2016 Annual Giving USA Report Released

Posted on June 21 2016 by admin

The Giving USA Foundation (a public service initiative of The Giving Institute) has released their 2016 annual Giving USA Report on Philanthropy in collaboration with The Indiana University Lilly Family School of Philanthropy. Using data from calendar year 2015, the Giving USA report compiles and analyzes data on charitable giving in the U.S in order to identify trends that can be useful to nonprofit organizations. The following is a summary of the sources of the $373.25 billion in charitable giving disclosed in the 2015 report:

(Numbers in billions of dollars and rounded)

  • $265.01 (71%) Individuals
  • $59.72 (16%) Foundations
  • $29.86 (9%) Bequests
  • $18.66 (5%) Corporations

Seventy-one percent of donations come from individual donors in 2015. This is a familiar statistic, as the giving from individual donors composed 72% in both 2014 and 2013. In fact, very little changed in the overall mix of donor sources from 2014 to 2015. Bequests increased from 8% to 9% of the total, and Foundations increased from 15% to 16%. Corporations remained consistent at 5%. Giving USA notes that the total increase in charitable giving was 4.1% from 2014 to 2015, and was primarily driven by an increase in donations by individuals. This translates to an increase of $80.8 billion, and builds on the increase of 7.1% from 2013 to 2014.

In addition to the breakdown of contribution sources, the Giving USA Report also highlighted some other interesting information:

  • Average annual donations made by U.S households reached $2,124 in 2015, in comparison to $2,030 in 2014. It is also estimated that giving by both itemizing and non-itemizing individuals increased by 4.1% and 2.5%, respectively.
  • The 3.9% increase in corporate giving is attributed to the 2015 increase in GDP and corporate pre-tax profits of 3.5% and 3.3%, respectively.
  • The nonprofit categories seeing the highest increases in giving are education, public-society benefit, environmental and animal, and international affairs organizations.
  • Total giving as a percentage of GDP during 2015 and 2014 reached a post-2006 high of 2.1%.

More information regarding the Giving Institute and the Giving USA report can be found here. A two page summary of the highlights from the full report can also be obtained at no cost on the Giving USA website.

By Paul Biggs

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Charity Navigator Launches CN 2.1

Posted on June 15 2016 by admin

On June 1, Charity Navigator announced the launch of CN 2.1, an enhancement of their previous charity rating system CN 2.0. This includes several changes to the seven “Financial Health” rating metrics used to evaluate charities, and to help donors make wise decisions in choosing where to make their donations. Here are the primary changes that have occurred in the change from CN 2.0 to CN 2.1:

  • Primary revenue growth: Annualized growth in primary revenue from the most recent three to five years was included under CN 2.0. This has been removed from the CN 2.1 rating system. This seems to be a wise choice, as revenue growth does not necessarily demonstrate how impactful and efficient a nonprofit is with its resources.
  • Several metrics involving expenses have been modified to include the average expenses from the charity’s three most recent fiscal years, instead of only considering expenses from the most recent fiscal year. This should present a more accurate representation over time, as one year may be an anomaly. The change has been applied to program expenses, administration expenses, fundraising expenses, and the working capital ratio:

Program Expenses:
CN 2.0 Program Expenses ÷ Total Expenses
CN 2.1 Average Program Expenses ÷ Total Average Expenses

Administration Expenses:
CN 2.0 Administration Expenses ÷ Total Expenses
CN 2.1 Average Administration Expenses ÷ Total Average Expenses

Fundraising Expenses:
CN 2.0 Fundraising Expenses ÷ Total Expenses
CN 2.1 Average Fundraising Expenses ÷ Average Total Expenses

Working Capital Ratio:
CN 2.0 Working Capital ÷ Total Expenses
CN 2.1 Working Capital ÷ Average Total Expenses

  • Fundraising Efficiency: Similar to the changes in expense metrics, the calculation of fundraising efficiency has been changed from the single year calculation of fundraising expenses ÷ total contributions to the three year calculation of average fundraising expenses ÷ average total contributions. This should also present more accurate results as contributions may be solicited and received across different fiscal years.

The implementation of this new rating system resulted in 27% of the 8,000 charities rated by Charity Navigator receiving a new star rating. Nineteen percent increased by one star, while 8% decreased by one star. For more information on the rating changes, see the Charity Navigator website.

