Charities Fake Their Numbers to Look Good

Last Updated Dec 23, 2009 1:30 PM EST

Donors may be getting conned.

Today's sorry economy is creating the worst year in recorded history for charities, as cash-strapped consumers struggle to keep themselves afloat in an era of nagging unemployment and steep corporate cut-backs. In that environment, many experts have advocated keeping a close eye on how much a charity spends on administration and fundraising versus "programs" in order to assure that you're getting the best bang for your donated buck.

But some watchdogs maintain that charity accounting is so loose and easily manipulated that donors may be disastrously misled.

Consider the disturbing tale of Feed The Children, an Oklahoma City organization that has a long, controversial history. The non-profit takes in roughly $1 billion annually in cash and in-kind contributions, making it one of the nation's largest charities. The charity's claim that it spends 91% of donations on programs likely makes donors assume that the charity is doling out 91 cents worth of food for every $1 raised, but that claim is completely misleading, said Laurie Styron, an analyst with the American Institute of Philanthropy, which examines the finances of some 500 large national charities and sponsors a charity rating service at charitywatch.org.

When you take out the fudging, AIP says this group spends less than 25 cents of every donated dollar feeding children. Roughly 65 cents of every dollar is spent raising money, largely by running heart-rending radio and television advertisements and sending out direct-mail appeals, according to AIP's analysis. Feed The Children has plenty of other problems too, including a legal dispute between its board and founder Larry Jones, who was recently ousted.


How could their numbers be so off? In this case, Styron maintains that the charity vastly overvalues so-called "in-kind" gifts. That makes it appear that the charity is receiving more in donations--and giving out more in "in-kind" relief--than is actually the case. One example cited by this watchdog group: "pharmacy discount cards" that the charity valued at $22.4 million. An organization that received more than $100,000 in these cards said the cards had such limited use that they were were virtually worthless, according to AIP.

Why inflate the value of non-cash contributions? Two reasons: Donors then get big tax deductions for providing the goods and services that likely cost them a fraction as much. And the charity benefits because by inflating the value of these "donations," the millions that the organization spends on advertising and salaries appears to be a paltry portion of the overall budget. That allows them to win the "efficiency ratio" war that provides the basis for many ratings by well-known rating services such as Charity Navigator.

Feed The Children spends $20.7 million on administrative expenses, including six-figure salaries for Larry Jones ($234,937); Frances Sue Jones ($187,052) and Larri Sue Jones ($166,320), according to Charity Navigator. But, with reported contributions exceeding $1 billion, these expenses account for less than 2% of Feed The Children's budget.

American Institute of Philanthropy, which calls Feed The Children "the most outrageous charity in America," says that 88% of the Feed The Children's private support comes from "in-kind" donations that AIP believes are reported at inflated values, which makes these ratios meaningless.

Feed The Children spokesman Tony Sellars says he takes no stock in AIP's numbers.

"I don't put any credence in anything they do," he said.

Sellars would not say how the organization values in-kind contributions: "That's an internal process that we don't disclose."

Sellars said that Feed The Children has delivered 735 trucks of food and supplies this season, the most ever. Larry Jones is no longer drawing a salary, however, Sellars could not provide up-to-date figures on top-employee pay. (Frances Sue and Larri Sue Jones remain on the payroll, Sellars said.) Feed The Children has a four-star rating from Charity Navigator, which Selllars says is a "much more credible evaluator of charities."

Charity Navigator does list Feed The Children as a four-star charity. But Ken Berger, president of Charity Navigator, acknowledges that their system of evaluating charities has some shortcomings and they're in the process of revamping it as a result. Specifically, Charity Navigator simply sorts and reports the financial data that charities report to the IRS. They group makes no effort to verify that the numbers are accurate. In the future, Charity Navigator intends to come up with a system to evaluate a charity's effectiveness at carrying out its mission. But these comprehensive ratings are not currently available.

In the meantime, Berger acknowledges that hundreds, and maybe thousands, of charities fudge their numbers. And it's legal.

"The accounting principles that are used are very flexible," he said. "The reality is that filling out these [IRS financial] forms is as much art as science."

Styron said that inflating the value of in-kind donations is a common way to fudge a charity's numbers, making a non-profit appear efficient on paper, when it's wildly inefficient in practice.

Another way that charities can fudge their numbers is to claim their fundraising expenses as "educational" costs, Styron said. Charity regulators allow the cost of mailed solicitations to be classified as "education" (which falls under the "programs" umbrella) as long as there is some "call to action" in the fundraising appeal, she said. What's that? It can be as mundane as saying: "Remember to get your annual breast exam," Styron said. Or "Vote!"

In addition, the cost of salaries for staff members must be allocated between "programs," "administration," and "marketing," based on how they spend their time. That, too, is a subjective process, where those with the most aggressive stance about what falls into the "programs" basket look the best.

Charities that don't play these games end up looking bad by comparison, complains Ken Martinet, president of Catholic Big Brothers in Los Angeles. Martinet said his group has an overhead and advertising ratio of roughly 20%, which would make his small charity appear an overspender in some donor's eyes. The charity suffers because much of its work is done by volunteers, which means it raises less and spends less money than some of the others. Were to account for the time of its volunteers (even at a discounted hourly rate), the charity's expense ratio would be enviously low, he said.

"Overhead ratios are a red herring," agreed Holden Kamofsky, co-founder of GiveWell.net. "That tells you nothing about whether the charity is succeeding in helping the people they purport to help."

If you can't rely on efficiency ratios, how do you give wisely--particularly in a year when every dollar counts? There's no easy answer.

Fledgling organizations like GiveWell and Philanthropedia are attempting to come up with a new way to evaluate charities based on what they accomplish. Charity Navigator is also working on an effectiveness measure. But these groups are new and their evaluations are subjective. Philanthropedia, for example, ranks Accion, an international micro-finance charity, as top-notch, while GiveWell gives them zero (out of three) stars--their way to signal you should send your dollars elsewhere. (GiveWell also gives Feed the Children zero stars.)

Moreover, small regional charities including many food banks, shelters, and religious organizations, are not rated by any of these national groups, which largely leaves donors to their own devices.

"There's no easy solution," said Martinet. "Everybody just throws up their hands."

A better response may be to limit the number of charities that you give to and investigate those charities thoroughly, suggested Styron. Go to their offices. Ask for their financial statements. (If they don't provide them willingly, consider it a red flag.) Understand what they're doing; who they're helping; and how they help. Volunteer. See what they do first-hand.

"The financial statements can be hard to understand," Styron said. "But the thing about giving locally is you can see with your own eyes how your money is being spent."

Kamofsky added that it's important to hold charities accountable. Ask the charity if it has a way to monitor their program's effectiveness and how they have done so far. If they don't even attempt to monitor how effective they are at achieving their stated goals, you should give elsewhere, Kamofsky said.

"Most charities are full of people with good intentions, but good intentions are not enough," he said. "As long as donors assume that charities are good, they will not hold them accountable. If donors don't hold them accountable, they won't be good."

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