ABSTRACT

This article presents a case study of a well-known nonprofit organization, Susan G. Komen for the Cure, with a large and visible series of fundraising charity walks. The organization did not report or disclose the walks' gross revenues and fundraising expenses separately in its financial statements over a seven-year period. Instead, the organization recorded only its share of the net proceeds as contributions when the cash was received. This accounting treatment helped Komen meet the Better Business Bureau's standards for accountability and achieve a top rating from Charity Navigator.

INTRODUCTION

This case study describes how Susan G. Komen for the Cure1 (“Komen”) structured a series of special events involving a second, previously existing and independent nonprofit organization, the National Philanthropic Trust (“NPT”). In accounting for the events, Komen employed an accounting method that differs from what is traditionally and widely used for similar special events. By reporting the net proceeds from these walks on a cash basis, rather than reporting the walks' gross revenues and expenses on the accrual basis, Komen was able to report fundraising ratios in 2004 and 2005 better than Better Business Bureau minimum guidelines. This accounting treatment also allowed Komen to achieve “four-star” Charity Navigator ratings from 2005 through 2010.

This case also illustrates difficulties faced by outsiders in determining whether an unusual arrangement between contracting parties is motivated by accounting considerations or by other business factors. These difficulties are evident here, even though an unusual amount of information about the underlying economics is available. More specifically, we have access to testimony in an arbitration proceeding by Komen's chief operating officer, a book by the original founder of the Breast Cancer 3-Days, and information about how other organizations organize and account for similar special events. This evidence, taken together with the relatively favorable accounting impact on Komen's financial reporting of the event structure, seems to support an argument for opportunistic financial reporting. The evidence is not dispositive, however, and alternative business motivations are also discussed. Both organizations, in correspondence to us, defend the propriety of their accounting practices.

This case is significant both because of Komen's prominence and because of the increasing frequency and growing magnitude of special fundraising events. While existing large sample studies conclude that opportunistic financial reporting of special event receipts net of expenses occurs, this case study provides a clearer picture of both the potential motives for such an accounting procedure and its potential impact on an organization's standing with monitoring groups. We argue that, irrespective of Komen's motive for the structure of the special event arrangement, under applicable GAAP, Komen should have reported the event revenues and expenses gross on an accrual basis, rather than net on a cash basis.2

Komen, which claims to be the global leader of the breast cancer movement, has invested more than $1.9 billion in the fight against breast cancer since inception in 1982 (Komen 2012a). Over this period, key indicators of the success of the effort to prevent and cure breast cancer have improved significantly, although the explanation for these improvements is not clear. Komen's founder, Nancy Brinker, cites significant improvements in both the five-year survival rates for women diagnosed with breast cancer and increases in the number of women over 40 receiving mammograms since 1982 (Komen 2012c). Ms. Brinker further notes the reduced stigma of the disease and the increase in support services available to women with breast cancer. Statistics from the National Cancer Institute's Surveillance Epidemiology and End Results Program support Ms. Bricker's claim of progress, showing improvements of relative survival rates for women with breast cancer over the 1974–2004 period and, more importantly, show that the age-adjusted rate of mortality from breast cancer has fallen from 31.6 per 100,000 in 1992 to 22.2 in 2009 (NCI 2012).

The focus of this study is a series of Breast Cancer 3-Day fundraising walks. We focus on the 2003 to 2009 calendar-year walks, as later walks employ a different contractual structure. These were major events—75 Breast Cancer 3-Day walks occurred over seven years, involved thousands of participants, and raised $527 million for breast cancer (Table 1). Komen's reliance on this method of fundraising is not unique. Walk/run fundraisers have grown from a single 1969 Hunger Walk that raised $25,000 to approximately 40,000 events nationwide (Kadet 2011). In 2010, the seven largest walk/run fundraisers engaged over 6.5 million participants and raised over one billion dollars in gross revenues (Kadet 2011).3 These fundraising walks are sponsored by some of the most prominent charitable organizations in the United States (The Walking Site 2012).4

TABLE 1

Key Financial Results

Key Financial Results
Key Financial Results

Analogous to off balance sheet transactions conducted by some U.S. for-profit companies, Komen did not report the gross revenues and associated costs of the Breast Cancer 3-Days events on its income statements for its fiscal years ended March 31, 2004 to 2010. NPT, a large and independent nonprofit organization founded in 1996, managed the walks under contract with Komen in return for 15 percent of the net proceeds.5 NPT reported all of the gross revenues and expenses related to the walks on its own financial statements and remitted 85 percent of the net proceeds to Komen. NPT used funds from its 15 percent share to start its own breast cancer program.6 Komen reported only its share of the net proceeds from the events as contributions, and only after Komen received the cash from NPT. The detailed gross revenue and expenses from the events were not disclosed in the footnotes of Komen's financial statements or in any other Komen report. As a result, external evaluators and readers of Komen's financial statements could not readily see the magnitudes of the 3-Days' revenues and expenses. As discussed below, it appears that net reporting resulted in more favorable cost ratios to Komen than would have resulted from gross reporting of event revenues and expenses.

