J. Account.

Public Policy 28 (2009) 485494

Contents lists available at ScienceDirect

J. Account. Public Policy

j o u r n a l h o m e p a g e : www.elsevier.com/locate/jaccpubpol

Unintended consequences of expense ratio guidelines: The Avon breast cancer walks
Daniel Tinkelman *
Department of Accounting, Taxation, and Legal Studies, Zarb School of Business, Hofstra University, Hempstead, NY 11549, United States

a r t i c l e

i n f o

a b s t r a c t
This case study examines how donor and rating agency focus on percentage-based expense ratios exacerbated pressures on the Avon Product Foundations breast cancer walks. Beginning in 2002, Avon changed its business and accounting practices in ways that eventually helped it report better compliance with charity monitor guidelines. However, the number of walkers and amounts of funds raised dropped; the new accounting practices are less transparent and of questionable conformity with GAAP. 2009 Elsevier Inc. All rights reserved.

Keywords: Charitable Expense Ratios Charitable monitoring agencies

1. Introduction This paper adds to the literature studying how non-prot organizations react to externally imposed benchmarks. Wing et al. (2004) argue that many non-prot organizations control reported administrative and fund-raising activities in order to meet expectations of donors or charity monitors. Similar to the for-prot world, where companies use both accounting and real earnings management to improve reported gures, non-prot managers can affect reported cost ratios both by making real changes in activities and by changing accounting practices. This case study contributes to the literature in two ways. First, through an examination of the pressures upon the Avon Products Foundation (Avon) around 2002 and actions it took, this case eshes out ndings of prior empirical studies. The nature of the Avon walks, and the accounting for them, changed in the same period as a key charity monitor tightened its criteria for acceptable performance. While the link between pressures and actions is always difcult to prove conclusively, there is considerable reason for linking them in this case.

* Tel.: +1 718 469 1343; fax: +1 516 463 5684. E-mail address: daniel.tinkelman@hofstra.edu 0278-4254/$ - see front matter 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.jaccpubpol.2009.08.003

486

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494

Second, the Avon walks are worthy of study in their own right. They were one of the rst largescale, multi-day fund-raising events (Pallotta, 2008). Well over a hundred thousand people have participated in them over the past decade, raising well over $500 million. Avon sponsored 34 Avon Breast Cancer 3-Day walks from 1998 through 2002; and 30 subsequent 2-day walks, through the end of my study period in 2006, under the name Avon Walk for Breast Cancer (AWBC). Avon continues to sponsor walks. The factors that affect fund-raising expense ratios for Avon are also applicable to other large-scale events. An unusual amount of information was available for this study, largely because of extensive litigation between the Avon Foundation and Pallotta TeamWorks (PTW), the producer of the walks until 2002.1 The Pallotta TeamWorks web site contains detail nancial information on its events (PTW, 2002). Dan Pallotta has written a book (Pallotta, 2008). Avon personnel and their audit partner discussed a prior draft of this paper with me.2 Other, similar, walk events provide a useful standard of comparison.3 My main ndings are as follows. In 2002 non-prot monitors announced that certain measures they used to judge good fund-raising and program expense ratios would tighten in 2003. Avon had already received numerous complaints that its events costs were too high. The walks were complex 3-day events, covering 60 miles, and involving thousands of participants. Meeting the then-existing monitor guidelines through 2001 had been difcult; meeting tighter guidelines would be even more so. In 2002 and 2003, Avon made operational and accounting changes to its walks that appear designed, at least in part, to meet the monitors new, tighter guidelines. In 2003, Avon replaced PTW with another, lower fee, event producer, reduced the number of walks each year, and took other cost-cutting measures. It also changed accounting, by allocating large amounts of event costs to programs, which improved its reported ratios. It stopped reporting the fund-raising success of individual walks. Avons reported ratios improved markedly beginning in 2003. Unfortunately, the actions Avon took were associated with a major deterioration in the fund-raising success of the walks. Also, I believe the cost allocation procedures it adopted are of questionable conformity with GAAP. A case study allows close examination of accounting and business issues, and has the potential to give additional insight to researchers, regulators, auditors, donors, and other interested parties. The specic details of the pressures upon Avon, and its accounting choices, suggest areas for future research using other methods. The description of the pressures upon organizations to report good ratios can sensitize regulators, auditors, media and donors to the adverse impacts these pressures have on organizational behavior and accounting. Understanding the pressures organizations face is critical if auditors are to properly plan and conduct audits. Section 2 discusses charitable monitors guidelines on the use of funds. Section 3 examines the pressures on Avon and the actions it took in 2002 and afterwards that appear to respond to these pressures. Section 4 discusses the unintended consequences of trying to meet rating agency standards, and it outlines further research possibilities.

