This document discusses whether not-for-profit organizations place too much emphasis on metrics used to evaluate them, such as ratios of expenses allocated to programs, administration, and fundraising. While these metrics aim to provide transparency, there is significant subjectivity in how expenses are allocated. Additionally, a focus only on these metrics may cause organizations to underfund administration and fundraising, hindering their ability to achieve their missions. The document suggests donors should consider an organization's mission and results rather than just metrics.

1. 4 The PPC Nonprofit Update, december 2014, Volume 21, No. 12
Are Not-for-Profits
Missing the Point?
In the last two editions of The PPC Nonprofit Update,
we covered several common metrics applied to and
used by not-for-profit (NFP) organizations and some
of the underlying estimates and assumptions that go
into calculating those key ratios. The intention of those
ratios is to level the playing field and give granting
agencies, foundations, and donors the ability to make
assessments about an NFP before committing funds for
a contribution or grant. However, can too much empha-
sis be placed on these metrics, especially given the
amount of subjectivity layered within them? Taking it a
step further, should donors and other funding sources
even be focusing on the metrics at all? Shouldn’t the
focus instead be on supporting and advancing the mis-
sion of an NFP instead of arbitrary metrics? Resolving
these issues fully is well beyond what can be covered
here; in fact, many books have been written about these
very same questions. Instead, we’ll highlight a few of
the issues relating to these questions.
Subjective Metrics
As covered in the previous articles, NFPs have great
latitude in allocating expenses among three functional
categories (program, administration, and fundraising)
that are not explicitly tied to an activity of the NFP. All
NFPs that file an IRS Form 990 are required to present
expenses in this way. Further, GAAP requires certain
special NFPs called voluntary health and welfare
organizations (VHWOs) to also present an additional
financial statement called a Statement of Functional
Expenses that shows the expenses of a VHWO by both
functional and natural classifications.
However, beyond this guidance, there are few, if any,
bright line tests with respect to how NFPs allocate
these expenses. Instead, GAAP just requires that the
methodology selected by the NFP be reasonable, objec-
tive, and based on data that can be financial or non-
financial. Consequently, consistency between different
NFPs is nearly impossible to achieve on what are argu-
ably, rightly or wrongly, the most significant indicators
produced by the organization.
Various watchdog groups compile and monitor the
ratios and often add their own supplementary ranking
and commentary about the overall performance of the
NFP based on the ratios. Interested parties, like donors
and other funding agencies, can access the information
and use it to make a better informed decision. However,
the rankings and commentary vary greatly from watch-
dog group to watchdog group, which, again, makes
evaluation and comparison of NFPs difficult. One thing
that most of the watchdog groups can agree on is that,
generally, it is better for an NFP to direct a substantial
amount of its resources to program services ahead of
administration and fundraising. But in doing so, are
NFPs missing critical opportunities?
Misplaced Focus?
Most donors are compelled to give to an NFP because
they are drawn to the organization’s mission through a
personal connection and, because of that connection,
they feel better about the contribution when they know
that as much of it as possible is being used for program
services that support the NFP’s mission. However, the
flip side to that coin is that by pushing more and more
money to programmatic expenses, it may actually harm
the organization by not fully supporting critical admin-
istrative functions and by hindering the NFP’s ability to
continue to raise funds.
Fundraising. Consider the following example regard-
ing fundraising. A local arts organization that funds art
outreach programs for disadvantaged children raised
a total of $100,000 in contributions for the year; 90%
of which was spent on expenses that are program-
matic and directly support the mission. As a donor,
that program expense ratio would probably make you
feel pretty good about how your money was spent. But
what if that same organization had been able to take
$25,000 of that money—meaning that the program
expense ratio would be, at best, 75%—and mount an
aggressive fundraising and awareness campaign that
would have yielded an additional $500,000? Wouldn’t
that arts organization be better able to serve the com-
munity, and a broader section of the community, with
more resources?
Administration. Similar to fundraising expenses, an
NFP that has significant administrative expenses may
be considered to not be devoting enough of the contrib-
uted funds to support the mission. However, the largest
administrative expense in almost any organization is
salary expense. An organization that isn’t willing to des-
ignate salary expense at a sufficient level to attract and
retain innovative, cutting-edge leadership is missing out
on opportunities for new growth.
