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Charity Network Inflates Efficiency and Reduces Accountability

   Aug 01, 2009

In May of 2009, The Arizona Republic reported on its yearlong investigation of activities between the Don Stewart Association (DSA), a Phoenix-based televangelism ministry, and its affiliated secular charities. The Republic reported that "most of the 22 charities with ties to [DSA]…performed controversial transactions with supplies that helped inflate their finances." Most of the groups-which are affiliated through financial transactions, common employees, board members, or personal or family ties-have received cash donations through the Combined Federal Campaign (CFC), the world's largest workplace charity campaign.

Non-cash transactions among DSA and its affiliates led to multiple groups taking credit for the same donations. Each group that received the goods was able to record their incoming value as revenue, and their outgoing value as a program grant to the next group, which then also recorded it as incoming revenue, and so on. According to The Republic, the groups affiliated with DSA transferred the goods at least twice before shipping them overseas where they would be used by the needy. This is problematic since passing around and taking credit for the same goods artificially inflates revenue and program expenditures for each group, thus making overhead expenses seem proportionally lower without a corresponding increase in overall goods received by the needy.

For the tax years covered by The Republic's investigation (2003-05), it also found that "at least 65% of the total goods donated" by the 22 charities only happened on paper and the goods were not physically handled by the groups. The reporter from The Republic told AIP that "about 80% of the revenue claimed by these 22 charities involves some form of paper transfers of goods."

Spokespeople for the charities maintain that "each charity is independent and not controlled by another charity," according to The Republic. The spokespeople also told the paper that the charities "deliver millions of dollars' worth of aid to the world's poor, sick and hungry, and there is no intent to exaggerate their finances."

Some national groups have different accounting standards than those practiced by DSA and its affiliates. The guidelines of the American Institute of Certified Public Accountants recommend that if a pass-through organization is only serving as an "agent for the donor, the donated items are usually not recorded." The Association of Evangelical Relief and Development Organizations (AERDO), of which DSA is not a member, has a reporting standard whereby generally only the organizations that take original possession of in-kind donations or are the end-use agencies may record the value of the goods.

For one of the transactions, Richard Owsley, pastor of the St. Louis Bible Fellowship, where two of the charity affiliates are based, told The Republic that his charities only claimed 75% of the value of the goods, assuming the partner charities would claim the remaining 25%. He was troubled to learn that the partner charities, which shared the final costs of shipping the goods overseas, claimed 100% of the value of the goods. This violates AERDO standards which call for "each partner [to] record the value of the donation based on their percentage of participation, not to exceed one hundred percent of the fair value," with "no more than two non-profit organizations" taking credit.

The accountant for 16 of the 22 charities in the network told The Republic, "it is misleading to look only at cash and exclude the value of goods that were donated to the charities…the charities use their cash to support each other's programs." The Republic's research found that 76% of cash contributions to the groups it investigated are spent within the network of charities on such things as salaries, travel, luxury vehicles, and donations to other groups in the network.

Our nation's charity accountability system is lacking when it comes to shining light on the financial activities of religious charities (which are exempt from disclosure rules) and their related, secular organizations. For example, Feed My People Children's Charities (FEED), which shares personnel and board members with DSA, receives 91% of its total support and revenue from DSA, according to its 2007 audit. Yet, since DSA is a religious organization and therefore not required to publicly disclose its finances, one cannot determine if the funds FEED uses are efficiently raised by DSA.

An accountability lapse also occurs when charities transfer funds to other organizations through intermediary charities. Such transactions make it very difficult, if not impossible, to judge the financial efficiency of these charities since it is not clear if these charities have actually raised their own funds or if they are taking credit for another charity's donations which were actually transferred to them. The good news is that AIP's rating system, which informs donors how well charities raise and spend their cash, helps keep donors from falling for exaggerated efficiency claims from charities that inflate their finances with pass-through or other questionable in-kind donations.

