Many Nonprofits Underreport Fund-Raising Costs



A striking number of nonprofits underreport their fund-raising costs to the public, according to a study.

Some 37% of nonprofits that received individual, corporate and foundation gifts totaling at least $50,000 said they had no fund-raising costs for the fiscal year 2000. What's more, nearly one in five charities that raised at least $5 million reported no fund-raising costs. The practice could stem from pressure from donors to keep overhead expenses low, the study concluded.

The study was conducted by the Center on Philanthropy at Indiana University in Indianapolis and the Urban Institute's Center on Nonprofits and Philanthropy in Washington. The study analyzed data from Internal Revenue Service filings from nearly 127,000 nonprofits.

One explanation is that some charities may be underreporting the costs to attract donors, who prefer to give to groups with lower overhead expenditures, the report said. Many donors, as well as charity-rating services, track the percentage of total expenses going to a charity's programs as a measure of a group's efficiency. More money going to fund raising rather than to programs can turn off donors.

Because organizations "almost always must spend money to raise money," the report stated, it is implausible that so many charities could have no fund-raising costs.

The study concluded that charities may be underreporting fund-raising costs because of poor accounting procedures or a general misunderstanding of IRS rules. One way some groups might be underreporting fund-raising costs is by "netting out" expenses from contracts with outside fund-raising firms. That means if an outside fund-raiser spends $1,000 to earn $1,000, the fund-raising costs are reported as zero instead of the $1,000 spent. IRS instructions, however, call for charities to report the actual amount spent.

The study's researchers acknowledged that charities may have legitimate reasons for not having fund-raising costs, such as relying on the fund raising of volunteers, board members, or related entities, such as the United Way. Those explanations, though, account for maybe half of the charities reporting no fund-raising costs, said Thomas H. Pollak, a senior research associate at the Urban Institute and one of the study's authors.

Spending money on fund raising and administration are necessary for charities to continue operating and to develop new services. "Yet many people automatically believe that the lower the costs are, the better the nonprofit uses donations," Mr. Pollak said. "This misperception provides significant incentive [for charities] to underreport costs or lump them into program expenses, which people are more willing to fund."

The study's full findings can be found at www.coststudy.org1.

Write to Rachel Emma Silverman at rachel.silverman@wsj.com2