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Behind Charities' Numbers

The effectiveness of a charity should be measured in outputs, not inputs, writes a reader. More letters: scorecards cannot supplant managerial judgment; hedge funds aren't ''black holes''; and more.
CFO Staff, CFO Magazine
March 1, 2007

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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:

  1. Too many measurements often lead to conflicts, and there is no mechanism other than managerial judgment to resolve the conflicts in scorecards.
  2. 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?


In addition, I am not at all convinced that raising the investment-asset threshold to $2.5 million would do anything, in the author's words, to "rein in" hedge funds. It would seem to me that one's net worth bears little correlation to one's investment acumen, and that a more appropriate threshold would be to institute a questionnaire probing the investor's ability to invest his money wisely. It hardly seems fair that only the rich are allowed access to investment vehicles such as hedge funds and private-equity pools, which have traditionally outperformed the public markets.

As the Securities and Exchange Commission's 2003 hedge-fund report investigating hedge-fund registration itself concluded, there is "no evidence indicating that hedge funds or their advisers engage disproportionately in fraudulent activity."

David Thayer
Founder
Turnkey Advisors LLC
Wayne, Pennsylvania


The Myth of Fingerprints

CFO survey respondents may not realize the problem-prone reality of the added safety measure that 73 percent of them consider to be tolerable — fingerprint scans ("Flying the Unfriendly Skies," Topline, December 2006).

Contrary to the jet-setting technology that dazzles us in TV shows such as "24," fingerprint scans will be a trip killer for executives flying on commercial aviation. How?

Fingerprint scanners require readable ridges, be they arches, loops, or whorls. Even forensic shows such as "CSI" and "Bones" realize that definitive "tread patterns" are needed to correctly identify footwear or vehicles. So what's the problem?

Human fingertips, like footwear and tires, wear out their ridges into "unreadable" dots, like sand grains on a beach. No "reading," no match. No match, no approval. Executives will get held aside and miss their flights. The affected populations? Middle-agers, recreational boaters, and some ethnic groups, as evidenced by both Virginia State Police training and the 14,000 applicant fingerprint scans done yearly at our hospital.

Chief Donald E. White
Director of Safety and Security
Northern Virginia Mental Health Institute
Falls Church, Virginia


Getting a Seat at the Table

It would seem that this is a perfect opportunity for human-resources professionals to get what they want: a seat at the table ("Are Your Workers Engaged?" Topline, January). How do you get employees engaged? Expect them to develop objectives to support the company's goals. Who can help get that done? HR professionals. However, HR professionals, by and large, continue to focus their efforts on personnel administration. I sure hope they wake up in time to get a seat at the table.

John Barnes
Via E-mail




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