He says the organization doesn't do any telemarketing or direct-mail campaigns. About 513,000 people made donations in 2004, says Smith, putting the average gift at just $24. RBC doesn't consider the cost of opening all of those envelopes as fund-raising costs. It checked that assessment with the Evangelical Council for Financial Accountability, an agency set up to assure that members conduct financial affairs responsibly, "and they agreed," says Smith. Smith says he does spend some time helping donors with gifts — "I'm the closest thing we have to a development officer" — but he says he doesn't track the time or report it as a fund-raising cost.

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