By Paul Biggs

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What Percent Should Charities Spend on Their Mission?

Posted on June 2 2016 by admin

Ever heard the cliché “comparing an apple to an orange”? I’m not a scientist and I don’t know the cellular differences of both, but I do know that oranges are acidic with a thick peel usually removed prior to consumption. Apple, on the other hand, is a brand of electronics most commonly seen in the form of a contraption on people’s hips to text, make calls and take pictures. Ok – just kidding – in this statement the apple I’m referring to is a fruit and this is a statement that has been used for centuries to point out that two items, although in the same category, are not always comparable.

So, where am I going with this? Someone, somewhere at some point analyzed a not-for-profit’s statement of functional expenses and related the amount of expenses in the program column to the amount “spent on the mission of the organization”. It has now become an unfortunate misconception that all other expenses are “wasteful” or “irresponsible” resulting in organizations feeling pressured to keep their program expenses high and management and general and fundraising low. “What percent of total expenses should a not-for-profit spend on their program?” is perhaps the most frustrating question I hear.

In my opinion, it is unreasonable to set a standard percent of program expenses organizations should meet to assess if they’re spending their funds towards their mission. There are innumerable charitable entities, each with unique revenue streams, cost structures, and personnel. Some charge program fees for the services they provide whereas others rely solely on donations. Some are heavily reliant on volunteers while others have employees to run the program. I know a few that don’t even have employees! These are things that directly affect the allocation of expenses.

You might be wondering how do the aforementioned examples affect the percent of program expenses? Well, if an organization doesn’t charge for services, they must have a higher focus on fundraising efforts to support their mission. Therefore, they’d have higher fundraising expenses than an organization that charged fees. A higher percent of fundraising expenses means you’d have a lower percent of program expenses. If a charity can rely heavily on volunteers, they don’t have to hire as many employees to run the program. Free labor is great! However, how would this organization compare to one that has fewer volunteers and more employees? It would appear to have a lower percent of program expenses due to the other having more for the salaries paid.

These are just two of the many factors that affect the allocation of expenses of a charity. I encourage you to look beyond the financial statements (which is not something you hear often from an auditor) and assess each not-for-profit separately. It’ll be much easier than trying to compare an apple to an orange.

By Samantha E. Mahlen, CPA

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Ethical Fundraising Practices

Posted on May 19 2016 by admin

Recently, I overheard two individuals discussing ethical fundraising practices for their small nonprofit organization over lunch. As an auditor specializing in non-profit, you can imagine how quickly this caught my attention. I was grateful for the noise of the restaurant and the influx of customers as I scooted my chair a little bit closer to hear their conversation. If it wasn’t for the dab of freshly dropped Dijon mustard down the front of my shirt, I might have introduced myself rather than awkwardly listened. I thought I would share some of their thoughts with you, while adding some of my own in italics:

  1. Maintain donor trust by respecting their requests and intent of the donation.
    It is a legal/fiduciary obligation of the non-profit to honor donors’ requests; therefore, it is essential that your staff understand what a restricted gift is and its significance. Keep in mind – a verbal agreement between a donor and a non-profit regarding the use of donor funds is enforceable. To protect the organization, I suggest implementing written agreements to describe how funds will be used and as a way to help manage donors’ expectations.
  2. Send gift acknowledgements timely.
    The National Council of Nonprofits’ has a tip sheet on “Saying Thank You to Donors”.
    Also, certain gifts have a legal requirement to acknowledge donors’ charitable gifts. The IRS details when those acknowledgements are required and has examples of written acknowledgements non-profits can use.
  3. Respect donors that wish to remain anonymous.
    A donor could wish to remain anonymous for a number of reasons. As a non-profit, it is your obligation to respect their right. To address donors’ concerns, the Association of Fundraising Professionals (AFP) created a Donors’ Bill of Rights and encourages non-profits to adopt the policy.

To add my own – be transparent with financial information and fundraising practices as it inspires confidence from the public. This prevents myths about misuse of funds and inspires donors to make contributions if they can see how their funds are impacting the community and organization.