2. Charitable monitoring agencies criteria Academic research has found a clear association between good program and fund-raising ratios and subsequent donations. See Parsons (2003). Meeting rating agency standards and popular expectations of reasonable uses of funds may be especially important for the Avon walks, which require every walker to raise well over $1000 and to spend days walking. If walkers become nervous about Avons handling of funds, the walks could shrivel.
1 I was engaged as an expert witness by PTW, on matters that are not related to the accounting issues discussed in this paper. Executives of Avon, Susan G. Komen for the Cure (Komen), and the companies producing Avons events testied, as well as marketing experts. Exhibits included ads, event materials and contracts with the event producers. 2 As discussed below, they disagree with some of my conclusions. 3 A particularly similar series of events is that sponsored by Komen beginning in 2003, and run by the National Philanthropic Trust (NPT), patterned after the earlier Avon walks: former PTW employees helped produce the walks, Komen obtained PTWs trademarks and other intellectual property, and the walks used the 3-day name.

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494 Table 1 Key nancial results of 3 event series. Year Number of walks Receipts ($ millions) Fund-raising ratio Reported With joint costs
* *

487

Program ratio Reported Without allocated joint costs

Avon 3-days 1998 1 1999 4 2000 7 2001 9 2002 13 Avon Walk 2003 2004 2005 2006 for Breast Cancer 8 6 8 8

$7 28 70 89 145 $27 36 37 46

40% 43% 36% 43% 49%

**

40% 43% * 36% * 43% * 49% 67% 46% 46% 52%

56% 69% 41% 69% 71% 77% 73%

* * *

56% 69% 41%

38% 23% 23% 28%

56% 52% 60% 64%

The table is based upon nancial statements or Form 990 data, assuming Avons other special events are immaterial. The reported fund-raising ratio equals reported fund-raising expenses divided by donations from the public. The ratio with joint costs equals (reported fundraising expense + joint costs allocated to expenses other than fundraising) contributions from the public. (Costs allocated to Avons other programs are not counted here.) The reported program expense ratio = reported program expenses total expenses. The program ratio without allocated joint costs = (reported program expenses expenses allocated to Breast Cancer Crusade) total expenses. Total expenses for 2005 exclude a $7.5 million loss on the settlement of the PTW litigation. Percentages in bold type do not meet BBB Wise Giving Alliance criteria. * Prior to 2003, Avon allocated no event expenses to programs. ** If Avon Products contributions are included, this ratio would meet BBB guidelines.

