Non-profit accounting for fun and profit

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I had an accounting professor many years ago who would teach the various “creative accounting” shenanigans that clever accountants could use to cover up nefarious business practices. However, he would always precede the lecture with the disclaimer, “Only those of you planning to become auditors should listen to this. The rest of you, close your ears.” I hereby give you the same disclaimer.

Today’s lesson is about how you can “cook the books” of a “non-profit” business organization (technically a “not-for-profit” organization, but that term is less used in the common media) to enrich yourself and your friends. These “shenanigans” happen all too frequently, and not surprisingly, Donald Trump is a master at this.

I must also first say that I have worked, often as a board member and a treasurer, with some excellent non-profit organizations of various sizes and they all have met the legal and societal objectives for this type of organization. Non-profits get certain tax preferences, and often provide tax-advantages to the people who fund them, in order to further a particular social cause. This merits Internal Revenue Service recognition, usually as what is called a 501(c)(3) organization, a reference to the controlling tax code regulations.

Churches, some medical facilities, international anti-poverty organizations, and similar groups are basically subsidized by you, the taxpayer, by escaping taxes on business transactions that often look a lot like for-profit business. Most donations to these organizations can also be deducted from the income of donors as tax shelters. And because of those privileges, we are entitled to hold these organizations to a higher standard, although we, and they, often fail at that goal. [1]

I have three examples of “creative accounting” used by the more unscrupulous non-profit organizations. At the end, I have some advice for protecting yourself against the worst of these guys, as well as guidance for finding the best non-profits meriting your time and your donations. If you want to skip right to the “Trump” part, scroll down to the section called “Money laundering the tax-free way.”

Hiding the big salaries

Many charitable organizations, especially those providing direct services, are mostly “payroll,” with most of their expenses paying for staff who are paid to “do the work.” However, let’s say that you and your friend want to help a good cause, say, disabled veterans or homeless pets, but you also want to make some serious money yourselves out of the deal as well. How do you pull this scam off?

It is not difficult to legally set up a not-for-profit organization with your state, naming some good friends as your legally-required board of directors. In a not-for-profit there are no “owners” in the conventional sense. The board is responsible for the prudent operation of the organization, but the president or “executive director” usually runs the day-to-day operations. So getting some compliant friends to make up your board is an essential first step.

Next, you raise some donations (tax-deductible to the donor) perhaps through a heart-wrenching television advertisement or a good telephone marketing list. And maybe you even give away most of the donated money to support your intended purpose. But if your board of directors is not attentive to the accounts, or if they are part of the scam, you can pay yourself and your friend salaries that are well above the market rate for the skills you are bringing to the job.

I have seen very small charities and “independent” churches (a whole separate story there) pay their top managers one-half of a million dollars per year or more in salary, plus generous housing and travel perquisites. Also, the hiring of spouses and children at above-market salaries is not uncommon as a way to extract more cash out of the organization. Nice work if you can get it, subsidized by you, the taxpayer. [2]

Now it must be said that some non-profits are as large as any huge for-profit business, and a large salary might be merited given the scope of fiscal responsibility. Also, I must note that religious employee salaries in “mainstream” denominations, those with active oversight and long histories, are usually sacrificially low. But salaries in more questionable non-profits remain a ripe opportunity for abuse.

It is also important to note that most registered non-profit organizations are required to give you free access to an IRS filing they prepare annually called a Form 990. In that document, you will typically find the salaries of the top executives of the charity and other important financial information. The best charities give you easy access, even online, to the Form 990 because it contains the very accomplishments they are most proud of, and most good charities pay their top people much less than they could earn in the private sector. Even then, don’t forget that these workers are (usually) normal people with families to support and mortgages to pay. Good people do this work because it is a worthwhile and satisfying career. Some bad eggs, however, use this system to get rich.

Outsourcing fundraising and marketing

Back to those creative television advertisements showing caged dogs and starving children, with sad songs in the background that bring a tear to your eye. Many of these non-profits are fine organizations and use your donations well. But if the “creative accounting” types can’t get away with big salaries, there is a fallback position involving this part of the business.

Fundraising and marketing costs, even for a great non-profit, can be large. It takes money to raise money, even for the best ones. However, it is possible to “offload” fundraising and marketing tasks, contracting with private companies to perform these functions. The trick to making money here is for charity insiders to also own, directly or indirectly, the contracted fundraising, telemarketing, or promotions management company.

In one case from 2013, an Iowa telemarketing company appears to have been created specifically for the purpose of raising money for a dubious charity, and it then passed on only 15% of its collections to that charity, run by the same people, charging the other 85% as “fundraising costs.” The telemarketing, essentially, was the business. [3]

When you see expensive fundraising advertisements on television, there is likely an advertising agency involved creating the video, and even taking a placement fee for each contract secured with a broadcaster. Some major advertising firms admirably do this work pro bono. I have worked with a couple of these agencies and they are both gifted and generous with their time. The above-mentioned Form 990 will typically note this professional work as “gifts in kind.” For other charities, however, this relationship can be a bit more “obscure,” as there is sometimes substantial profit to be made here.