By Kristian Haralson

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Defining Independence

Posted on May 4 2016 by admin

Prior to becoming a CPA, when I heard “independence” I would think of Toby Keith songs, fireworks, and the American flag. Now that I’m an auditor, independence is not only a celebration on July 4th but also an assessment we must make on every attest engagement we perform.

The American Institute of CPAs (AICPA) accurately states objectivity as “a distinguishing feature of the profession”. An engagement team’s independence and lack of bias towards a client gives the users of the financial statements (the Users) confidence that the statements present fairly, in all material respects, the financial position of the entity.

The AICPA’s Code of Conduct (the Code) defines several “threats” that, without proper safeguards in place, could impair the independence of the auditor. In the not-for-profit world, the most applicable threats are familiarity, management participation, and self-review. For example:

  • Familiarity: The wife of one of the attest engagement team members is the CFO of the client.
  • Management participation: A tax partner of the firm serves as a director of the entity.
  • Self-review: The firm’s accounting niche prepares invoices or other source documents and calculations for the attest client.

Would the team member write up his wife on a material weakness if he knew it could affect her bonus (and result on him sleeping on the couch)? Would the partner give an adverse opinion if it reflects poorly on a fellow partner or would an attest engagement team review work of their coworkers and write it up as wrong? Either of those would make the holiday party quite awkward.

There is a plethora of situations that could result in a threat to independence. Our profession is continuing to assess and update standards to mitigate these threats. After all, you’re paying for an unbiased opinion and that’s what you should get.

By Samantha E. Mahlen, CPA

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Donated Services

Posted on April 20 2016 by admin

Volunteer time (or donated services) is only recorded as revenue and expense in the financial statements if the services create or add value to a non-financial asset (such as construction services provided to a building) or if the services meet all of the following three criteria:

  1. The services require specialized skills
  2. The services are provided by individuals who possess the specialized skills required
  3. The services would typically need to be purchased if not donated

The specialized skills include skills provided by individuals such as accountants, bankers, electricians, doctors and nurses, or teachers. An indication that skills are specialized is that the individual is required to possess a license or certification to provide the services, and the services require technical tools or equipment used with a higher level of proficiency than the general public. If an individual with specialized skills provides volunteer services that do not require those skills, the volunteer services should not be recorded in the financial statements. An example of this would be an attorney providing volunteer services coordinating a special event. Because the services are not legal in nature, they would not qualify to be recorded even though the lawyer possessed specialized skills.

Regardless of whether it qualifies to be recorded in the financial statements or not, volunteer time carries a high level of value to nonprofit organizations. The NonProfitTimes reports that total volunteer time provided to U.S. nonprofits in 2015 is expected to be valued at $188 billion. This amount is based on a calculation of 7.9 billion hours of volunteer service provided by 62.8 million Americans with an estimated average hourly wage of $23.56.

The full article is available here.

By Paul Biggs


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Let’s Get Political

Posted on April 12 2016 by admin

Whether you’re affiliated with a party or vote as an independent, you’ve probably considered “unfriending” or “unfollowing” some of your more politically opinionated friends on social media due to the relentless long-winded paragraphs and meme posts about Trump’s hair or Sander’s age. I’ve come to the conclusion that I can either get off social media and avoid late night comedy or just try to ignore it.

The controversial issues of 2016, however, are difficult to ignore. Legislation concerning healthcare, potential budget cuts and immigration will heavily effect many charitable organizations. So what do you do if your entity would benefit most from a particular candidate winning the election? NOTHING.

Under the Internal Revenue Code, 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating or intervening in any campaign on behalf of or in opposition to any candidate for public office. Activities such as contributing to a campaign or issuing a public statement (verbal or written) on behalf of (or appearing to be on behalf of) the organization in favor of or opposition to a candidate and/or campaign would be a violation of this prohibition.

If you would like to keep your tax exempt status intact and avoid potential excise taxes, pay close attention to the activities of your entity. Monitor your expenses, especially for lobbying, to ensure it is in line with acceptable activities. Edit and control all statements made on behalf of the organization paying special attention to social media.

If there is any question as to if an activity would be a violation, contact your attorney for advice prior to commencement. Candidate/campaign support is one area of not-for-profit regulation that’s “black and white:” You just can’t do it.