Komen's accounting treatment of the Breast Cancer 3-Day walk series over the seven-year period was done with the blessing of KPMG (for fiscal 2004), Ernst & Young (for all fiscal years after 2004), and an astute board that includes business executives, lawyers, and finance executives (Komen 2006b). Both KPMG and NPT, in correspondence to us, assert their accounting was proper.7 While we argue in the “Accounting for Special Events Administered by Third Parties” section that the accounting was improper, we presume that Komen management believed that its accounting was allowable under GAAP and, therefore, we do not argue that there was accounting fraud. The application of GAAP is a matter of professional judgment, and the remarks in this article regarding GAAP compliance are solely the authors' judgments. We focus on the consequences of this treatment, and on the difficulty of determining from outside the motivation for the arrangement.

As a secondary matter, we also consider how the event costs should have been treated given that the events involve allocating joint costs of fundraising and programs. We argue that the entire cost of the Komen events, as they were structured, should have been reported as fundraising costs. If the events were structured in a more traditional manner, part of the costs might have been classified as public education program expenses.

The next section details the history and management structure of the Breast Cancer 3-Days. A discussion of Komen's possible motivations for the chosen structure follows in the third section. The fourth section estimates the impact of Komen's reporting decision on its financial information. The fifth section discusses what we believe is the proper accounting for fundraising events under GAAP and the IRS Form 990 rules. Concluding remarks are in the sixth section.

HISTORY AND MANAGEMENT STRUCTURE OF THE BREAST CANCER 3-DAYS

Exhibit 1 shows a timeline of events constructed from the Komen and NPT audited financial statements for the fiscal years 2004 to 2010. Table 1 summarizes the event history of the Breast Cancer 3-Day walks and provides key financial information.

EXHIBIT 1

Timeline of Events

Boxes represent fiscal years for Komen and NPT, respectively. Komen's fiscal year-end is March 31 and NPT's fiscal year-end is June 30.

EXHIBIT 1

Timeline of Events

Boxes represent fiscal years for Komen and NPT, respectively. Komen's fiscal year-end is March 31 and NPT's fiscal year-end is June 30.

The walks were originally developed by a for-profit company, Pallotta TeamWorks (PTW), with the Avon Foundation (Avon) as the sponsor and beneficiary. From 1998 to 2002, 34 Avon Breast Cancer 3-Day walks were held, grossing about $334 million in revenue (Table 1). The walks were major productions with an aggregate of over one hundred thousand participants raising more than $300 million from 1998 to 2002 (Table 1). In 2002, Avon decided to stop using PTW and started its own series of two-day walks.8 PTW offered to manage the Breast Cancer 3-Day walks for Komen, and Komen and PTW negotiated a tentative deal for a 2003 series of 15 events.

The potential costs of the walks were a concern for Komen from its first contact with them in 2002. While Komen had benefitted from its Race for the Cure 5K races since 1983, and had a reputation for efficient management, the 3-Day walks presented new challenges. The walks were much more costly to administer and required more extensive planning and upfront costs than Komen's prior events (Tinkelman 2009). In contrast with a race that can take place in laps around a public park during a morning or afternoon, the 3-Day events were intercity and involved extensive advertising in advance to recruit participants and required feeding, housing, and providing other services to thousands of participants over three full days.

The costs of the Avon Breast Cancer 3-Day walks had been heavily scrutinized by the time Komen became interested in the event and negative publicity focused on the high costs of some of the events (Pallotta 2008; Tinkelman 2009).The cost per dollar raised for the Avon events varied widely. Margins (revenues less operating expense) for the events from 1998 through 2001 varied between 45 percent and 71 percent, with a 62 percent median (PTW 2012). In 2002, a new event in Florida had only a 39 percent margin, and an Atlanta event had a 26 percent margin, while the Chicago event had a 70 percent margin (PTW 2012). These returns were for similar events, with the same organizers, and for the same cause.

The likely risk to Komen of running such walks would have been reputational; poor financial ratios resulted for at least some prior events sponsored by Avon. While the average cost of Avon walks did meet the pre-2003 Better Business Bureau standard that costs be less than 50 percent of funds raised (New York Philanthropic Advisory Service [NYPAS] 2012), the average cost of the Avon walks, as a percentage of revenue raised, was worse than the post-2002 Better Business Bureau (BBB) standard of 35 percent in all but one year, and averaged over 40 percent during the 1998 to 2002 period (Table 1).9 As noted above, some individual walks had considerably worse performance than the averages.

It appears that Komen was aware of this risk. Komen initially negotiated features in its draft contract with PTW with the effect of trying to ensure that cost ratios would meet BBB standards. After Avon announced in the summer of 2002 that it intended to organize its own 2003 series of breast cancer walks in many of the same cities and at the same dates as the 15 proposed Komen walks, Komen did not finalize its contract with PTW and, instead, moved more slowly to sponsor walks. Ultimately, and after PTW became insolvent, Komen purchased the rights to the Breast Cancer 3-Day walks from PTW at a very low price and moved forward with a series of three walks in 2003 and more walks in later years. As discussed below, Komen used an alternative event management structure that is the basis of this study.

Most organizations that sponsor run/walk events either administer events themselves or hire outside for-profit fundraisers. In either case, both revenues and costs gross are separately disclosed. In this case however, Komen contracted with the nonprofit NPT to manage three Breast Cancer 3-Day walks during calendar 2003 (Komen 2004). Komen loaned NPT the funding to cover the start-up costs of the walks. NPT in turn formed an affiliate, NPT Breast Cancer 3Day, LLC, which subcontracted with for-profit fundraising companies (Causeforce Inc. in 2003 and Event 360 in later years) to manage the walks.10 In return for managing the walks, NPT received 15 percent of the walks' net proceeds. The remaining 85 percent of the net proceeds were remitted to Komen. Participants in the Breast Cancer 3-Day events were informed of the 85/15 percent division of proceeds.

