Advisory Opinion - ECFA.org

Donor Disclosures and Accountability for Limited Use Appeals

Principles and Guidelines

Fund raising appeals often solicit funds for specific purposes that create donor expectations and result in responsibility for the organization to use and account for such funds in accordance with those purposes. Any appeal that purports to limit the use of funds to a specific program, purpose, or project (i.e. to less than any or all exempt purposes) is a limited use appeal.

ECFA's Standards provide that:

Resources be used and accounted for in accordance with their intended purposes.
Communications be truthful, current, complete, accurate and not misleading
Created donor expectations be realistic and fulfilled by the use of funds.

Historical practices of faith missions and other charities has conditioned donors to give for specific purposes and to expect the use of their funds will be for the stated purposes and not for general use of the organization. Such practices include raising funds to support specific projects or programs, as well as to support the ministry of specific workers. Fund-raisers acknowledge that specific use appeals are more effective than general appeals.

The following principles and guidelines will be applied to specific interpretations:

Any appeal that solicits funds for specific purposes (other than unlimited or general use for any exempt purpose) should be accounted for separately to demonstrate that the funds have been used for the limited purpose and to reflect any balance remaining.
Any appeal that gives examples of specific use, but is intended to be used for general or any exempt purpose, should clearly indicate that fact in the communication and in the response device.
The donor's indication on the response device is the primary indicator of donative intent; the understanding set forth in the appeal is supplemental to the donative intent expressed in the response device.
A limited use gift results whenever a donor selects a giving option on a response device other than "unrestricted" or "where needed most."
All funds that are given for specific purposes, projects, or programs, should be accounted for separately with charges allocated based only on disclosed policy (such as administrative assessments or indirect costs) or for costs that are directly attributable to the project, program, or purpose.
Information concerning limitations or lack thereof should be clear and complete both in the response device and appeal letter.
Statements in response devices and receipts regarding overfunding policies such as "funds in excess of those needed will be used as directed by the board:"
- do not make limited use gifts unrestricted, until a future event occurs, and
- do not diminish the organization's moral, social, and perhaps legal obligation to use the funds for the specified purpose, except when such an unanticipated event occurs.
Such events of overfunding should be unusual and infrequent, not a normal or common occurrence.
Funds received from appeals for specific purposes based on implicit donor directives and donor expectations, should be used and accounted for as donor-restricted (see glossary; past practice has often used the term "designated").

ECFA suggests the following disclosure for response devices and receipts (you should consult legal/tax counsel for your specific application):

"Contributions to (charity) are administered and disbursed under the supervision of the Board of Trustees/Directors. In the unlikely event that a ministry is overfunded, gifts may be used in another ministry activity as closely in keeping with your interest as possible."

Standards Committee Interpretations

The Standards Committee of ECFA has observed practices where either: a) the expectations created by the appeal to the donor are not consistent with the financial practices, b) the disclosures made are not complete or contain material omissions, and/or c) the accounting records do not demonstrate the appropriate use of funds.

The following are examples of the application of these principles and guidelines:

A ministry that distributes Bibles and related literature as its primary purpose, appeals for funds to distribute Bibles in a particular country. Those funds are included in general income, and the accounting records do not account for the costs associated with distributing Bibles in that location to determine whether or not the funds donated for that location have been used for the stipulated purpose or whether balances remain.
Interpretation

The ministry is not in compliance with ECFA Standards and should account for gifts by country with appropriate allocation of costs associated with their distribution and any unspent balances held for use in that location.
A child sponsorship agency appeals to donors to support specific children and creates the impression that specific sponsorships directly benefit specific children. In fact, sponsorship funds are pooled and spent on a project basis under the philosophy of child-focused community development programs. Although there is shared benefit to the entire community by worthwhile development, only a small amount of the project budget is exclusively for the sponsored children in the community.
Interpretation

The agency is not in compliance with ECFA Standards unless it discloses to donors that:
- Child sponsorship gifts are pooled to support child-focused community development projects. As such many of the benefits are shared by all the children in the community.
- The agency must insure that sponsored children are receiving direct benefit from the development activities in the community. Community development activities must create specific improvements in the lives of the sponsored children within the community. Periodic reports should be provided to the donor which clearly explain the project activities, how they benefit the sponsored child, as well as the specific progress of the sponsored child.
- In addition, child sponsors may also support the child directly through prayer, communication, and encouragement.
- Donor receipts and related accounting records should indicate that financial support has been provided in fulfillment of a pledge of support for the pooled sponsorship funds with a preference for an individual child.
A ministry appeals for gifts to feed the hungry and indicates that $X will provide X meals. They do not account for the donations and costs of the meal program as a separate fund. The meal costs quoted are based on national rather than local factors. In fact, much of the food and labor is donated and the gifts are primarily used for the general support of the mission rather than being limited to use in the feeding program.

