Accounting Rules Allow Nonprofits Discretion in the Reporting of Joint Costs
–published April 2013
In nonprofit financial reporting, the funds spent on telemarketing,
direct mail, or other solicitation activities that also include an "action step" or "call to action"
are referred to as "Joint Costs." Charities often use joint costs as a way of inflating their reported
charitable program spending and deflating their reported fundraising costs. Although the use of this
accounting "trick" is often perfectly in line with the accounting rules for the reporting of joint
solicitation costs (AICPA SOP 98-2), these rules allow for many interpretations and judgments that
can produce questionable results.
Joint cost accounting rules require that certain criteria related
to "purpose," "audience," and "content" be met before joint costs are allocated to charitable program
functions. The criteria, however, are subjective in nature and therefore, leave room for biased
interpretation by the charity. More specifically, while a charity may contend that portions of its
solicitation materials qualify as a call to action with a purpose that promotes the charity's mission
to an appropriately targeted audience; another interpretation of the purpose, audience, or content may
result in a different conclusion. For instance, if a fundraising letter from a genetic disorder charity
includes educational information for the potential donor about healthy eating and exercise, the charity
likely is applying joint costs. This means that the charity is reporting a portion of the cost to prepare
and send that fundraising letter as a charitable program expense because the solicitation includes an
educational component about healthy eating and exercise. When most donors think about how their contributions
are used for the programs of a genetic disorder charity, they probably hope that this includes areas such
as patient care or research—not educating potential donors on diet and exercise, which seemingly would
have very little, if any, influence over whether one actually becomes afflicted with the genetic disorder.
Another example is an alcohol abuse charity applying joint costs because of a "don't drink and drive" call
to action that is included with a direct mail campaign received by individuals who rarely consume alcohol
and/or usually rely on public transportation. Is such a joint solicitation truly an effective promotion of
an alcohol abuse charity's mission to the extent that a portion of the expenses should apply to program
activities? Or as a potential donor, would you rather see your contribution being spent towards bona fide
program efforts such as increasing the law enforcement of drinking and driving offenders, or even towards
sending such a call to action to a targeted group of recipients with a history of driving under the influence?
These examples show that the interpretation of the purpose, audience, and content criteria for joint costs makes
it relatively simple for charities to disguise the costs of fundraising as program services that most donors
would not think of as the types of charitable programs they hope their contributions are being used to
The accounting rules for joint solicitation costs also do not prescribe
or mandate a specific method for allocating the expenses between fundraising and charitable program
services, nor are any allocation methods prohibited. Rather, the guidance given describes that the
chosen allocation method "should be rational and systematic," the result should be "reasonable,"
and the method should be "applied consistently given similar facts and circumstances." This creates
variation in how joint costs are applied by different nonprofits based on auditor judgment and
determination, which can make it difficult to objectively compare the fundraising and program
efficiencies of different charities. Further, although auditors may be determining the joint
cost allocation methodology, it is not in their scope of work to judge the legitimacy or substance
of the charitable program(s) that the charity contends are benefiting from the solicitation activities.
This decision is made by the charity, which again raises the question of objectivity discussed above.
In some circumstances it may even be an independent contractor, not the charity itself, that
oversees the selection of the solicitation materials that are supposed to be promoting the charity's
mission and program services.
The next time you receive a fundraising solicitation from a charity with a
"call to action," use your own discretion and ask yourself if it really seems like the most effective way
to educate the recipients and assist the charity in achieving its program goals. If the joint solicitation
material truly is related to a charity's program goals, it should be easy to conclude that the program
elements of the campaign material are so effective on their own that they would be delivered by the charity
even if they were not accompanied by a donation request. This would justify the application of joint costs.
Otherwise, the odds are that joint costs are merely being used to improve the charity's reported
program and fundraising efficiency ratios, and if that is the case, your donation can be better put to