In Komen's audited financial statements, the Breast Cancer 3-Day was described as “a project of the National Philanthropic Trust (NPT), an independent nonprofit organization” (Komen 2010). Komen did not record the event receipts and expenses directly on its books and its footnotes do not disclose this information. Rather, Komen recorded its share of the net proceeds as a contribution when the cash was received.

If Komen had directly hired a professional fundraiser to operate the walks, both GAAP and the IRS clearly would have required Komen to report the gross activity on its financial statements and Form 990 (Keating, Parsons, and Roberts 2008; AICPA 2011, Technical Practice Aids TIS Section 6140.21; IRS 2005). Because the Breast Cancer 3-Day events were considered a project of an “independent nonprofit organization,” the rules requiring reporting the gross activity of events run through professional fundraisers were not directly applicable. We argue below that other aspects of GAAP should have required reporting gross activity.

To more fully evaluate this structure, we reviewed the financial statements and Form 990s of the ten largest sponsors of walk events in 2010, as well as Avon. None of these ten disclosed having an outside charity manage events similar to Komen's relationship with NPT. In addition, all ten organizations separately reported expenses related to special events. We also noted that Komen did not use this arrangement for its Race for the Cure 5K runs, and stopped using the arrangement for the 3-Days in 2010.

MOTIVES FOR THE EVENT STRUCTURE

We identify two potential motives for Komen hiring NPT to manage the walks in exchange for 15 percent of the net proceeds. The first possibility is that Komen engaged NPT for such business reasons as a need for outside expertise to operate these new large-scale events or to limit Komen's risks. The second is the financial reporting motive of achieving better financial ratios by reporting event operations net.

The Case for Business Factors

Did valid business reasons exist for Komen to contract with NPT until Komen gained sufficient experience to manage the events in house? One could make the argument that engaging NPT, who then in turn engaged subcontractors, is no different than the common practice of hiring an overall project manager, who in turn brings in subcontractors. While extra fees are incurred, it can be justified by the management skill of the general contractor. In this case, Komen had not managed events like the 3-Day events before and may have been reluctant to build the necessary in-house staff needed for such complex events, especially since the success of the events was unclear initially. Indeed, NPT hired some of PTW's ex-employees who had considerable experience with the Avon events.

In some cases, engaging a second organization can also protect against the risk of financial losses. We are not privy to the contracts between NPT and Komen, but if they provided that NPT would bear the responsibility if the event expenses exceeded revenues, Komen was potentially protected from losses.

Komen became involved with the walks cautiously. It began negotiating with PTW in 2002 but did not finalize the deal. When Komen decided to move forward, it began with only three events, not the 15 initially considered. The number of events grew until 2009. It may be that the arrangement with NPT was used to obtain expertise and limit risks until Komen felt confident enough to take over full management of the events, which it did in 2010.

The Case for a Favorable Financial Reporting Motive

Alternatively, Komen may have contracted with NPT to avoid showing unfavorable financial statement ratios that would compromise its ratings by monitoring groups such as the Better Business Bureau and Charity Navigator. Many nonprofit organizations rely heavily on donated funds and services. Organizations can benefit from high ratings that convince donors and volunteers that the organizations are worthy of support.

In the absence of alternative measures of effectiveness, donors often consider evaluations by third-party information intermediaries. Regulators in many states report ratio data for organizations registered in their states (Feng, Ling, Neely, and Roberts 2013). Academic studies, starting with Weisbrod and Dominguez (1986), document associations between what are considered to be acceptable program and fundraising ratios and subsequent donations. Prior literature suggests donors give less to organizations that report a high “price” of donations (the inverse of the program expense to total expense ratio) and/or a high ratio of overhead expenses to total expenses (Tinkelman 1999; Parsons 2003; Jacobs and Marudas 2009). This focus creates pressure on organizations to report cost ratios that convey an appearance of efficiency.

There is evidence that Komen management believed that it was important to show favorable cost ratios. Many potential donors look into how Komen is rated by monitoring agencies. Komen ranks in the top ten for most visited Charity Navigator rating pages with 461,875 page views from August 2006 to March 2012 (Charity Navigator 2012). Komen affirmatively states that they have received a four-star rating from Charity Navigator for five years running (Komen 2012b), and that it meets BBB standards.

According to testimony by Komen's Chief Operating Officer (Judicial Arbitration and Mediation Services, Inc. [JAMS] 2005) in the arbitration proceeding between PTW and Avon, maintaining favorable cost ratios was important to Komen's management in 2002. In its 2002 negotiations with Pallotta TeamWorks to manage the Breast Cancer 3-Day walk series, Komen's management sought to ensure at least a 65 percent return to the charity for the Breast Cancer 3-Day event. Explicitly cited in the contract was the recently adopted Better Business Bureau (BBB) guideline that fundraising could not cost more than 35 percent of the total revenue (JAMS 2005). In short, Komen appeared to express clear concern for its reported financial ratios.

Mathematically, low margin events' revenues and expenses reported “gross” increase an organization's reported fundraising ratios and decrease its program ratios. On the other hand, fundraising ratios are always lower, and program spending ratios are always higher, when an organization reports net contributions from any event that collects more than its costs. An organization that cares about ratios benefits from reporting funds from events on a net basis rather than on a gross basis.

