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I read with much interest your recent article on nonprofit accounting and oversight ("Misgivings," January). While I don't disagree that it is not uncommon for charities to misreport the percentage of their overall costs allocated to fund-raising or administrative costs, the practice isn't necessarily intentionally deceptive nor is it, as Patrick Rooney, director of research at Indiana University's Center on Philanthropy, commented, "the next big area of accounting fraud."
The Evangelical Council for Financial Accountability (ECFA) has been providing oversight of charities for more than 27 years and has consistently found that financial integrity, proper governance, and ethical fund-raising are much more sophisticated and integrated into the framework of an entity than a simple process of addition, subtraction, or even long division.
When charity watchdogs condense this important topic of integrity and truthfulness into two- and three-star ratings and a grading scale based on the percentage of the charities' cost structure allocated to fund-raising and administrative costs, they miss the point, which is that the results or effectiveness (or worthiness) of a charity are measured not in inputs (the dollars and cents allocated to various functional categories) but in the outputs, which are related to the overall public good that is being accomplished by the charity.
We believe it is important for a charity to report information accurately. It is also important to measure efficiency, and a consistent, internal appraisal of the percentage of the charity's budget spent on fund-raising as well as general overhead is a good tool for the CFO. At the same time, as soon as the percentage becomes a public measuring tool of good and bad, the perception becomes that the effectiveness of the charity, the worth of the charity, or the integrity of the charity can somehow be measured by the same tool.
It is no wonder number crunchers get upset when there is some inconsistency between charities on what gets included as fund-raising cost and what is included in administration vs. program expense. When these numbers are given the seemingly premier importance that your article claims they should be given, we are getting the cart in front of the horse. There is a lot more gray in what goes in these administration and fund-raising buckets than most CPAs want you to believe.
Kenneth A. Behr
President
Evangelical Council for Financial Accountability
Via E-mail
Scoring Scorecards
Have you ever noticed that the biggest advocates of the balanced business scorecard are IT companies ("Links Still Missing," Topline, January)? Data companies and accountants love all that data collection, storage, and parsing, and ignore two key facts:
- Too many measurements often lead to conflicts, and there is no mechanism other than managerial judgment to resolve the conflicts in scorecards.
- There are no successful scorecards that tie into value programs, because the time horizons for scorecards tend to be daily, weekly, or monthly, and value is the present value of future cash flows, hence a structural conflict in the application.
Besides these primary flaws, scorecards are almost always static, and markets and circumstances change faster than scorecards do. In fact, all of that useless data is itself an impediment to value-creating behavior, because it tends to make people try to game the system.
This is not to say measurement isn't important; it's vital, but scorecards are only a small part of the answer in operations and worse than useless in decisions about strategy.
Richard Bassett
Via E-mail
No Black Holes
I admit to taking issue with CFO's assertion that "there is no denying that hedge funds are the black holes of the investment galaxy" ("Inflection Point," Topline, January). I, for one, deny it. But even if it were true, I would point to the existing regulatory apparatus, which forces many hedge funds to remain secretive for fear of having held themselves out to the general public. And if hedge funds are such "black holes," providing "almost no transparency," why have they become so popular? Very few investors would or should accept such an opaque operating strategy. And for those few who do, don't they deserve the risks they so brazenly bear in not demanding more from their hedge-fund investment advisers?
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