Interpretation

The ministry is not in conformity with ECFA Standards and should:

Account for such gifts as donor-restricted and limited to use only in the feeding program of the mission. (Otherwise the boxes on the response device must indicate unrestricted use such as "here is my gift of $X to help feed, cloth, shelter and minister to the needy at this Christmas season and throughout the year.")
Modify appeals to not give the impression that a specific amount will provide a certain number of meals, unless the amount is supported by data for that mission taking into account the cost benefit of donated food and labor to serve the meals.

Glossary of Terms

Designated net assets — Unrestricted net assets set aside for specific purposes by action of the governing board; e.g., future programs, investment, contingencies, or purchase or construction of fixed assets.

Donor-imposed condition — A donor stipulation that specifies a future and uncertain event whose occurrence or failure to occur give the donor a right of return of the assets it has transferred or releases the promisor from its obligation to transfer its assets.

Donor-imposed restriction — A donor stipulation that specifies a use for the contributed asset that is more specific than broad limits resulting from the nature of the organization, the environment in which it operates, and the purposes specified in its articles of incorporation or bylaws, or comparable documents for an unincorporated association. A restriction on an organization's use of the asset contributed may be temporary or permanent.

Restricted net assets — Resources whose use is restricted by an outside agency or person as contrasted with those over which the organization has complete control and discretion.

Restriction — A limit on the time or purpose of use of a gift created by a donor stipulation.

Stipulation — A statement by a donor which creates a restriction.

Temporarily restricted — Donor restricted for a stated period of time or until a stated event.

Unrestricted net assets — Resources that have no external restriction on their use or purpose. They can be used for any purpose designated by the governing board, as distinguished from resources restricted externally for specific purposes.

Qualified Audit Opinions

Issue:

Should a qualified audit opinion by an auditor on financial statements affect the acceptance of an applicant to ECFA or the continued membership of a current member? Are there any exceptions permitted and how should this issue be addressed with applicants or members?

History:

Historically ECFA has accepted some qualified audit opinions. This has been done on a case-by-case basis, based on the nature of the exception. Standard 3 requires an audit which is in accordance with auditing standards generally accepted in the United States of America (GAAS) with financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The ECFA Commentary on Standard 3 further explains that the audit should provide the reader with reasonable assurance that an organization's financial statements present fairly, in all material respects, its financial position, results of operations, and cash flows. To the extent that ECFA has been able to determine that the qualification does not "materially effect" the presentation of the statements, it has allowed qualifications.

Examples:

Examples of the qualifications are listed below.

Description:

Incomplete contributions verification (not done through direct confirmation with donors)
Incomplete or missing year-end physical inventory of materials
Unvalidated property and equipment carrying amount
Inadequate loss/bad debt provision
Unrecognized gifts-in-kind revenue
Unverifiable accounts receivable
Inadequate retirement benefit reserve
Inadequate pension footnote information
Presentation of revenue recognition/change in revenue recognition
Uncombined or unaudited related entities
Cash basis reporting
Inadequate internal control over cash receipts

Conclusions:

ECFA believes it is not practical to produce a list of “acceptable” qualifications. Each qualification may contain different degrees of severity and may affect the fair presentation of the financial statements differently.
Financial statements prepared on the cash basis of accounting are not in accordance with generally accepted accounting principles, and thus are not acceptable. If the difference between cash and accrual (GAAP) basis financial statements is not material, the member should expect that the auditor will issue a GAAP basis report.

If the difference is material, the financial statements should be revised accordingly.
ECFA maintains that obtaining an unqualified opinion is important and that members should work with their auditors to obtain an unqualified opinion.

(a) Many times the auditor can remove the qualification if some action is taken by the organization. Each organization should attempt to rectify the situation causing the qualification before the opinion is finalized.

(b) Many exceptions to a qualified opinion appear to be immaterial to the overall financial statement presentation. The organization should attempt to discern materiality of a qualification and urge the auditor to remove the qualification when it is not material.

