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Key Areas to Explore in Form 990s

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By Bill Smith
April 4, 2007 09:07 AM

Internal Revenue 990 forms can offer a wealth of information to the journalist looking into nonprofits. Following are some key areas that I have found helpful in the past:

1. Fundraising expenses. Usually high fundraising expenses can signal that a nonprofit relies too heavily on outside telemarketers or direct mail fundraisers to raise money for their operations, leaving little for their actual programs. Sometimes, charities will try to hide their fundraising expenses by categorizing them as postage or "other expenses." Make sure you find all the fundraising expenses in the 990.

2. Noncash contributions. On the first page of a nonprofit's 990 is a breakdown of both cash and non-cash income for the year. If a nonprofit has an unusually high amount of non-cash income (compared to its cash income) it could be a red flag. Nonprofits can dramatically improve the appearance of their fundraising and management expenses (compared to their program expenditures) by dealing in large amounts of Gifts in Kind. Sometimes the GIK are legitimate, but sometimes they are used almost solely to inflate program expenditures in an effort to justify higher salaries and attract more cash donors.

3. A nonprofit's excess or deficit for a particular year, as well as its cumulative assets. If a nonprofit is losing money each year, it probably indicates a problem. If its assets are showing unusual growth each year, that too could be a problem. There are cases where charity officials build up their assets to ensure long-term employment and salary for its officials, spending little on program work.

4. Compensation of officers, directors, etc. Unusually high compensation is a problem. Unusually low compensation, however, also can be a problem, particularly if it appears officials of the charity are working full-time and have no other means of support. This is an example of what I like to call the "too high" or "too low" phenomenon. Compensation that is too high may be a sign of inflated management costs; compensation that is too low can sometimes indicate that a charity official is being compensated in some other, less obvious way.

5. Abnormally high accounting fees, occupancy fees, or legal fees also can be a signal of trouble. Also look for exorbitant travel costs. Excesses in any of these areas can signal problems. For instance, if legal fees are high, check to see whether a nonprofit has been embroiled in recent legal action, or look for a relationship between the charity's lawyer and the charity's executive director. Similar scrutiny should be made of accounting costs. Nonprofit officials can use occupancy expenses to compensate themselves or their friends above the market rate.

6. Look closely too at relationships among salaried officials. It is not unusual to find the salaried director of a charity also has hired his or her spouse, children, even mother or father. While not illegal, it can signal unusually tight control in the hands of related individuals.

7. One of more interesting breakdowns is often called "other expenses." Sometimes these also are labeled "various" or "miscellaneous" expenses. If you are seeing any unexplained expenses that seem unusually high, find out what that money is being used for. A designation that some charities like to use is something called "program development." While often perfectly legitimate, we have found cases where "program development" is simply a way to hide additional money going to executive directors, board members or other officials.

8. Look for boards that are either too small or too large. Sometimes, there may be only one, two or three people on a board of directors' list and too often they are related to one another. There is always a serious question of just how strong the oversight is for those nonprofits.

Recently, we did a story in which an executive director/founder of a charity came under investigation for taking what appear to have been large sums of money from the charity, even though he was drawing no salary. Only when the board was expanded did some of the new directors notice that the checks and balances that should have been there weren't. The lack of oversight may have cost the charity -- and donors -- hundreds of thousands of dollars.

A board that is too large also can be a problem. A board of 30, 40 even 50 people can indicate that nobody feels responsible. One recent charity had a board of more than 20 people made up largely of well-recognized local personalities. When contacted, all of the directors said they had not attended a board meeting in years and did not even realize they were still serving on a board. It seems that a good board is maybe five to seven independent people, who take their roles as fiduciary watchdogs very seriously.

9. The founder is also the executive director. In my experience, this is very often not a good idea. It may indicate that a nonprofit was founded more to provide a job than to do good work.

10. In fundraising, try to identify the fundraisers and other independent contractors. We actually have uncovered more than one case in which a charity's executive director set up a family member in a for-profit fundraising consulting company and then directed millions of dollars to them. Sometimes, there is no effort to hide it. Even if there is no obvious link, a check of the for-profit company with the Secretary of State can often uncover potential links with the charity.

11. Look at other organizations that receive cash donations from a charity. A few months ago we stumbled on a case in which a national cancer charity was giving almost all of its cash grants to other charities with post office boxes in the same city. It turned out that this was a network of about two dozen charities that were getting money from workplace giving programs. Virtually all of the money was going to pay salaries of the charity heads or to circulate the cash among each other. Most of the money to support the charities was coming from federal employees through the Combined Federal Campaign.

12. Look closely at a charity's assets, especially property. One charity's 990 seemed perfectly acceptable with one notable exception -- a mortgage payment on a house in a rural area near St. Louis. It turned out that the executive director had used the charity to buy a house almost immediately after finalizing his divorce. He claimed later that he had hoped to turn the house into a rehabilitation center, but nothing was ever done toward that end.

Click here for Smith's article on separating good, well-run nonprofits from bad ones.

Bill Smith has worked as a reporter at the St. Louis Post-Dispatch since 1985, assigned to cover nonprofits for the past three of those years.

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