Additional circumstantial support for a financial reporting motivation is found by considering the business justifications discussed earlier. These justifications involved Komen lowering its risk of financial loss or obtaining extra management expertise by bringing in NPT. With regard to lowering risk of financial loss, none of the Avon events had actually lost money; with regard to obtaining extra management expertise, we find no evidence that NPT possessed significant prior experience managing fundraising events. Prior to the 2003 Komen arrangement, NPT operated primarily as a manager of donor-advised funds and had less event management experience than did Komen.11 In fact, NPT's Form 990 for the fiscal year ended June 30, 2002 shows zero fundraising expenses. Thus, taking on management of the Breast Cancer 3-Days appears to have represented a new undertaking.12 In contrast, Komen had extensive prior experience organizing fundraising events and, concurrently with the Breast Cancer 3-Day walks, managed the Komen Race for the Cure Series. The Race for the Cure Series includes more events and raises more money than the Breast Cancer 3-Day walks.

There is also no evidence that NPT charged unusually low fees for its services. The Breast Cancer 3-Days had higher fees relative to donations under NPT's management than under PTW's. NPT's 15 percent of net proceeds totaled about $39 million over the course of the relationship, or about 7.4 percent of the gross receipts of $529 million. These costs are in addition to the costs of NPT's for-profit subcontractors. PTW's fees had averaged about 3 percent of gross receipts. NPT's remuneration was also higher than the management fee paid by Avon for its post-2002 Avon Walk for Breast Cancer (AWBC) walk series, which had many similarities to the Breast Cancer 3-Days.13

In the “Magnitude and Implications” section we quantify the benefit to Komen of reporting net special event contributions. If Komen managed the events itself, it would have had to report them gross in its financial statements. Also, applicable IRS rules require gross reporting on Form 990 when contributions are received through a federated fundraising organization, professional fundraiser, commercial co-venture, or affiliated organization (IRS 2005). This is particularly significant because many stakeholders, including Charity Navigator, rely on the Form 990 for nonprofit financial information. GAAP has a similar rule.14 By contractually structuring its arrangement with an unaffiliated nonprofit organization that was not a professional fundraiser, Komen's arrangement for the 3-Days arguably did not fall under this rule and, thus, gross reporting would not have been required for IRS reporting.

MAGNITUDE AND IMPLICATIONS

In this section, we consider the impact of recording the gross revenues and expenses of the walks on the financial statements of Komen. We first obtained NPT's audited comparative financial statements for fiscal years ended June 30, 2004 through 2010 from the Illinois Attorney General's website. NPT included the gross revenue and expense of the walks in its financial statements. Since all Breast Cancer 3-Day events take place after June 30 in each calendar year, the fiscal years 2004 to 2010 include calendar years 2003 thru 2009 events, respectively. Data in Table 1 and Table 2, Panels A and B are from the financial statements. Similarly, we obtained Komen's audited financial statements directly from its website for fiscal years 2004 through 2011. Komen's fiscal year-end is March 31, so each fiscal year's results include only walks from the prior calendar year.

TABLE 2

Potential Impact on Komen Financial Results of Recording the NPT 3-Day Events

Potential Impact on Komen Financial Results of Recording the NPT 3-Day Events
Potential Impact on Komen Financial Results of Recording the NPT 3-Day Events

NPT's event fundraising expenses are generally not shown separately. However, we assume that all of the event fundraising costs are disclosed as part of the joint cost disclosures, since prior to 2003 NPT reported no fundraising costs.15 We believe that this assumption is conservative, in NPT's favor, and consistent with the footnote disclosures for fiscal 2005 and 2004, which show that over 95 percent of the total fundraising expense for those years was related to the 3-Day events.

Gross 3-Day receipts for the three calendar 2003 events are only $33 million (Table 1). This was the first year—and planning for the events started late—that resulted in relatively few participants. NPT (NPT 2005) reports total fundraising expenses associated with the 3-Day events of $17 million, or about 50 percent of event receipts. The financial statements note that close to $7 million in joint costs were allocated to programs. If these are considered costs of administering the events, then the total event costs are around $23 million or 70 percent of reported event revenues. The 70 percent cost ratio (shown in Table 1), when joint costs are included, is considerably higher than the final year (2002) under PTW. This is a predictable result of spreading the sizeable up-front costs over fewer events and fewer walkers per event.

Performance in calendar 2004 was better. Ten walks were held, with gross calendar 2004 event receipts of $75 million (Table 1). The cost of funds to raise the $75 million represented 56 percent of the total, which is again higher than the 35 percent BBB target. In fact, in all but the final year that the walk series was managed by NPT, the percentage of cost of funds to the event receipts missed the BBB target. While walks organized by NPT cost more as a percentage of funds raised compared with PTW, NPT received triple the percentage of net proceeds as compensation (Table 1, Column 5: 15 percent compared to 5 percent on average for PTW).

If the same economic events had occurred, even if Komen did not incur the 15 percent fee charged by NPT, but Komen had recorded the gross revenue and expenses related to the walks on its books, there would have been a noticeable increase in Komen's fundraising cost ratios and a decrease in its program cost ratios. To estimate the extent to which Komen reported different cost ratios by not recording the Breast Cancer 3-Day walks, we added the estimated total cost of the walks from Table 1 to the reported financial information from Komen's audited financial statements (Table 2, Panel A). The entire cost of the walk (but not including NPT's share of proceeds) is treated as fundraising expenses.

