Questions Arise on Accounting at United Way
The New York Times
November 19, 2002
By Stephanie Strom
Some United Way organizations, trying to appear more successful and more efficient with their donors' money, are counting contributions in ways that make the numbers look more robust -- and expenses look smaller.
In a number of cases, including two of the largest United Ways -- those in Washington and Chicago -- different organizations counted some of the same contributions, thus inflating not only their own numbers but the system's totals, according to United Way executives.
Moreover, the United Way of America's reporting guidelines direct its 1,400 members to count as their own contributions money that was actually handled by or raised for competing organizations in shared campaigns, the executives said. The guidelines also tell members to count as contributions the value of volunteers' time, a practice many other charities frown on, although it is permissible in limited circumstances.
And while local United Ways publicly report the percentage of their total contributions used for administrative purposes, they do not tell donors that different amounts are applied from different types of contributions to cover costs, a review of their practices shows.
United Way of America's president said that while some of the practices conformed with generally accepted accounting principles, they might no longer pass muster after recent corporate scandals demonstrated that even approved practices can be used deceptively.
''What happened at Enron and WorldCom has raised the bar for both for-profit and not-for-profit businesses,'' said Brian A. Gallagher, president of the United Way of America. ''We have to respond.''
United Way is by far the largest organization raising money in American workplaces. It channels money to thousands of small local charities that would otherwise struggle to find donors and increasingly creates its own programs to address community needs.
No one disputes its good intent. But its accounting practices raise questions for potential donors who want to know precisely how much of their contributions go to people in need rather than the organization helping them. In effect, these practices, by artificially inflating reported contributions, make it seem as if expenses consume a smaller portion of donor dollars. That makes United Way look better against competing charities at a time when more and more donors are relying on services that rate charities.
''Because they miscount the totals, they start off with a faulty number,'' said Rick Cohen, president of the National Committee for Responsive Philanthropy, a watchdog group in Washington. ''That's their fundamental flaw.''
Each time a case of double counting has arisen, United Way of America executives have said it is limited to a particular United Way. They defend the other practices that have been called into question.
But executives at some local United Ways are less certain. After reading in newspapers about questionable accounting and financial management at the United Way of the National Capital Area in Washington last January, ''I felt chilled because I had seen some similar things in other United Ways,'' said Brian T. Hassett, who served as president of the United Way in Chicago until recently.
Les White, a former county manager in San Jose, Calif., said he saw some of the same things when he was brought in to resuscitate the United Way Silicon Valley. ''Some of what I read about in Washington, D.C., sounded so familiar,'' he said. ''It's myopic to insist that these problems are only in one place.''
The practices have developed as the United Way has struggled to recover from recent scandals. Contributions began falling in 1992 when William V. Aramony, the United Way's national leader, was accused of fraud, embezzlement and other charges, and a string of local scandals like the one in Washington this year have not helped. Contributions are now lower, after adjusting for inflation, than they were a decade ago, even as charitable giving has doubled over all.
One of the most serious accounting issues the organization faces is known as double counting, which occurs when each of two or more United Ways counts the same contribution as its own.
The problem has come to light this year in the Chicago area and in Washington. Here's how it happens. The United Way of Suburban Chicago, an umbrella organization for 52 United Way organizations in the Chicago area, planned to count as its own some $350,000 raised at Baxter International -- the same money counted by an unaffiliated United Way, that of Lake County.
Each organization insists that it managed the campaign and wants to include the money in its total, as each has in the past. The United Way of America is now conducting a review.
In 2000, The Arizona Star reported that the United Way of Tucson counted almost $1 million raised in California for charities there. And the United Way of the National Capital Area counted as its own the $1.2 million raised from Giant Food's employees, who assigned some of that money to the United Way of Baltimore.
Each time an instance of double counting surfaced, the United Way of America insisted that the practice was exclusive to the United Way in question. But in 1999, Mr. Gallagher headed a task force to address double counting, which suggests that the United Way had concerns about how widespread the practice might be.
The task force prescribed how such contributions were to be booked. But its explanation was confusing -- and it undercut its own recommendations. ''The task force realized early on that it would be impossible to create standards that all United Ways 'must' adhere to, and demanding strict adherence is arguably not part of our culture right now,'' the task force report said.
When the report was released, fewer than 13 percent of United Ways, or roughly 178 of the 1,400 organizations, had written guidelines for reporting and spending, and as the task force recognized, the national organization has little ability to compel compliance.
''There's so much variance among United Ways in things like accounting, finances and systems,'' said Arnold Henning, the interim president of the United Way in Chicago. ''The independence to vary from city to city is our strength when it comes to services because it means we know the needs of our communities. But it's also our weakness because people don't understand that the practices of one United Way are not the practices of all United Ways.''
Double counting is not the only way that reported contributions are overstated. An increasing number of companies like Sears, Hewlett-Packard and Verizon are using newer organizations like the JK Group to administer employee-giving campaigns and allowing other fund-raising groups like the Black United Fund or the Public Interest Fund of Illinois to take part.
Yet United Ways count this money as their contributions. Indeed, the United Way of America instructs members to count the entire amount raised in those campaigns, not just the amount of money designated for United Way.