(c) Where appropriate, the organization should encourage the auditor to use alternative testing methods to gain assurance and remove the qualification.

(d) In cases where there is an immaterial difference between the reports of an organization on cash basis versus accrual basis, the auditor should be urged to issue an accrual-based opinion on the financial statements.
ECFA expects organizations to obtain an unqualified GAAS/GAAP opinion. If an organization chooses not to remove a qualified opinion which could be removed, it cannot expect ECFA to look favorably on that qualified opinion.
All qualified auditors' reports will be subject to greater disclosure. ECFA may need additional details from the auditor regarding the nature and severity of the exception before it can consider the application or approve an Annual Membership Review. If, after receiving these materials, ECFA believes there is no material misstatement or risk of misinterpretation, then ECFA may accept the audit.
ECFA believes that organizations with a "Going Concern" are at greater risk of violating ECFA Standards 4.0, 7.2 and 7.3. The concern is that there may be unrealistic expectations on the part of the donors with regard to what their unrestricted donations will accomplish. Contributions used to solve past problems rather than to fund current ministry objectives causes a “Going Concern” to be viewed as unfruitful.

ECFA may accept an audit with a current "Going Concern," but will disclose this condition on the ECFA profile.

Evaluation of Marketing Programs

Overview

Charities are frequently presented with creative marketing opportunities that may lead to additional revenue for the charity. Some of these concepts may come near or go beyond the boundaries of traditional marketing programs. A proposed marketing program may involve recommending or promoting:

equipment, from photocopiers or other office equipment to vehicles,
services, from household moving services to long-distance telephone services,
or a combination of a products and services.

While these marketing endeavors generally do not involve the solicitation of charitable gifts, they often include contact by the charity or a third party with the charity's donor base, members or other constituents. The contact often results in the expenditure of money to obtain a product or service. There is generally, but not always, a direct or indirect financial benefit to the charity as a result of the transaction.

ECFA neither approves nor disapproves of specific marketing programs in which a member organization may engage. But ECFA does encourage members to adequately review and measure the risks associated with marketing programs. ECFA cannot advise the public about activities of non-ECFA members who may be strategically linked to or partnered with an ECFA member to accomplish a marketing program.

Application of Principles

These principles and questions may be a helpful guide in evaluating potential marketing programs for your organization:

Principle. Your donors, members and other constituents are a highly valuable resource from God.
Questions: Do all marketing activities honor and respect the rights and privacy of your donors, members and other constituents? Does your organization retain control over your mailing list? Or, does a third party have the opportunity to integrate all or part of your mailing list into their customer database which, in turn, might be sold in the marketplace?
Principle. Standard 7.1 requires "truthfulness in communication". All marketing materials should be clear and transparent. Expectations of donors should match the reality of the marketing service or activity.
Question: Are all marketing activities transparent in their purpose and benefits?
Principle. If you are partnering with a third party, carefully consider your motivation and their motivation to engage in the relationship. The sole motivation of your organization should be to further your ministry objectives.
Questions: How does the proposed alliance with a third party further your ministry objectives? Does the furtherance of your ministry's objectives surpass the profit motive of the third-party partner?
Principle. Understand the risks for your ministry before entering into a marketing relationship with a third party. Do not put your organization at undue risk.
Questions: Will the proposed activity be totally under the control of your ministry? Will the success of the endeavor or the third-party partner be enhanced, as viewed by your organization or the third party with which you are partnering, if you lend the name or reputation of your organization to the proposed activity? As a result of the activity, is your organization exposed to unrelated business income tax issues?
Principle. The products or services offered should be consistent with the standards of your ministry.
Questions: Are you certain that the products and/or services that will be distributed by you or a third party to your donors, members or other constituents provide quality at competitive prices? If the products or services are not satisfactory to your donors, members or other constituents, will the image of your organization be diminished?
Principle. Good stewardship of ministry resources is always an important criteria.
Questions: Have you projected the level of ministry resources required to implement and manage the proposed program? Does this financial commitment represent the highest and best use of your ministry resources?

Summary

The conduct of ministries should provide a benchmark for integrity and righteousness. The long-term impact on your ministry should be considered before entering into an alliance or partnership for the promotion of a product or service.

Questions on particular activities may be referred to ECFA for general guidance. It may be possible for ECFA to share the strengths and concerns about particular marketing activities.

