For the third time since I became New To Seattle, United Way of King County recently released yearly results claiming absolutely phenomenal financial efficiencies. And for the third time, I’m here to tell you the agency–the nation’s largest United Way unit by donations–has gilded the lily by employing convoluted, creative accounting to make that declaration.
To be clear, I mean gilded the lily exactly the same way Shakespeare meant it when he coined the sentiment in his famous, four-century-old play, King John. “To gild refined gold, to paint the lily … is wasteful and ridiculous excess,” a character says. In other words, UWKC unnecessarily adorned something already pretty.
In its financial statement for the year ending June 30, 2013, UWKC calculated what amounts to its charitable commitment ratio–the percent of total expenses spent on the charitable mission as opposed to management, fundraising and certain other overhead–as 98%. Looking at exactly the same data but not competing in the tough world of nonprofit fundraising, I figured 91%.
The reason this is lily-gilding is that 91% is a very respectable charitable commitment ratio. The Better Business Bureau Wise Giving Alliance says anything at or above 65% is okay. The average last year for all 1,300 United Way units was 86%. So that means UWKC claimed it had only one-seventh the overhead of all the other United Way units, which pretty much operate in the same workplace-deduction fashion.
Really? Maybe a little too good to be true?
Sit back and let me explain hothouse accounting, Seattle style.
Back in July, UWKC issued a breathless press release declaring that $113 million (I’m using round numbers) had been raised from gifts in the just-ended fiscal year, “top spot in the nation” among UW units. As the financial statement later detailed, $104 million came from the working public, with the rest, $9 million, coming from grants and corporations included donated labor. Another $6 million came in from a separate endowment started years ago by the Bill and Melinda Gates Foundation (and which is now worth $146 million).
As I see it, the donations received were not $113 million, but really $113 million plus the Gates $6 million less $1 million reserved for future uncollectible pledges. That totals $118 million. UWKC had another $1 million of non-gift revenue, for total income of $119 million. But UWKC didn’t count the $6 million in Gates money as gifts, perhaps for a crucial reason I will offer later.
On the expense side, UWKC listed $112 million of money directly spent on charitable purposes plus $11 million in management, certain overhead, and fundraising costs, which for the sake of simplicity I will just call overhead. This amounted to total expense of $123 million, meaning the charity ran a deficit of $4 million. That number is right on the financial statement.
Now, in the nonprofit world outside of UWKC headquarters, charitable commitment normally is calculated as charitable purpose expense as a percent of total expense. The math here is easy: $112 million/$123 million, which equals 91%. That’s my number.
That’s not UWKC’s number.
Instead, the agency used a formula I call Leave Out Almost All Of The Bad Stuff For Public Relations Consumption. To be fair, it’s explained on pages 23 to 26 of the 32-page financial statement–if you manage to get that far, understand what you’re reading and thus realize how outrageous it is.
First, UWKC acknowledged the $11 million in overhead. But then the agency subtracted $1 million in depreciation, apparently on the theory that equipment never wears out. Then UWKC took off $2 million in expenses covered by earmarked corporate contributions. That brought the listed overhead down to $8 million.
Finally, UWKC brought out the big gun it had hidden away. Remember I wrote earlier that UWKC didn’t count the $6 million Gates-seeded endowment money as an incoming gift? Here’s maybe the reason why. In calculating efficiency, UWKC took the remaining $8 million of bad stuff and reduced it by the Gates money, bringing down the claimed overhead to a mere $2 million.
This is called netting and is a tactic associated with some very shady charity operators, which I don’t consider UWKC to be. Still, in my opinion, it is not good to pretend that $9 million of expenses actually spent on overhead were not.
Nevertheless, UWKC then divided the remaining $2 million into the $104 million of gifts from working folks to come up with a “net operating ratio” of 2%, which, subtracted from 100%, produced the glorious 98% rather than the decent 91% I see. In this I am hardly alone here. The parent United Way Worldwide employs a formula that, using slightly different math and data on tax returns rather than financial statements, also would calculate 91%.
Still, UWKC is shameless. Its financial statement acknowledged the differing United Way Worldwide calculation (on page 26) and bluntly stated its own formula and the inputs used were “specially defined by the Organization.” I’ll say. In the past, I’ve shown UWKC financial statements to nonprofit accountants around the country, who expressed astonishment at the audacity.
Where, you might ask, were UWKC’s auditors, in this case the regional firm of Moss-Adams LLP? Bailing like the swells on the Titanic. Here’s what the accountancy put in its auditor’s letter–page 2 of the financial statement–about the UWKC calculations on pages 23 to 26:
The operating ratio data, which is presented as supplementary information on pages 23 through 26, is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has not been subjected to the auditing procedures applied in the audits of the financial statements, and accordingly, we do not express an opinion or provide any assurance on it.
And in case anyone missed this, the top of each page of calculations was marked “UNAUDITED” in all-capital letters.
I invite any interested party to post comments below. In lieu of flowers, of course.
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Or in this case, the non-opinion.
Depends on the circumstances, personality and wisdom of the key players. Could have been a non-event addition of the above note the first time the special calculation was reported. Could have been a casual conversation. Could have been a mild difference of opinion and could have been fight. Depends how big a deal management perceives the supplemental opinion to be.
Jim, any thoughts on the tensions that must exist when an auditor bails out on a nonprofit client’s big accounting claim?
Typically, supplemental information would fall within the scope of audit testing that already takes place and thus there would be a very different comment in the accountant’s report. The comment in the report says the measure is outside the scope of testing and the accountants are disclaiming any responsibility for it. In the usually cautious language of accounting, they are essentially making the same point you are: beware – you’re on your own.
Calling attention to metrics the company made up that are outside the accounting rules is an issue with public companies, most noticeable for those companies raising money the first time.
I trust the risk assessment documentation in the accountant’s workpapers reflects management’s desire to use non-GAAP metrics in order to report a very high ratio.