Wise Giving Wednesday: The GAAP in Charity Financial Figures
As a former independent auditor, it’s hard for me to imagine a world in which there are no standards for charity financial statements. In such a world, organizations could produce financial statements without regard to how other groups report their financial transactions. The public would never know the basis of charity financial statistics in financial summaries or media references. Comparisons between organizations would be a guessing game, at best. Of course, such financial anarchy makes no sense and defeats the objectives of reliability, relevance, comparability and understandability that help make up some of the core objectives of Generally Accepted Accounting Principles (GAAP). Yet in the real world there are many instances where financial presentations do not comport with GAAP. It’s not always clear to readers, however, when this occurs so here are three tips to help guide your use of charity financial information.
1. Recognize the Reliability of Audited Financial Statements: As a standards-based charity evaluator, BBB Wise Giving Alliance is especially sympathetic to the importance of standards and guidelines in providing a useful reference point and helping to encourage good practices. This is one of the reasons that the financial section of BBB Charity Standards prefer to use a charity’s audited financial statements as opposed to the IRS Form 990. Audited financial statements are prepared in accordance with GAAP which are the accounting standards established in the United States by the Financial Accounting Standards Board. In turn, the auditor’s opinion attached to audited financial statements will identify any material aberration from GAAP so that users are aware of this difference when reviewing the financial statement contents.
2. Identify the Source of Financial Information: The IRS Form 990, the annual financial form that charities file with the IRS, is not intended to provide a financial presentation that is consistent with GAAP. As a result, in some instances, there can be significant differences between the IRS Form 990 and a charity’s audited financial statement. When you see a charity financial reference in media, on a website, or in a fundraising letter, look closely to see if the source is clearly identified so that you know whether or not the summary is based on GAAP financial information.
3. Watch Out for Non-GAAP Financial Statistics: Even if a charity’s audited financial statements are the source of financial summaries or ratios referenced on websites or other sources, be mindful that sometimes these use numbers that have been re-calculated. They may omit, reclassify or add figures that alter the summary from a GAAP presentation. Unfortunately, these financial stats are not always clearly labeled to inform users of these changes. For example, referenced charity financial ratios may omit in-kind gifts or reject certain GAAP practices (e.g. see Wise Giving Guide story on joint-cost allocation). Please note that the financial section of reports produced by BBB WGA will specify if BBB WGA has questioned the charity’s audited financial statements if BBB WGA believes that GAAP has not been followed.
On a separate note, as part of our Building Trust Video Series we are pleased to provide a video that features Mark Bergel, Ph.D., Founder and Executive Director of A Wider Circle (a BBB Accredited Charity). A Wider Circle is an organization that works to end poverty for individuals and families by collecting and distributing donated goods, providing professional attire, job preparedness courses, and a well-baby program.
We are always working with charities to publish or update reports for donors. Visit Give.org or local BBBs to check out any charity before giving. Our recently evaluated charities include:
Finally, remember to let us know by going to https://www.give.org/ask-us-about-a-charity1/ if you are interested in seeing a report on a charity not on the list and we will do our best to produce one.
H. Art Taylor, President & CEO
BBB Wise Giving Alliance