We believe this treatment is appropriate because nonprofits are required to report all of the costs (with the exception of direct benefits) of special events as fundraising expenses unless three criterions are met: purpose, content, and audience. FASB ASC 958-720-45 paragraph 40 (FASB 2012) states that whenever “a majority of compensation or fees for any party's performance of any component of the joint activity varies based on contributions raised” the purpose criterion is not met and, therefore, all of the event costs (excluding direct benefits) should be recorded as fundraising expenses.16 Here, NPT's contractual remuneration for its services was based on the contributions raised.

When the total cost of the events is treated as fundraising expenses, the program expense ratio exceeds the BBB standards in 2003 and 2004, but results in a ratio below 70 percent in all years except for 2007 and 2009 (Table 2, Panel A). This is a noticeable difference from Komen's unadjusted program expense ratio, which averages 79 percent over the 2003 to 2009 time period (Table 2, Panel A). In addition, fundraising expenses more than doubled, on average, when the costs of the events were added to existing fundraising expenses (Table 2, Panel A). While Komen reported, on average, only spending 11 percent of total expenses on fundraising from 2003 to 2009, when the cost of the events are added to fundraising expenses, the average ratio of fundraising expenses to total expenses increases to 25 percent (Table 2, Panel A).

We also considered a second way of reporting results, assuming that Komen was able to allocate some of the costs to programs (see Table 2, Panel B). To estimate Komen's allocation, we assume the same allocation percentages of joint costs used by NPT. These ranged from 28 percent to 35 percent over this period.17 The results in Table 2 Panel B, indicate that Komen would have narrowly met the BBB standards for spending at least 65 percent on programs in both 2003 and 2004, even though the adjusted ratios are significantly poorer than Komen's reported cost ratios.

We also examine the impact of recording gross revenues and expenses from the Breast Cancer 3-Day on Komen's Charity Navigator Rating. Historically, Charity Navigator rates organizations from zero to four stars based on seven financial metrics (Table 3, Panel A).18 Scores over 60 are assigned a four-star rating, and lower scores earn from zero to three stars. Komen advertises that they received a four-star rating in the last five years (Komen 2012b). Prior to NPT being hired to manage the Breast Cancer 3-Day walks, Komen earned a three-star rating (Table 3, Panel B). The final five years NPT acted as event manager, Komen received a four-star rating (Table 3, Panel B).

TABLE 3

Charity Navigator's Rating Methodology and Komen's Star Ratings

Charity Navigator's Rating Methodology and Komen's Star Ratings
Charity Navigator's Rating Methodology and Komen's Star Ratings

To determine the impact on the Charity Navigator rating, we consider two of the seven metrics utilized by Charity Navigator—the program expense ratio and the fundraising expense ratio. From Table 2 Panel A, we utilize the adjusted program expense ratio and adjusted fundraising expense ratio, assuming all joint costs are allocated to fundraising. Based on the Charity Navigator rating methodology in Table 3 Panel A, Komen would have received zero points from its fundraising expense ratio from 2005 to 2008, 2.5 points from 2009 to 2010, and 7.5 points in 2011. Komen's points from the program expense ratio would have been from 2005 to 2011: 6.3, 6.1, 6.7, 6.9, 7.4, 6.9, and 7.5, respectively. Thus, Komen would have received a three-star rating, not a four-star rating, from 2007 to 2010 and received a two-star rating in 2006 (Table 3, Panel B).19 If, as in Table 2 Panel B, we assume that some of the joint costs could be allocated to programs, Komen would have still experienced a drop in rating from a four to a three star in 2007, 2008, and 2010. Clearly, whatever Komen's primary motivation for the event structure may have been, the omission of the gross revenues and expenses from the Breast Cancer 3-Day was material to Komen's financial statements and resulted in improved ratios.

ACCOUNTING FOR SPECIAL EVENTS ADMINISTERED BY THIRD PARTIES

A separate but important issue beyond Komen's motivation for the event structure is whether Komen complied with GAAP and IRS Form 990 rules when recording only the net proceeds from the Breast Cancer 3-Day walks on a cash basis.

According to FASB ASC 958-605-25-28 (FASB 2012) (originally issued in 1999 as part of Financial Accounting Standard No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others) when donor contributions (i.e., money raised by the walks) are collected by a recipient organization (i.e., NPT), but the donations are intended for a third-party beneficiary organization (i.e., Komen), and the recipient organization does not have the power to redirect the contributions, the beneficiary organization should recognize its rights to the assets as a receivable. Implementation guidance suggests the third party beneficiary organization should recognize the gross amount of the contribution, along with expenses associated with raising the gift, and a receivable for the net amount (FASB ASC 905-605-55-86).

In this case, due to Komen's ownership of the walks and the fact that donors were told that Komen was entitled to 85 percent of the net proceeds, NPT clearly lacked the “variance power” to redirect the contributions. Thus, we believe the rules of FAS No. 136 apply. A literal application of FAS No. 136 would require Komen to record the gross walk revenues and the related expenses on an accrual basis, rather than reporting only the net proceeds on a cost basis when the funds were received from NPT.