Outsourcing Gift Processing

Organizations may make use of a third-party vendor to process mail, including product orders, premium fulfillment and gift income. Services that can be provided include picking up mail from post office boxes, opening mail, processing orders, issuing receipts, data entry for accounting purposes, bank deposits, reports of all types for management analysis, etc. The process of collecting mail, banking gifts, issuing receipts, etc., is often referred to as “caging”. ECFA member organizations have asked questions concerning the practice of outsourcing “caging” services and whether or not it is appropriate for ECFA members. This advisory opinion has been developed in response to these questions.

These services can be very helpful to charitable organizations and are often used by charities that have very large volumes of mail to process and believe that contracting with specialty organizations for these services is a more efficient use of their resources. Very small organizations can also make good use of businesses providing caging services. Small organizations may not be able to provide adequate security controls in mail opening and gift processing areas; i.e., more than one person being present at all times. In these cases all income is deposited directly into the account of the charity and the vendor bills the charity for their services.

When used in this manner there is absolutely no problem with such outsourcing and, in fact, it may be a wise use of a charity’s resources. The charity should satisfy itself that the vendor operates with essential controls in place. One method of determining this is to request and receive a report on internal controls of the service organization by an independent accountant, a Statement on Accounting Standards (SAS) report, if such is available.

However, in some instances fund-raising consultants offer caging services for their clients and this is where serious concerns begin to emerge. Fund-raisers may offer caging services as a means of insuring payment for their services, or as a way to overcome a charity’s concern about upfront costs of a fund-raising effort. This can be presented as a guaranteed no loss effort where the fund-raiser agrees to limit its expense to no more than what actually comes in. In those cases funds are placed directly in the account of the fund-raiser (or in a joint account with the charity) and only the net income in excess of the fund-raiser’s costs are forwarded on to the charity. Also, in some agreements between fund-raisers and charities, the charity’s donor list becomes available to the fund-raiser to rent or sell to provide additional income to the fund-raiser. These situations offer many opportunities for abuse and can cause problems in several areas.

Problem Areas

Outsourcing of gift processing may also raise concerns in the following areas:

Accounting and reporting. When only net income is received by the charity the temptation exists to book the net income without any accounting for the expenses of the fund-raising campaign. This would result in an understatement of fund-raising expenses and therefore would not provide an accurate picture of the organization’s operations. This would clearly not be in accordance with generally accepted accounting standards and therefore would be a violation of ECFA’s Standard 3.
Donor communication. When donors respond to a particular fund-raising effort they would naturally expect that their gifts are going to the charity itself, to be used for the purpose described in the fund-raising communication. When the fund-raiser banks the gifts and only a portion (or possibly none) of the gift is passed along to the charity, donors would have been misled and several of ECFA’s fund-raising standards may have been violated (7.2, 7.3, 7.4 and 7.6).

Legal Aspects

Some states have laws stating that all income from fund-raising appeals must be deposited in accounts held solely in the name of the charity. In those states the arrangements mentioned above would be illegal and the charity would be liable for whatever penalties those states have established.

Summary

Outsourcing of gift processing services can be a proper and appropriate approach for a charity to acquire to obtain higher levels of efficiency, security and control. However, it is never appropriate for a fund-raiser to provide the caging service. The fund-raiser must never control the income, bank accounts or have ownership of donor lists of a charitable organization.

Ministry Activities on the Internet

Much of the Internet’s innovation lies in its unique ability not only to reach a wide audience, but also to provide that audience with immediate access to a wealth of information and services. From on-line charitable contributions (including donations received through third-party operated websites) and product sales, to on-line auctions, Internet-based affinity programs, and much more, the Internet impacts many ECFA members.

ECFA’s Seven Standards of Responsible Stewardship^TM apply to charitable solicitation and other member activities, whether the activities are conducted via the Internet or via non-Internet venues. However, certain issues that are not addressed specifically by the Standards—such as privacy, security and responsible partnering with other organizations—are into focus more sharply because of the Internet. For example, if a charity accepts gifts by credit card, security concerns should be heightened. If a donor provides email and other contact information to the charity, privacy issues may arise based on the way the charity uses that information to contact the donor.

The purpose of this Advisory Opinion is to provide basic guidance for ECFA members as they conduct Internet activities.

