Sarbanes-Oxley Archives

The Chronicle of Philanthropy just reported in its June 4^th issue that the value of endowments held by all 229 organizations in its survey declined by a combined $29.1 billion from 2007 to 2008. This will come as no surprise to development directors. Many organizations don’t want to talk much about the big drops they’ve seen in their endowments, other than to say they are “similar to what the rest of the market has seen.”

My view is that putting our heads in the sand about our financials is a failed approach, and one that will hinder future fundraising.

Why? Because donors understand that market failures are not the failure of the organization. But if they learn that the organization is not flexible to respond to challenges, if they feel it doesn’t communicate the bottom line, and if they don’t see transparency in fiscal governance, then donors may rethink where they are putting their next dollar.

So how do you communicate your finances to donors?

Really all stakeholders should have an understanding of your finances. You should make at least annual presentations—albeit less detailed than what you show your board—of your inflows and outflows plus your major financial challenges. This is not just a rehash of the annual report, which is more of a “look-back” document, but rather a clear indication of your strategies for the future. Incorporated into this presentation should be an explanation of how past financial decisions have affected future mission-driven outcomes. You should also include the ways in which you change the lives of the people you serve. In other words, it’s not just a PowerPoint with numbers.

Some institutions find this a shocking idea. But your Form 990 is already out there for the world to see. The question is: are you backing it up with good fiscal management policies? Are you communicating the coming challenges as you see them? Are you outlining the staffing, programmatic and expense item changes you are making in response to an increase in need or a decrease in funds, or both? How are you still meeting your mission goals?

When donors, staff, trustees and other stakeholders are included in the budget conversation, they are much less likely to pick on a particular item they hear about through the grapevine.

In his new book What Would Google Do?, Jeff Jarvis talks about how the internet has become not just a collection of information, but a conversation. In much the same way, the post Sarbanes-Oxley, new Form 990, GAAP accounting rules world of nonprofit fiscal management is also becoming more of a conversation. You can either put your head in the sand and pretend it’s not going on, or you can engage your stakeholders and understand their perspectives as together you create your future financial plan.

As the school year draws to a close, it’s common for many organizations that run on this calendar to assess how they’ve done. Specifically, board and staff may do self-evaluations, and boards evaluate the executive, the one staff member for whom they are responsible. But these assessments are just part of the picture of how an organization measures its effectiveness or shortfalls.

How are You Assessing Your Impact?

One of the tools now being used by the nonprofit and public sector worlds, and which has been around in the for-profit sector since its inception, is the concept of ROI, or Return on Investment.

What’s the definition of “Investment”? For nonprofits, foundations and public sector organizations, the investment is a simple equation: Investment = Volunteer Time + Donor Dollars + Staff Time + Goods or Services Provided. All of these combined reflect your investment in the communities you serve.

What about “Return”? Some organizations measure impact by number of people served. Some calculate the value of the volunteer hours they expend in a community if they had been paid in real dollars. Some groups measure impact against a set of goals or outcomes determined at the start of a project or year. But for the independent sector, this is always a tricky equation, because ultimately you are trying to change human lives. And sometimes that impact can’t be easily measured. And so you also need to find stories about the communities you have served, the families helped, the habitats rescued. You need to find a way to merge hard data and benchmarks with a more nuanced picture of your impact and responsiveness to need.

Why Measuring Impact Matters

It’s a daunting task, yet public and nonprofit sector organizations must try. One reason is that the accounting scandals of the recent past, the Congress’s response with the Sarbanes-Oxley Act, the country’s current economic crisis and the IRS’s new Form 990 have brought with them an enhanced focus on transparency and accountability. Donors, volunteers and staff are all looking at these measures, too, to make important decisions about their own investments of time and money. Now all nonprofits and federal sector agencies must find a way to demonstrate more tangibly how their work affects their outcomes.

Back in 2005, The Panel on the Nonprofit Sector (established by Independent Sector) made recommendations that as a best practice, charitable organizations should design procedures for measuring and evaluating their program accomplishments based on specific goals and objectives. Today the need for measuring outcomes becomes even more urgent.

Looking Towards the Future

Just last month, President Obama signed the landmark Edward M. Kennedy Serve America Act, which will enable millions of Americans to serve one to two years in a wide range of nonprofits. With this kind of influx of human capital “investment,” nonprofits will need to think boldly about how to measure the impact they have not only on the communities they serve, but also on the very individuals who are being added to their volunteer ranks. In other words, they will need a way to track the “multiplier effect” of what these individuals learn inside their organizations but also bring back to other groups and communities when they leave.

How does your organization measure its mission impact or ROI? Please share your benchmarking and evaluation ideas and stories.