In further support of our opinion that GAAP called for reporting the gross revenue and expenses from the walks, not net amounts, we point to FASB ASC 958-225-45, paragraphs 15–17 (FASB 2012), which were originally issued in 1993 as part of FAS No. 116, Accounting for Contributions Received and Contributions Made (FASB 1993). The FASB states:

A statement of activities may report gains and losses as net amounts if they result from peripheral or incidental transactions or from other events and circumstances that may be largely beyond the control of the NFP and its management. Information about their net amounts generally is adequate to understand the NFP's activities. The frequency of the events and the significance of the gross revenues and expenses distinguish major or central events from peripheral or incidental events. Events are ongoing major and central activities if they are normally part of an NFP's strategy and it normally carries on such activities or if the event's gross revenues or expenses are significant in relation to the NFP's annual budget. Events are peripheral or incidental if they are not an integral part of an NFP's usual activities or if their gross revenues or expenses are not significant in relation to the NFP's annual budget. Accordingly, similar events may be reported differently by different NFPs based on the NFP's overall activities. An NFP may report net amounts for its special events if they result from peripheral or incidental transactions. However, so-called special events often are ongoing and major activities; if so, an NFP shall report the gross revenues and expenses of those activities. Costs netted against receipts from peripheral or incidental special events shall be limited to direct costs.

Applying this FASB guidance to this case study, we believe that net accounting by Komen is appropriate only when one of the following provisions is met: (1) Breast Cancer 3-Day walks are peripheral or incidental transactions, or (2) Breast Cancer 3-Day walks are largely beyond the control of Komen and its management.

To address the first provision, 75 walks were held from 2003 to 2009 garnering $527 million in gross receipts (Table 1). The costs of the walks represented roughly 16 percent of the total expenses reported by Komen (Table 2, Panel A). Accordingly, we believe that the walks were not peripheral or incidental transactions.

When judging whether the Breast Cancer 3-Day walks were largely beyond the control of the organization, we believe it is material that Komen owned the rights to the walk and had contractual rights to receive 85 percent of the net proceeds. NPT was referred to as the “event manager” in the Komen audited financial statements and received loans from Komen to fund the startup costs for each year's event series. Further evidence of Komen's control is that Komen decided not renew the contract with NPT and manage the walks in house beginning in 2010. Finally, Avon, the sponsor of the walks before 2002, reported the gross proceeds and expenses for the events, even though they did not own the walk series. This evidence suggests that Komen should have reported the gross revenue and expenses of the walks on its books.20

CONCLUSION

While Komen's charitable cause is noble and well worth the full support of the public, its reporting of fundraising walks from 2003 through 2009 did not disclose the gross revenues and costs of these events. Whatever the motivation for this accounting treatment, omission of these figures had a material favorable impact on Komen's financial ratios, resulting in better evaluations and rankings from the Better Business Bureau and Charity Navigator. The case thus highlights the potential impact of net reporting of special events and, thus, justifies both the financial reporting standards for nonprofit organizations set forth in FASB Standard Nos. 116 and 136 and the IRS Form 990 rules calling for recording gross donations when funds are received through federated fundraising organizations or commercial co-ventures.

While we cannot definitively say contributors and other stakeholders would have altered their decisions had they known full details about the walks' performance, prior literature suggests at least some donors may have reduced their contributions or chosen not to give to Komen. In addition, Komen's method of reporting gave it an advantage over peer charities who raised substantial funds via fundraising walks and reported the gross revenue and associated expenses (with the corresponding adverse impact on the cost ratios).

This case also indicates how difficult it can be for researchers to determine whether unusual contractual arrangements and/or transactions are motivated for financial reporting, as distinct from business considerations.