By Samantha E. Mahlen, CPA

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Arizona Gives Day

Posted on April 5 2016 by admin

It’s that time of year again, and this might be the first time your accountant is not referring to tax season. We are talking about Arizona Gives Day, the annual one-day online giving campaign to Arizona not-for-profits hosted by the Alliance of Arizona Nonprofits and Arizona Grantmakers. Since 2013, this program has raised over $4,556,359. Last year alone raised over $2,000,000. So get your tax refunds ready for today, April 5, 2016 and make this the best year yet. Click here for more information.

By Rebecca A. Gornto

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Q&A: Advertising

Posted on March 17 2016 by admin

What is advertising?

As defined, advertising is the promotion of an industry, entity, brand name, product or service through the use of media. Its purpose is to create a positive image for the company and to encourage individuals to use the company’s products or services. Advertising, however, is not fundraising.

When do I report the advertising expense?

Advertising should be expensed as incurred or at the time the advertising first takes place. Some direct-response advertising costs can be capitalized.

What is direct-response advertising?

Direct-response advertising occurs when a customer is urged to respond directly to the advertiser through the use of a “device,” i.e. business reply card, coupon to cut and mail, etc. These costs can be capitalized if the organization can prove through historical data that customers responded to a specific advertisement and there is a future probable economic benefit. Keep in mind: if the organization advertises free products or services, then there is no economic benefit.

There are two types of direct-response advertising costs that can be capitalized: 1) direct, incremental costs incurred in transactions with third parties, i.e. artwork and 2) portion of associated employee payroll-related costs.

How do I amortize capitalized advertising costs?

The organization should amortize on a cost-pool-by-cost-pool basis over the period it expects to generate sales from a specific advertisement.

How do I account for tangible assets used in advertising?

Tangible assets, such as billboards, should be capitalized and depreciated. Printed materials, such as brochures, should be accounted for as prepaid supplies until they are distributed or are no longer expected to be used.

What are the disclosure requirements?

The financial statements should include the total advertising costs charged to expense for each statement of activities presented, the total capitalized advertising costs included in each statement of financial position presented, and the accounting policy regarding when costs are recognized.

By Kristian Haralson

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ACFE – Report to the Nations on Occupational Fraud and Abuse

Posted on March 8 2016 by admin

The Association of Certified Fraud Examiners recently released their annual “Report to the Nations on Occupational Fraud and Abuse”. The report provides statistical information on fraud in the workplace during 2014. Here are a few of their findings:

  • Participants estimated that the typical organization loses 5% of revenues each year to fraud.
  • The median loss caused by the frauds in the study was $145,000.
  • The median duration — the amount of time from when the fraud commenced until it was detected — for the fraud cases reported to ACFE was 18 months.
  • Asset misappropriations (theft) were the most common, occurring in 85% of the cases in the study, as well as the least costly, causing a median loss of $130,000.In contrast, only 9% of cases involved financial statement fraud, but those cases had the greatest financial impact, with a median loss of $1 million. Corruption schemes fell in the middle in terms of both frequency (37% of cases) and median loss ($200,000).
  • Tips are consistently and by far the most common detection method. Over 40% of all cases were detected by a tip — more than twice the rate of any other detection method. Organizations with hotlines were much more likely to catch fraud by a tip.
  • The smallest organizations tend to suffer disproportionately large losses due to occupational fraud.
  • The presence of anti-fraud controls is associated with reduced fraud losses and shorter fraud duration.
  • The higher the perpetrator’s level of authority, the greater fraud losses tend to be. Also, collusion helps employees evade independent checks and other anti-fraud controls, enabling them to steal larger amounts.
  • It takes time and effort to recover the money stolen by perpetrators, and many organizations are never able to fully do so.

To read the full report, click here.

By David Woods

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Our Not-For-Profit niche is a strong team of experienced professionals who focus their work in the not-for-profit industry. Henry & Horne has been a stable local firm in Arizona for 55 years, and the Not-For-Profit niche has a long history of working with charitable organizations and other tax exempt organizations of all kinds. Our focus is exceptional client service and building relationships with our clients to promote communication throughout the year, not just at the time of the annual audit. We highly value and are very proud to be helping those who help others.

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