James Sullivan
Strategic Needs of Your Charity-Minded Clients

Here's how you can lend an ear and help them.

June 18, 2009
by James Sullivan, CPA, PFS

Nonprofit organizations are facing increasing demands from donors and other stakeholders for greater accountability and transparency. Even before the Madoff scandal and recent unfavorable news stories questioning the governance of many prominent nonprofit organizations, the calls for better and more complete information were growing. But the type of information needed has yet to become widely available. This is rapidly changing, however, and CPA wealth managers who are also personal financial specialists have a lead role to play assisting affluent clients with the compiling and interpretation of such information.


  • J. Ezra Merkin, acting as the investment advisor to three nonprofit organizations, directed millions of dollars into Bernie Madoff's funds. At the same time he was serving as investment advisor, he was also serving as a board member with those same organizations. While Merkin is not accused of having any knowledge of Madoff's $50 billion Ponzi scheme, New York State Attorney General, Andrew Cuomo, is now investigating whether Merkin violated his fiduciary duty as a board member.
  • The Orlando Sentinel raised a firestorm when it reported in February that the chief executive officer of Florida's largest blood bank will earn almost $600,000 this year after receiving a $106,000 raise. The story also detailed how many of the board members profit directly from their board memberships — approving millions of dollars worth of transactions with the nonprofit organization that benefit each other's business.

These and similar stories have raised questions in the minds of donors regarding the nonprofit organizations they support. How well managed and governed is the organization? Is the organization effective in meeting its stated goals (does it even have a well articulated set of goals)? How much of each dollar donated goes to administration and overhead? Do board members fulfill their fiduciary duties? Unless these questions are properly answered, trust in nonprofit organizations, and donations, will continue to erode.

But the Madoff scandal and the Orlando Sentinel story are just one part of a growing trend demanding that nonprofits be better managed and governed. In a report published last year by McKinsey & Company and The William and Nora Hewlett Foundation The Nonprofit Marketplace Bridging the Information Gap in Philanthropy, the consulting company noted the rise toward "strategic" or "outcome-oriented" philanthropy. These affluent donors — which McKinsey identifies as having household incomes of over $200,000 — are more likely than before to perform research online and/or work with intermediaries who will guide their decisions regarding donations. These donors want to know that their dollars are having a real impact.

The Information Gap

There is a problem — the information donors need from nonprofits to judge their effectiveness is, with only a few exceptions, not available. Nor has a clear set of outcome based reporting standards been established. This is expected to change in the future. To date, how well the organization is managed has been determined, in part, by the numbers found in the IRS Form 990 filed annually by most nonprofits. These forms are publicly disclosed and available online. The information that could be gleaned from the form in the past was limited — but that will change with the new Form 990.

The new Form 990 represents the first major revision since 1979. It expands the questions asked about governance, compensation and operating policies. Margaret Linnane, executive director of Winter Park, Fla.-based Rollins College Philanthropy & Nonprofit Leadership Center, believes the new Form 990 can be used as a marketing and fundraising tool. It is an opportunity for the organization to tell its story and demonstrate that it is well governed and managed.

Todd Ruopp, co-founder of consulting firm Unleashing Performance, Inc., which works with nonprofit organizations, warns that nonprofits are often inconsistent in how each reports their Form 990 information. Until there is greater consistency, Ruopp believes it is helpful for a potential donor to work with a knowledgeable CPA who can evaluate and interpret the information. The donor can describe the impact he or she wishes to make and the CPA can evaluate if a nonprofit has the competency and ability to achieve it.

More robust information is still needed on outcomes — how effective was the organizational meeting its mission? This should be measured given the organization's inputs – from donations to volunteer and staff time. In other words, how well did the organization do given the resources available? What was its social impact? The organization may have low overhead but that amounts to little if the money spent for the stated purpose was ineffective.

According to Linnane the demand for outcome based information is not new – it began over 10 years ago when many of the United Way local organizations began making requests that went beyond asking for the nonprofit's outputs but also asked for measurement of the organization's effectiveness.

No one is suggesting that this information is easy (or inexpensive) to provide. But there is a rich and growing body of literature on how nonprofits can best meet the information demands. In addition, several nonprofit organizations are leading the way in measuring and communicating results. The Internet has already changed how the information is disseminated and promises to change the relationship between the donors and the organizations.

Overcoming the Information Gap

Providing advice on nonprofit organizations to wealthy donors is not new. Many large banks and other financial institutions have offered philanthropic guidance to their wealthiest clients for many years. But the Internet has changed how broadly such information can be disseminated. But the quantity of information has little to do with the quality of information available. A good advisor should help his or her client shift through the information and help separate the relevant from the irrelevant (for more information on the role CPAs can play with nonprofits, see the June 8th and 15th issues of the CPA Insider).

The Internet's impact has already been well beyond that of just the gathering and disseminating information to a worldwide audience. In the report, Online Philanthropy Markets: From ‘Feel-Good' to Effective Social Investing? Keystone reports on how the Internet has changed the relationship between donors and the nonprofit organizations they support. The Internet provides a way for these organizations to reach out to potential donors around the world. Social networking sites (such as Facebook) also serve as a way for likeminded donors to form online communities in support of their favorite cause.

All of this points to new ways for donors and their advisors to find information on nonprofit organizations, exchange information with other donors and change the relationship from "passive donor" to active participant. Like it or not, nonprofit organizations will have to recognize and embrace these changes in order to respond to donor demands.

The Emerging Role of the CPA, PFS Wealth Manager

The AICPA plays a significant role in the not-for-profit industry. CPA, PFS wealth managers also have a role to play. After all, many of the donors are our clients. We need to be proactive assisting them with their donation and bequest decisions. As our clients become more involved in making sure the dollars they donate are used effectively, we can provide them with the guidance needed.

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James Sullivan CPA, PFS, MAS, is Investment Counselor at Core Capital Solutions LLC and has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions LLC as an Investment Counselor, he spent over 20 years at Arthur Andersen LLP specializing in financial planning, investments and individual tax planning. His primary focus today is assisting his clients enhance their overall retirement through proper investing, goal setting and tax planning.