REFERENCES

REFERENCES
American Institute of Certified Public Accountants (AICPA)
.
2011
.
Should a NPE Report Amounts Charged to the NPE by a Professional Fund-Raiser Gross, as Fund-Raising Expenses, or Net, as a Reduction of Contributions? Technical Practice Aids TIS Section 6140.21
.
New York, NY
:
AICPA
.
Better Business Bureau Wise Giving Alliance
.
2012
.
Implementation Guide to the BBB Wise Giving Alliance Standards for Charity Accountability
.
Charity Navigator
.
2012
.
Feng
N. C
.,
Q
.
Ling
D
.
Neely
,
and
A. A
.
Roberts
.
2013
.
Using archival data sources to conduct nonprofit accounting research
.
Journal of Public Budgeting, Accounting and Financial Management
(
forthcoming
).
Financial Accounting Standards Board (FASB)
.
1993
.
Accounting for Contributions Received and Contributions Made
.
Statement of Accounting Standards No. 116
.
Norwalk, CT
:
FASB
.
Financial Accounting Standards Board (FASB)
.
1999
.
Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others
.
Statement of Accounting Standards No. 136
.
Norwalk, CT
:
FASB
.
Financial Accounting Standards Board (FASB)
.
2012
.
Not-For-Profit Entities
.
Accounting Standards Codification Topic 958
.
Norwalk, CT
:
FASB
.
Internal Revenue Service (IRS)
.
2005
.
Instructions for Form 990 and 990-EZ
.
Jacobs
,
F. A
.,
and
N. P
.
Marudas
.
2009
.
The combined effect of donation price and administrative inefficiency on donations to U.S. nonprofit organizations
.
Financial Accountability and Management
25
(
1
):
33
53
.
Judicial Arbitration and Mediation Services, Inc. (JAMS)
.
2005
.
Testimony and Briefings Related to JAMS Reference No: 1420011424, Pallotta TeamWorks, Claimant/Counterclaim Respondent vs. Avon Products Foundation, Inc
.
New York, NY
:
Judicial Arbitration and Mediation Services, Inc
.
Kadet
,
A
.
2011
.
Are Charity Walks and Races Worth the Effort?
Available at: http://www.smartmoney.com/spend/travel/are-charity-walks-and-races-worth-the-effort-1306536923690/#article_tab_comments
Keating
,
E. K
.,
L. M
.
Parsons
,
and
A. A
.
Roberts
.
2008
.
Misreporting fundraising: How do nonprofit organizations account for telemarketing campaigns?
The Accounting Review
83
(
March
):
417
446
.10.2308/accr.2008.83.2.417
National Cancer Institute (NCI)
.
2012
.
Survey Epidemiology and End Result: Fast Stats
.
National Philanthropic Trust (NPT)
.
2004
.
Financial Statements for Fiscal 2004 and 2003
.
New York, NY
:
NPT
.
National Philanthropic Trust (NPT)
.
2005
a
.
Financial Statements for Fiscal 2005 and 2004
.
New York, NY
:
NPT
.
National Philanthropic Trust (NPT)
.
2005
b
.
National Philanthropic Trust Ranked in Top Quartile of Philanthropy 400
.
National Philanthropic Trust (NPT)
.
2006
.
Financial Statements for Fiscal 2006 and 2005
.
New York, NY
:
NPT
.
National Philanthropic Trust (NPT)
.
2007
.
Financial Statements for Fiscal 2007 and 2006
.
New York, NY
:
NPT
.
National Philanthropic Trust (NPT)
.
2008
.
Financial Statements for Fiscal 2008 and 2007
.
New York, NY
:
NPT
.
National Philanthropic Trust (NPT)
.
2009
.
Financial Statements for Fiscal 2009 and 2008
.
New York, NY
:
NPT
.
National Philanthropic Trust (NPT)
.
2010
.
Financial Statements for Fiscal 2010 and 2009
.
New York, NY
:
NPT
.
National Philanthropic Trust (NPT)
.
2012
.
Who We Are
.
New York Philanthropic Advisory Service (NYPAS)
.
2012
.
Standards before March, 2003
.
Pallotta TeamWorks (PTW)
.
2012
.
Record of Impact 1997 to 2002
.
Pallotta
,
D
.
2008
.
Uncharitable: How Restraints on Nonprofits Undermine Their Potential
.
Lebanon, NH
:
Tufts University Press, University Press of New England
.
Parsons
,
L
.
2003
.
Is accounting information from nonprofit organizations useful to donors? Review of charitable giving and value-relevance
.
Journal of Accounting Literature
22
:
104
129
.
Susan G. Komen for the Cure (Komen)
.
2004
.
Final Audited Financial Statements 2003–2004
.
Susan G. Komen for the Cure (Komen)
.
2005
.
Final Audited Financial Statements 2004–2005
.
Susan G. Komen for the Cure (Komen)
.
2006
a
.
Final Audited Financial Statements 2005–2006
.
Susan G. Komen for the Cure (Komen)
.
2006
b
.
Annual Report 2005–2006
.
Susan G. Komen for the Cure (Komen)
.
2007
.
Final Audited Financial Statements 2006–2007
.
Susan G. Komen for the Cure (Komen)
.
2008
.
Final Audited Financial Statements 2007–2008
.
Susan G. Komen for the Cure (Komen)
.
2009
.
Final Audited Financial Statements 2008–2009
.
Susan G. Komen for the Cure (Komen)
.
2010
.
Final Audited Financial Statements 2009–2010
Susan G. Komen for the Cure (Komen)
.
2011
.
Final Audited Financial Statements 2010–2011
.
Susan G. Komen for the Cure (Komen)
.
2012
a
.
About Us
.
Susan G. Komen for the Cure (Komen)
.
2012
b
.
Accolades
.
Available at: http://ww5.komen.org/AboutUs/Accolades.html (last accessed October 13, 2013).
Susan G. Komen for the Cure (Komen)
.
2012
c
.
Message from Our Founder
.
The Walking Site
.
2012
.
Walking Events
.
Tinkelman
,
D
.
1999
.
Factors affecting the relation between donations to not-for-profit organizations and an efficiency ratio
.
Research in Governmental and Nonprofit Accounting
10
:
135
161
.
Tinkelman
,
D
.
2009
.
Unintended consequences of expense ratio guidelines: The Avon breast cancer walks
.
Journal of Accounting and Public Policy
28
(
6
):
485
494
.10.1016/j.jaccpubpol.2009.08.003
Weisbrod
,
B
.,
and
N
.
Dominguez
.
1986
.
Demand for collective goods in private non-profit markets, Can fundraising expenditures help overcome free-rider behavior?
Journal of Public Economics
30
:
83
95
.10.1016/0047-2727(86)90078-2
Wisconsin Department of Safety and Professional Services
.
2007
.
Department of Regulation and Licensing Website, Charitable Organization Details for National Philanthropic Trust
.
Available at: http://drl.wi.gov/drllookup (last accessed October 13, 2013).
1

Susan G. Komen for the Cure was formerly the Susan G. Komen Breast Cancer Foundation.