Additional Resources
For a deeper dive on the fundraising and administrative
examples above, and several other observations unique

2. The PPC Nonprofit Update, december 2014, Volume 21, No. 12 5
to NFPs, consider spending time with some of these
additional resources—
zz Dan Pallotta, The Way We Think about Charity is Dead
Wrong: This presentation is part of the TED Talks
series, and can be found at www.youtube.com/
watch?v=bfAzi6D5FpM. Drawing on years of practical
and successful experience, Dan is the author of a
number of books on the issues faced by NFPs.
zz Stanford Social Innovation Review, The Nonprofit
Starvation Cycle: This study from Stanford
investigates the cycle of NFPs not investing enough in
infrastructure to meet unrealistic donor expectations
about the cost of running an NFP, which only
perpetuates the unrealistic expectations as NFPs go
without. The study is available here: www.ssireview.
org/articles/entry/the_nonprofit_starvation_cycle/.
zz Guidestar, Charity Navigator, and the BBB Wise
Giving Alliance, The Overhead Myth: An Open Letter
to the Donors of America: Three of the nation’s most
influential watchdog organizations co-authored
an open letter to donors urging them not to focus
primarily on metrics but instead to pay attention to
transparency, governance, leadership, and results.
The full letter and supporting studies can be found at:
http://overheadmyth.com/.
Metrics do have a place in the conversation about NFPs,
but perhaps they should be the “small talk” rather than
the heart of the conversation itself. Reducing an NFP
to a simple series of numbers doesn’t do justice to the
important work that NFPs perform. Further, in doing
so, donors and watchdog groups alike may be uninten-
tionally limiting an organization’s potential and hurting
NFPs more than benefitting them.
• • •
Big Changes for
SSARS
On October 23, the Accounting and Review Services
Committee (ARSC) of the AICPA issued SSARS
21, Statement on Standards for Accounting and Review
Services: Clarification and Recodification. That SSARS
clarifies and recodifies the standards that cover compi-
lation and review engagements and introduces a new
financial statement preparation service. These are the
most significant changes to SSARS since the issuance
of SSARS 1 in 1978.
What Is in SSARS 21?
SSARS 21 replaces all existing SSARS except for AR 120.
ARSC is addressing that AR section separately. The new
codification includes the following sections:
zz AR-C 60, General Principles for Engagements Performed
in Accordance with Statements on Standards for
Accounting and Review Services
zz AR-C 70, Preparation of Financial Statements
zz AR-C 80, Compilation Engagements
zz AR-C 90, Review of Financial Statements
AR-C 60
AR-C 60 provides general principles for all engage-
ments performed in accordance with the SSARS and
is intended to help accountants understand their
professional responsibilities when performing SSARS
engagements.
AR-C 70
Although the preparation of financial statements
has always been a separate nonattest service that
accountants performed for their clients, or a service
that accountants did in connection with their compila-
tion, review, or audit service, the SSARS did not previ-
ously provide guidance on the conduct of a preparation
service engagement. The main provisions of AR-C 70
include the following:
zz The requirements apply when an accountant in public
practice is engaged to prepare financial statements
and the requirements may be adapted to the
preparation of other historical or prospective financial
information.
zz Professional judgment is required to determine
whether the accountant has been engaged to prepare
financial statements or merely to assist in preparing
them. AR-C 70 doesn't apply to assistance.
The requirements to AR-C 70 don’t apply if the accoun-
tant prepares the financial statements and will also
compile, review, or audit those financial statements.
zz The objective is to prepare financial statements
in conformity with a specified financial reporting
framework, not to verify information or express an
opinion or conclusion on the financial statements.
zz The accountant should obtain a written engagement
letter signed by the accountant and management.
zz There are disclosure requirements if the financial
statements are prepared in accordance with a special
purpose framework or contain a known departure from
the applicable financial reporting framework.
zz Each page of the financial statements should include a
statement indicating that “no assurance is provided.”
zz Financial statements may be prepared that omit
substantially all the disclosures required by the
financial reporting framework if the omission has been
disclosed and is not intended to mislead users.