Even for the best charities, fundraising and marketing costs can be uncomfortably-high, because that is the competitive media world in which we live. You need to “comparison shop” here, and fortunately the “sore thumbs” will often stick out, with out-of-the-norm levels of marketing and fundraising costs.

Money laundering the tax-free way

This brings us to the Donald J. Trump Foundation, the Trump family’s primary charitable arm. Currently being sued by the New Your Attorney General’s office, the evidence indicates “creative accounting” on a massive scale. [4]

The process appears to have begun with a “board of directors,” the body responsible for oversight, that has never met, giving a great deal of freedom in the raising and disbursement of money to a couple of individuals. Here are some of these alleged “quirks” in accounting:

  1. In the time period before Trump ran for president, very little Trump family money actually went into the foundation. Instead most of the “donation” funds appear to have come from business associates who were seeking favors, or even worse, were “shaken down” for contributions.
  2. Again prior to the run, most of the “charitable” disbursements went to organizations that simultaneously booked expensive galas and other fundraising events at one of the Trump resort properties. This arrangement looks more like a “rebate” than a charitable donation, and again, much of it was paid out of non-Trump money as noted in #1 above, or was accomplished simply by overcharging the organizations using the facilities, then rebating it back for tax advantages.
  3. During the run-up to the important 2016 Iowa presidential caucus, Trump held a fundraiser, with contributions run through the foundation, raising millions of dollars supposedly to go to veterans’ organizations. When the press could find no organizations that subsequently received checks, there appeared to be a hastily-arranged public delivering of checks. However, the entire process was allegedly managed, not by the foundation, but rather by the campaign itself, and timed to the caucus, in possible violation of campaign laws. [5]

The Donald J. Trump Foundation is not alone in using “creative accounting” practices to “launder” tax-free donations to questionable ends. In 2013, the head of one “foundation” used $30 million of tax-free donations to invest in risky investment schemes. [6] Other non-profits, while supposedly organized for charitable purposes, are really just routing political contributions for very rich people for their tax advantages.

Finding the good ones

Fortunately, there are still many great charities and other not-for-profit organizations doing fine work in the U.S. and worldwide. Charity Navigator (www.charitynavigator.org) is a great resource for performing some “due diligence” about where your donations wind up. They rank numerous charities from zero to four stars on two scales. The first scale is “accountability and transparency,” and it is the most straightforward. Four-star charities on this scale reveal to the public a long list of characteristics, including how the organization is run, and by whom. In addition, you will find their policies for financial conflicts of interest and independence of board members, and also whether they provide audited financial statements to the public. “Questionable” charities often refuse to disclose this type of information to the public, and even some well-known charities resist being completely transparent with the public.

The second scale, “financial performance,” dives deeply into those audited statements to grade them on “best practices” on items like their percentage of administrative and fundraising expenses, as well as their overall financial stability. This is the harder of the two scales in which to achieve four stars. Many excellent charities can’t get beyond three stars precisely because they run so “lean” in getting donations directly to recipients that they may risk long-term financial comfort, which is not necessarily a bad thing.

“Comparison shopping” of worthwhile charities has become an easier task thanks to Charity Navigator and other rating services. The best charities want you to examine their Form 990, and while some of these documents are daunting reads, it doesn’t take long to be able to put the recipients of your donations side-by-side to assess their financial management and impact on the world. Charity Navigator helpfully extracts some of the key numbers on their own websites, but there is more and better information to be found in the Form 990 for each organization, and a Form 990 link is often provided right on the Charity Navigator site.

And in case you were wondering, the Clinton Foundation scores four stars on both the transparency and financial management scales on Charity Navigator, with an impressively-high 86.9% of contribution dollars being used to deliver its charitable services. The Donald J. Trump Foundation is not rated, rather is flagged with a “High Concern” advisory. One could blame a “Deep State” conspiracy for the wide discrepancy in the ratings between the two foundations, or one could conclude that the auditors involved learned well their professors’ lessons in detecting “creative accounting.”


Notes:

  1. Technically, churches are not required to register as 501(c)(3) organizations, although it is very common to do so in order to better formalize the tax deductions of the donors.
  2. Thomas, Judy L., and Laura Bauer. “After Losing His Building, Pastor Jerry Johnston Starts Over.” The Kansas City Star, 17 Sept. 2011. As an example, this independent church went into bankruptcy, yielding to disclosures of huge salaries and benefits to one family.
  3. Hansen, Amy. “Polk County Judge Bars Telequal from Professional Fundraising in Iowa.” Osceola Sentinel Tribune, 1 May 2013.
  4. Davidson, Adam. “The Inconvenient Legal Troubles That Lie Ahead for the Trump Foundation.” The New Yorker, 28 June 2018.
  5. Bump, Philip. “How Trump Allegedly Used His Nonprofit to Support His Presidential Bid.” The Washington Post, 14 June 2018.
  6. “National Foundation of America Founder Convicted of Defrauding Clients of $30 Million in Assets.” Federal Bureau of Investigation, 11 Mar. 2013.

2 thoughts on “Non-profit accounting for fun and profit

  1. Pingback: Non-profit organizations and expanded political power – When God Plays Dice

  2. Pingback: Why taxing churches is harder than you think – part 1 – When God Plays Dice

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