2

FASB and other pronouncements require a level of professional judgment in applying relevant standards to specific factual situations.

3

The seven largest walks were sponsored one each by the March of Dimes, the American Cancer Society, the American Heart Association, Leukemia and Lymphoma Society, Juvenile Diabetes Research Foundation, and two by Susan G. Komen for the Cure.

4

Notable charities conducting national fundraising walks include the National Kidney Foundation, the March of Dimes, the American Cancer Society, the Arthritis Foundation, the American Lung Association, Leukemia and Lymphoma Society, the Juvenile Diabetes Research Foundation, and the Cystic Fibrosis Foundation, among others (The Walking Site 2012). As discussed below, the Avon Foundation for Women also holds large walks very similar in nature to Komen's.

5

NPT's primary activity is to manage charitable assets and make grants. NPT's 2012 annual report indicated it managed over $1.7 billion in charitable assets in its latest year and had made nearly 73,000 grants (NPT 2012).

6

NPT, in private communication, has indicated it made significant grants for breast cancer.

7

Komen has stated in private correspondence that “Komen has always followed generally accepted accounting principles in its financial statements which, as you have pointed out, are audited by nationally recognized, independent auditing firms. We stand behind the reporting for this program.” In private correspondence regarding a prior draft, NPT indicated it disagreed with our findings and conclusions. NPT's financial statements for the years involved in this study received unqualified audit opinions from nationally recognized auditing firms.

8

PTW brought an action in arbitration against Avon, charging Avon's new series of walks was too similar to the Breast Cancer 3-Days, in violation of their contracts. One author was called as an expert witness in litigation between Pallotta TeamWorks and Avon Products Foundation, Inc., on issues not related to the subject of this paper. As a result, the author was granted access to transcripts detailing case facts (JAMS 2005).

9

A silver lining with the high cost of the events is that, potentially, some of the costs could be considered programmatic and allocated to program expenses if they met GAAP requirements (Tinkelman 2009). However, Avon had not been allocating event costs to programs prior to 2002.

10

The consolidated financial statements of NPT include those of NPT Breast Cancer 3Day, LLC. In our analysis, we treat NPT and NPT Breast Cancer 3Day, LLC together.

11

According to regulatory data (Wisconsin Department of Safety and Professional Services 2014), NPT had several years of relatively low levels of contributions, followed by a burst of growth in 2000. Its annual total revenues for its fiscal years ended June 30, 1997 to June 30, 2000 ranged from about $3 million to about $16 million. In fiscal 2001, total revenues leaped to $130 million, and they grew again in fiscal 2002 to $159 million. The fiscal 2002 results earned it a place in the top quartile of The Chronicle of Philanthropy's Philanthropy 400 list (NPT 2005b).

12

NPT's donor advised fund business continued to grow, but apart from its work with Komen, it did not expand its event management activities. NPT's 2010 financial statements show contributions of over $221 million. NPT's website (NPT 2012, accessed in June 2012) indicates, “We have raised over $2.8 billion in charitable contributions and currently manage over $1 billion in charitable assets. We have made nearly 60,000 grants totaling $1.5 billion to charities all over the world. We rank among the 25 largest grant making institutions in the United States.” However, the tab of the website titled “What We Do” is silent regarding event management.

13

According to the Avon Foundation's annual reports, in 2008, nine AWBC events were held grossing $63,389,179. A fundraiser, OP3 Inc., was paid $1,387,113 to manage the events, about 2 percent of gross receipts.

14

AICPA Technical Practice Aids TIS Section 6140.21 (AICPA 2011) states, “In circumstances in which a professional fundraiser charges an NPE [Nonprofit Entity] for soliciting contributions on the NPE's behalf, the NPE should report the amounts charged to the NPE by the professional fundraiser gross, as fundraising expense.”

15

Direct benefit costs (such as lodging, meals, etc.) are not considered fundraising expenses. Rather, GAAP allows organizations to deduct these costs directly from event revenues or report them as separate expenses. In our review of NPT's audited financial statements, it appears these costs are deducted from revenues. Consistent with NPT's treatment of these costs, we do not include direct benefit costs in our estimate of fundraising expenses.

16

It should be noted that NPT treated some of the cost of the events as programs. This is incorrect in our view. See Tinkelman (2009) for a more in depth discussion of the joint cost standards.

17

To provide some context for these figures, a review of ten of the largest sponsors of charity walks' financial statements reveals eight that disclosed a joint cost allocation. The percentage allocated to programs ranged from 31 percent to 76 percent with a median of 57 percent. After taking over the walk management in 2010, Komen's disclosed percentage of joint cost allocated to programs was 66 percent.

18

Charity Navigator also provides an accountability and transparency rating beginning in 2011. However, the financial metric score is still a key input to the overall rating.

19

Note that we believe that our discussion of the rating downgrade is conservative. In considering the seven metrics, two (program expense growth and working capital ratio) would have been unaffected by the gross reporting. Komen received the maximum ten points for administrative expenses and primary revenue growth and, thus, would not have benefited from gross reporting in these categories. The fundraising efficiency ratio would have worsened due to gross reporting, but for conciseness we chose not to discuss its impact.

20

While we believe Komen should have reported the gross activity from the 3-Day events, we do not believe Komen and NPT should have consolidated financial statements. NPT is a large independent nonprofit with its own board and a very different mission and set of programs compared to Komen. Consolidation would not be appropriate in this circumstance.