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Learning Ally 'Unlearns' Reporting Rules and Inflates Program Efficiency

   Aug 01, 2011

Founded in 1948, Recording for the Blind & Dyslexic recently changed its name to Learning Ally in an effort to reflect its broader vision of becoming "an advocate and friend to those who learn differently," rather than emphasizing its work for the blind. But the charity's name and focus are not the only things that have changed recently. Between fiscal 2008 and 2010, contributions to the charity jumped drastically by nearly 43%, and its program spending efficiency improved by ten percentage points—or so it seems based on the group's financial reporting to the IRS. A closer look at the numbers shows that this charity is not as large, or nearly as efficient, as it appears at first glance.

Cash donations to Learning Ally from non-government sources have declined over the past several years, but how the group spends most of its cash has not changed. The charity's largest program for many years has been "recording and disseminating recorded textbooks on audio and electronic media for individuals with a visual, perceptual or other physical disability…" according to recent tax forms. What has changed is that the charity is now including the value it places on the time unpaid volunteers spend recording these audio books and other media in its financial reporting to the IRS. This is explicitly against IRS rules, and has the effect of making Learning Ally appear larger and more efficient than charities that follow reporting rules.

Learning Ally valued volunteer time in 2008 at $19.9 million, according to its audited financial statements of the same year, but correctly excluded this amount from its tax form, in line with IRS rules. The following year this changed. In 2009, contributions to the charity of cash and goods amounted to $14.8 million, but Learning Ally added $23.9 million of volunteer time and other in-kind services to this amount, inflating contributions to $38.7 million. In 2010 the charity inflated its contributions by $19.2 million to $43.4 million, and its reported program spending by at least $18.8 million to $35.6 million.

A donor who takes this charity's reporting at face value would think that it increased what it spends on programs from 61% in 2008 to 71% in 2010. But those who dig a little deeper into the numbers will see that, once in-kind services are excluded, its public contributions have declined and its program efficiency has in fact decreased, not improved. Had the charity reported its expenses correctly, its 2010 program percentage would have been reported as 53%. AIP's analysis reveals that, once both in-kind services and goods are excluded, the charity spent only 52% on programs that year.

AIP asked Learning Ally's chief financial officer, Bill Hackett, why the charity included over $40 million worth of volunteer services in its tax form reporting in 2009 and 2010 when, according to IRS rules, this is not allowed. He responded that beginning in financial year 2009 Learning Ally outsourced its tax form preparation to an outside company that the charity believed had more expertise in new IRS disclosure requirements. He thanked AIP for bringing the error to his attention and indicated that as a result the charity will be filing amended tax forms for 2009 and 2010. While AIP commends Learning Ally for admitting its mistake, we find it worrisome that the charity's president, Andrew Friedman, did not question such a drastic jump in his organization's reported revenue and expenses prior to approving the 2009 and 2010 tax forms -- especially given that he served as Learning Ally's chief financial officer for two years before being promoted to president and CEO in 2011.

Another issue to consider is how reasonably Learning Ally is valuing its volunteer hours. According to the charity, if it did not have volunteers and instead had to hire people to read its audio books and other media, it would have had to pay them an hourly rate of $58 in 2008, $69 in 2009 and $70 in 2010. AIP asked Learning Ally how it arrived at these figures. CFO Bill Hackett responded that the charity "conducts periodic surveys of rates charged for comparable work by members of professional reader organizations such as Actors Equity Association, American Federation of Television and Radio Artists, etc." He qualified that "there is no exact corollary for our readers" but claimed that "the rates reflected in [Learning Ally's] financial statements are discounted substantially from the actual rates charged by these organizations."

AIP finds debatable whether the high hourly rate Learning Ally is placing on its in-kind services is reasonable. While there are no doubt some highly qualified actors or professional voiceover artists who might command a $58 to $70 per hour wage, AIP questions whether Learning Ally would really have been willing to spend over $60 million in cash over a three year period for such services had they not been donated by unpaid volunteers.

And herein lies the problem with allowing charities to mix together cash and non-cash donations in their financial reporting. Charities use their own judgment when deciding how to value in-kind goods and services. Accounting rules provide some guidance but still allow wide latitude for charities to decide what they might theoretically spend on non-cash donations had they not received them free of charge. Charities often decide on values that, one could argue, go well beyond what they might actually be willing to pay for these goods and services had they not been donated. If you are a donor who wants to understand how efficiently your cash donations to a particular charity will be used, taking a charity's financial reporting at face value when large amounts of in-kind goods or services of debatable value are mixed in will rarely provide you with the program percentage you are seeking.

This problem is further compounded by simplistic financial ratios published by some charity raters and oversight agencies in the nonprofit field that simply divide one number from a charity's tax form by another to arrive at a program percentage. Donors are often too quick to assume that the information published by these sources is the result of a thorough financial analysis and reflects how their cash donations to charity will be spent when this is rarely the case. One rater, Charity Navigator, gives Learning Ally three out of four stars on its web site based on the charity's incorrect tax form reporting for fiscal year-ended 2009. Part of this rating is comprised of the charity's self-reported program efficiency of "82.2%" which includes over $23 million of incorrectly reported in-kind services.

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