At least $2.4 million counted as contributions by the United Way in Washington was handled by its competitors, officials said, and $7.5 million was counted in New York City, according to its annual report.
United Way says this is legitimate because even when it does not actually collect or receive the contributions, its marketing and publicity efforts are responsible for them. ''The question is, Did the United Way incur a cost during the campaign?'' Mr. Gallagher said. ''If it did, then it's reasonable to include all the revenues raised in the campaign and calculate operating budgets and expenses against them.''
But others disagree. ''The guidelines say we can count this money, but frankly, it made me uncomfortable,'' Mr. Hassett said.
Nan Langen Steketee, consultant and co-founder of the National Alliance for Choice in Giving, noted that there are many other organizations managing fund-raising for governments and businesses. ''They do not count the money raised for other charities in their yearly totals,'' she said.
Mr. Hassett and others argue that counting such money creates ''phantom revenues,'' and expenses cannot be deducted from money that is not received. ''If the money doesn't flow into your coffers, you can't deduct from it,'' said Anthony DiCristofaro, a longtime United Way marketing executive.
The solution, Mr. DiCristofaro and other United Way executives say, is simple: Charge companies and governments a fee for United Way services to help offset the loss of phantom revenue.
There are other forms of phantom revenues. The United Way of America tells members to place a value on donated goods and include the amount in their tally of donations. This is acceptable accounting practiced by some other charities, but United Way critics question how the values are calculated.
More controversial is placing a value on volunteers' time and including it in contribution totals. The United Way directs its members to value their volunteer time at $14.83 an hour, although many local organizations refuse to go that far. For the most recent campaign, the United Way valued in-kind donations, including volunteer time, at $267 million.
The Financial Accounting Standards Board, the rule-making body for the accounting business, allows organizations to place a value on contributed time but with strict limits: Volunteers must either create or significantly enhance a nonfinancial asset or provide special skills that would otherwise have to be purchased. The Internal Revenue Service does not allow valuation of volunteer time at all for tax reporting purposes.
''With the United Ways, it is often quite a reach for them to try and use this volunteer time in their accounting,'' said Trent Stamp, executive director of Charity Navigator, an online charity rating service. ''I get the feeling they might be putting a dollar value on people licking envelopes, which is not what was intended.''
The United Way of America reports that on average administrative costs amount to 12.7 percent of total contributions. But because total contributions are inflated by the inclusion of noncash gifts like free computers or the gift of children's coats, expenses are understated.
Mr. Gallagher disagreed that contributions were inflated, saying the United Way's practices conform to accepted accounting principles.
Further, donors making ''unrestricted gifts'' -- those that allow the United Way discretion in spending their donations -- often pay a higher percentage of their contributions. The Washington United Way boasted that its administrative costs ate up only a dime of every dollar donated, but this masks the fact that 62 cents of every unrestricted dollar was going to cover overhead.
That was an extreme example but indicative of an overall problem, which also surfaced in Tucson two years ago. ''The sad thing is that the donors that are the most valuable to the United Way are the ones who are paying most,'' Mr. Hassett said.
The annual report of the United Way of New York City, perhaps the most candid of the United Ways about accounting, stated that it raised $132.4 million in total contributions last year. Almost 14 percent, or $18.3 million, was used to cover administrative expenses, it said.
But only $91 million of that total was in cash, it said, meaning that on average almost 18 cents of every actual dollar it handled was eaten up by expenses.
The organization deducted an average of 6.9 cents of every dollar for administrative purposes, it said, from $14 million collected from donors who earmarked their gifts for specific charities, a program the United Way calls Donor's Choice.
That means on average roughly 20 cents of every unrestricted dollar went to cover expenses, which falls within the Better Business Bureau's guidelines for expenses but is higher than the annual report would lead a donor to believe.
Lawrence Mandell, executive vice president of the New York United Way, defended the practice of charging different donors different amounts, stressing that donors who make unrestricted gifts to the United Way receive services that other donors do not.
''We have a strict volunteer review process that vets agencies on their behalf, we give those agencies management assistance, help develop their boards, and we find really highly competent agencies that donors might not otherwise know about,'' he said. ''Donors Choice donors don't get any of that.''
That said, Mr. Mandell acknowledged the need to give donors a clearer picture of how costs are allocated to them.
Recently, the United Way's National Professional Council approved standards being championed by Mr. Gallagher that would require United Ways to provide fuller disclosure to the national organization. Not complying would mean a loss of membership.
But the new standards do not address much of the reporting that makes contributions seem larger and expenses smaller. The council, for instance, left open whether or not to include donations raised by a third party.
The new standards face a vote at the United Way's annual meeting in April, but Mr. Gallagher said the council's endorsement gave him the power to carry them out earlier. ''I would be surprised and disappointed if they don't pass,'' he said.
Some United Way executives, however, worry that their colleagues will see the new standards, with the scrutiny from a committee that includes outside experts on ethics and finance, as another effort by the national organization to increase its power.
Correction: November 23, 2002, Saturday A front-page article on Tuesday about the United Way system's accounting techniques referred incorrectly to the calculation of contributions used to cover the charity's administrative costs. The national umbrella body, United Way of America, does not include the value of donations in kind, like computers and volunteer time.
Copyright 2002 The New York Times Company