The Light Of Public Scrutiny Burns Bright

Whether you like it or not, your organization is not immune from the kind of scrutiny concerning organizational expenses that Wounded Warrior Project was slammed with in 2016. Here’s the key question organization leaders have to ask themselves, according to Lou Mezzina, retired partner at KPMG LLP: If that scrutiny comes, are you ready for it? During the session, “Expense Allocations and the New ASU” at the American Institute of Certified Public Accountants (AICPA) Not-For-Profit Conference in National Harbor, Md., Mezzina discussed “the overhead myth” and the need to properly document organization expenses. Mezzina opined that, given the differing complexity and level of staffing and working necessary to achieve missions from organization to organization, expense ratios are given too much focus. The problem with pivoting too far from organization expenses, he said, is that it hurts fundraisers who depend on being able to tell donors that “90 percent of contributions go to mission.”

With that all in mind, Mezzina recommends being both cognizant of a general public preference for programmatic spending over fundraising and general spending and to be prepared to support organizational expense allocations with proper documentation. The 2016 AICPA Audit Guide states that activities not identifiable with a single program, fundraising activity, or membership development activity — but are indispensable to the existence of the organization — should be categorized as management and general activities. Mezzina likes that definition because it describes the underlying value of management and general expenses.

The most recent Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) includes payroll on the list of management and general activities as well as human resources, the costs of which are traditionally not allocated to a specific program. “Supervising activities,” often interpreted liberally by organizations, has also become more granular, Mezzina said, recommending that organizations revisit “direct conduct and direct supervision” to ensure compliance.

Multiple example scenarios were discussed during the session. Among the key takeaways from Mezzina was ensuring the documentation and accuracy of information. For instance, if an expense is attributable to multiple programs, make sure that there is a reasonable basis to allocate the expense one way as opposed to another and refine as better information becomes available. Similarly, Mezzina referred to a client where when it came to where to allocate employee time and effort – staff estimate time spent on various tasks on a quarterly basis. There is a bias with such practices, he said, as staff know that program work sounds better than fundraising or management – so maybe 20 percent programmatic work turns into 30 or 40 percent.

    Additional questions and responses raised during the session included:

  • Does an organization 100 percent funded by grants still have management and general expenses? Yes, according to Mezzina. The fact that the expenses are charged to a grant do not change its stripes.
  • Where should communications costs go? The answer can vary depending on the work, according to Mezzina. An annual report, for instance can be a general management cost. It is also possible for communications to contribute to program-level and fundraising reporting.
  • To what extent should an organization detail every line item? Use your own judgment. If your organization is preparing a 30-line matrix of expenses, stop what you are doing. Mezzina doesn’t see the need for a matrix greater than 10 or 12 lines.