Accurately report the charity's expenses, including any joint cost allocations, in its financial statements. For example, audited or unaudited statements which inaccurately claim zero fund raising expenses or otherwise understate the amount a charity spends on fund raising, and/or overstate the amount it spends on programs will not meet this standard.
Information Needed from Charity to Determine Compliance:
The charity provides the financial statements described in Standard 11 and the solicitation materials cited in Standard 15.
The Alliance follows these guidelines in evaluating the financial information provided. This standard addresses financial information in whatever form it may be available to the public.
- If the charity's financial statements and/or IRS Form 990 report no fund raising or administrative expenses--for example, the fund raising expense category in the financial statements or IRS Form 990 (Part I, line 15) is either blank or $0-the charity usually will not meet this standard.
- If the charity's financial statements and/or IRS Form 990 show that the charity has inappropriately reduced reported fund raising costs by displaying contributions "net" of these expenses, the charity usually will not meet this standard. In other words, a charity's fund raising expenses should be included in the fund raising expense category of the financial statements or IRS Form 990.
- In the case of special fund raising events, donors sometimes receive services or items of value in conjunction with their gift (for example, a meal or a theater ticket). Many charities report Fund Raising Event Income "net" of those expenses benefiting the donor. This method is how the information is displayed in the IRS Form 990 and is also permissible, under certain circumstances, per the accounting rules (see American Institute of Certified Public Accountants (AICPA) Not-for-Profit Organizations Audit and Accounting Guide, paragraphs 13.17 - 13.22.) However, all fund raising expenses associated with these events, such as the cost of invitations, mailing, promotion and consultant fees, should be included in the fund raising expense category of the financial statements and IRS Form 990.
- Some charities have fund raising activities, such as direct mail appeals, that also include activities, related to program activities usually in the form of public education message(s). The accounting rules (American Institute of Certified Public Accountants (AICPA) Statement of Position 98-2) permit the charity, under certain conditions, to report a portion of such appeal expenses as a public education program expense and a portion as a fund raising expense. This division of expenses is called "joint cost allocation."
The Alliance has no objection to educational or advocacy programs that are conducted in conjunction with fund raising activities. However, sometimes charities do not follow the accounting rules that address reporting of related costs. Charities sometimes allocate a portion of appeal costs to public education when the accounting rules do not permit this allocation. Or, they may over-allocate or exaggerate the amount of appeal expenses that are reported as a public education or other program expense. The Alliance may question the charity's joint-cost allocations in either the audited financial statements and/or IRS Form 990 in certain situations including, but not limited to, the following:
- One of the accounting rules requires that in order to allocate joint costs, the educational message must include a "call to action." In other words, it must ask the appeal recipient to do something that will help further the organization's cause, other than make a donation. Examples of a call to action include urging appeal recipients: to see a doctor if they have certain identified warning signs of a disease, to refrain from purchasing certain consumer products that involve animal testing, or to advocate the organization's cause by contacting an elected official.
Describing the charity's program activities and achievements, and/or including facts about the charity's cause that the recipient may not know, do not meet the above definition of a "call to action" above. Accordingly, the accounting rules do not permit costs of an appeal that contains only program descriptions and related facts to be allocated in part to program.
- Sometimes a charity's appeals include a "call to action" as described above, but the financial statements exaggerate the portion of appeal expenses that are reported as a public education program expense (as opposed to fund raising expense). As a result, the reported fund raising costs are inappropriately low and the program service expenses are inappropriately high.
To illustrate: suppose a four-page fund raising appeal describes a problem and the charity's efforts to address it. On the last page of the appeal, three lines ask the recipient to take some specific action such as contacting an elected official to advocate the organization's cause. If the charity then claims that the vast majority of the appeal costs are a program expense, as opposed to a fund raising expense, the Alliance would question the accuracy of the allocation.
- In determining if a charity's joint cost allocation is accurate, the Alliance considers the circumstances and content of the organization's appeals. Generally, if a charity reports that more than 50% of its fund raising appeal expenses are allocated to its program services, this reporting will likely trigger a more detailed review of this allocation.
- The accounting rules state that, in general, if a majority of compensation or fees of those conducting the joint cost activity (e.g., the fund raising company) vary based on contributions raised (i.e., the fund raiser is paid on a commission basis), then all the costs of the activity should be charged to fund raising. This rule holds even if the appeals include a "call to action" message.
- Alliance conclusions regarding a charity's compliance with this standard could also impact the application of Standards 8 and 9.