While it is unsettling to learn that multiple DSA affiliates took credit for the same goods, it is perhaps more unsettling to learn that this practice may make the participating groups more attractive to donors participating in the CFC. The CFC is a workplace giving campaign that allows federal employees and military personnel to donate a portion of their paychecks to charities of their choice. Donors can choose charities from a catalogue which lists the self-reported percentage each charity spends on administration and fundraising, or from the CFC website which allows donors to search charities based on this percentage. In 2007 the CFC raised $273 million in donations. 21 of the 22 DSA affiliates participated in the CFC in 2003-05 and these groups received most of their cash donations through this campaign, according to The Republic. When a charity serves as a pass-through organization and takes credit for donated goods, it can puff up its reported program spending and, in turn, shrink its administrative and fundraising percentage. As a result, a charity can appear more efficient and, presumably, attract additional cash donations.

According to the CFC website, it checks each participating charity to make sure it is a registered 501(c)(3) nonprofit organization with the IRS. It also states that each charity is "reviewed annually for evidence that they are providing services…as well as [for] public and financial accountability." However, it warns that "the CFC review does not evaluate whether an organization uses its donations efficiently. Each individual donor is responsible for evaluating this type of information." The CFC claims that "only legitimate, accountable, and responsible charitable organizations are admitted to the CFC," but the Office of Personnel Management, which runs the CFC, told The Republic that "it isn't in the enforcement business. It gathers the donations but isn't responsible for investigating the charities once they are deemed eligible for the campaign. That's up to the IRS." Unfortunately the IRS is only able to investigate about 1% of the 1.5 million nonprofit tax forms filed per year and, according to The Republic, it says it "must rely on the public to help detect a charity's questionable practices."

Charities participating in the CFC can also vie for donations by joining charity federations, such as the Independent Charities of America (ICA) which keeps a portion of the donations it helps raise. Charity federations help with marketing and, in the case of ICA, allow member charities to use a "Best in America" seal which may increase donations. In the past, AIP questioned the rigors of ICA's application process in our article, "F Rated Charities Awarded Best in America Seal," which appeared in the December 2008 Guide.

Another troubling fact uncovered by The Republic is that most of the charities tied to DSA that received cash donations through the CFC re-donated some of the cash to causes other than what the donor may have intended to support. For instance, it found that a diabetes charity donated funds to an AIDS group, and a breast cancer charity passed funds on to a childhood diabetes charity.

Since The Republic's investigation, the ability of the DSA-affiliated charities to inflate their finances may be somewhat reduced. As a result of a separate investigation, Canadian financial regulators recently revoked the nonprofit status of Canadian-based Universal Aide Society (UAS), which was a major source of in-kind donations for the charities within the network. However, the head of UAS is also a director of two new charities in the U.S., Universal Heart and Universal Aide Society America, both of which were founded after the Canadian regulators began their investigation of UAS in 2005.

The 22 charities affiliated with DSA that were identified by The Republic are:

 1.  AIDS Research and Assistance Institute (aka AIDS Awareness/Assistance Fund)
 2.  Alternative Cancer Research Fund
 3.  America's Children Hunger Network (aka America's Children Hunger Fund)
 4.  Breast Cancer Research and Assistance Fund
 5.  Cancer Aid and Research Fund
 6.  Cancer Research Wellness Institute (aka Cancer Research Wellness Network)
 7.  Childhood Diabetes Research Institute (aka Children's Medical Assistance Fund)
 8.  Childhood Leukemia Research and Assistance Fund
 9.  Children's Cancer Aid and Research Institute (aka Children's Cancer Research Fund)
10. Children's Christian Hunger Network (aka Christian Children's Hunger Network)
11. Children's Emergency Medical Fund
12. Children's Feeding Network
13. Children's Relief Mission
14. Christian Children's Education Fund
15. Christian World Relief
16. Diabetes Aid and Research Fund
17. Feed My Hungry Children
18. Feed My People Children's Charities (aka Feed My People International; Northern Arizona Food Bank)
19. Feed My People London
20. Feeding America's Hungry Children
21. Food Providers of America
22. Heart Disease Research Institute

Related Charities

Don Stewart Association