General

Adopt a written fund-raising philosophy. Apply and reapply the philosophy to all fund-raising practices—including Internet fund-raising.
Employ Internet practices that exhibit integrity, honesty, openness, and truthfulness.
Comply with all federal and state regulations regarding ecommerce. This includes charitable gift acknowledgments, state charitable solicitation registration, sales taxes, privacy, and unrelated business income issues.
Organizations should be careful to protect their own intellectual property rights and to avoid infringing on the rights of others. A website may imply rights under patent, copyright, trademark, trade secret, unfair competition, consumer protection, security, privacy, and publicity laws.
Apply a ministry's functional expense allocation procedures to the ministry's Internet activities.
Decide whether accepting gifts via credit cards is consistent with the ministry's fund-raising philosophy. Some ministries do not want to accept gifts at the risk of increasing a donor's credit card debt. Other ministries accept donations by credit card but communicate concerns about credit card debt to their donors.

Contracts with Internet Vendors

Before entering into contracts with Internet vendors, perform due diligence on the vendor.
Establish appropriate warranties, confidentiality guarantees and indemnification provisions in all agreements with Internet vendors.

Fund-Raising and Product Sales Transactions

Transaction fees (credit card and other transaction-based fees) that an Internet-based service provider charges should be reasonable. ECFA’s Standard 7.7 does not apply to reasonable transaction fees paid to Internet fund-raising integrators based on a percentage of the gift. In these instances, ECFA believes that donor-protection concerns are minimal.
Clearly document how contributions will flow to the charity from an Internet-based service provider. Clarify the extent of your organization's control over contributions and other funds.

Charitable Gift Acknowledgments

Comply with charitable gift receipting requirements. The IRS has confirmed that email gift acknowledgements meet its requirements. Additionally, electronic receipts are acceptable when issued through a third party, if the third party is actually an agent of the charity under state law (IRS Publication 1771).
Provide adequate communication for quid pro quo transactions. If a ministry provides a product in exchange for a donor’s gift, ministries should communicate this fact and the value of the product before accepting the donor’s gift.
Give donors an opportunity to reject products from a ministry before the gift is sent to the donor.

Project Financial Data

Some organizations post their audited financial statements on their Internet sites. This posting may provide easy access for Internet users. However, since many individuals do not have Internet access, availability of the audited financial statements on the Internet does not relieve an ECFA member of providing a hard copy of audited financial statements upon written request under ECFA’s Standard 5. Posting financial data on the Internet also does not relieve an ECFA member of providing project reports under ECFA’s Standard 7.6.

Security

Conduct on-line transactions only through systems that employ high-level security technology.
Prepare an appropriate and accurate information security policy addressing such issues as secure storage of data, secure transactions and other similar items.
Periodically (at least annually) test website security. Consider using an external security firm to regularly perform an independent assessment of the ministry’s on-line security.
To communicate your security policy to website users, clearly post it on your website.

Privacy

Protect the privacy of individuals interacting with the organization’s website. Collect only the information you need. Avoid collecting unnecessary data that might compromise an individual’s privacy.
Make it easy for individuals to “opt-out" of email lists (as well as surface mail lists) to prevent the dissemination of unwanted communications.
Allow individuals to “opt-in" before selling, transferring or otherwise distributing the data to a third party for communication, advertising or promotion purposes.
Prepare a confidentiality agreement to be signed by all individuals with access to donor data.
Prepare a privacy policy that is credible, effective and meaningful. It should address issues such as confidentiality, use of information, use of cookies, conditions for release of individual data, and similar items.
To communicate your privacy policy to website users, clearly post it on your website.

Hyperlinks to Sites of Others

When linking to the websites of others, perform adequate due diligence (including financial due diligence) to ensure third-party organizations are trustworthy and any products offered or ministries promoted by the third party are consistent with the mission of your charity.
If hyperlinked to the websites of others, review hyperlinks annually to monitor any risk management issues that may arise resulting from the links.

Hyperlinks by Others to Your Site(s)

When others link to your site(s) with your permission or knowledge, perform adequate due diligence to ensure third-party organizations are trustworthy and any products offered or ministries promoted by the other organization are consistent with the mission of your charity.
If the other organization places information about your organization on their website, periodically review the information to ensure its accuracy.

Complaints

Promptly respond to all Internet-related complaints. Employ your best efforts to fairly resolve in a timely fashion all legitimate complaints relating to transactions conducted through your website.