Monitoring agency criteria tightened in 2003, adding to pressure on the walks. Prior to 2003, the Council of Better Business Bureaus (CBBB) had regarded fund-raising expenses of up to 50% of related donations to be acceptable (JAMS, 2005 Heaney testimony) and the National Charities Information Bureau (NCIB) had suggested organizations spend no more than 40% of donations on fundraising. As indicated in Table 1, the Avon walks for the four years prior to 2002 had always met the 50% standard, but had twice exceeded the NCIB target with ratios of 43%. In 2003, the NCIB and the CBBB merged, forming the BBB Wise Giving Alliance (BBB). The BBB adopted standards that fundraising expenses should be no more than 35% of related contributions, and that the ratio of program to total expenses should be at least 65% of total expenses (BBB, 2006). The Avon walks prior to 2003 had never had fund-raising cost ratios that met this new standard. Research indicates that actual fund-raising costs vary across organizations due to several economic and organizational factors. Organizational strategy and donor pool matter (Baber et al., 2001). Organizational size, age, and sector affect costs (Hager et al., 2001). Large special events tend to have higher cost ratios (Bhattacharya and Tinkelman, 2008). The Avon walks, which need media advertising to attract a large number of relatively small donors, will always have higher fund-raising costs than events using direct personal appeals to wealthy donors. The walks fund-raising ratios depend not just on cost control, but, critically, on volume. Up-front costs, especially advertising, are high. Marginal costs of one more walker, or processing one more donation, are small. A high percentage of each incremental donated dollar is available for programs once up-front costs are covered. The BBB standards, however, focus on average and not marginal cost ratios.4 Many organizations react dysfunctionally to the pressure to show good ratios. Wing et al. (2004) speak of underinvestment by organizations in necessary infrastructure. See also Pallotta (2008). Organizations also respond by managing their accounting. Hagers (2003) survey of 1540 organizations in 2002 found a substantial minority of nonprot organizations are accounting for fundraising
4 Steinberg (1986) notes that rational economic decision-makers should consider the future use of marginal donations; past ratios of total or average donations are theoretically irrelevant.

488

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494

expenses as program services or administrative expenses, a practice that minimizes their reported fundraising expenses and maximizes their associated fundraising and program efciency ratios. See also Krishnan et al. (2006). How is the under-reporting of fund-raising ratios accomplished? Keating et al. (2008) report that at 27% of their sample organizations inappropriately net expenses against revenues, and another 12% may over-allocate costs to program or administration.5 See also Jones and Roberts (2006).

3. Pressures on Avon, and its operational and accounting actions 3.1. Background and pressures on Avon Between 1998 and 2002, PTW produced 34 events for Avon (Table 1). The events were extraordinarily successful. They raised about $339 million in gross donations, averaging almost $10 million per event. The total raised increased from $7 million in 1998 to $145 million in 2002. The net dollars raised, after event costs, was $74 million in 2002, or about $5.7 million per event. The walks were the major factor in the increase in the size of the Avon Foundation from under $3 million in total revenues in 1998 (Avon 1998 Form 990-PF) to $150 million in 2002 (Avon 2002 nancial statements). From 1998 to 2001, accounting for the events was highly transparent. Avon showed total gross receipts from special events, total costs of special events, and net proceeds from the events in the revenue and support section of its statements of activities. A footnote in 2001 listed the gross proceeds and total costs for each event. No event costs were allocated to programs or management and general expenses. Unaudited data for each event through 2002 was also posted on PTWs Web site (PTW, 2002). The walks were important to the Foundations corporate parent, Avon Products. Its 2003 annual report lists the power of our philanthropy as one of the four important equities which combined, form a powerful engine for growth. The Foundation spent over $13 million advertising the 3-day events through 2002. Every time an ad is shown, the Avon name is paired with the cause leading to favorable attitudes on the part of consumers. . . (Priluck in JAMS, 2005). Unfortunately, PTW was receiving bad publicity in 2002 regarding the costs of its events for both AIDS and for Avon (Pallotta, 2008). PTW used an unconventional approach to fund-raising, believing that non-prot fund-raising should use the same quality of tools and methods as corporate advertising (Pallotta, 2008). Advertising spending averaged $600,000 per event through 2001 (PTW, 2002). The events were largely staffed with paid employees, not volunteers. PTW argued that the events should be judged, not by percentage cost ratios, but by the money raised. Not everyone agreed. A 2002 Washington Post story said An unfolding list of questionable dealings from the nancial irregularities acknowledged at the United Way of the National Capital Area to the lavish spending of AIDS Ride promoter Pallotta TeamWorks to the stumbles of the American Red Cross in attempting to use its 9/11 donations for other causes has caused public condence in charities to plummet (Salmon, 2002). See also Pallotta (2008). The clear disclosures by event, unfortunately, subjected PTW and Avon to criticism when any one event did poorly. While the average PTW event tended to meet the then-current monitor guidelines, critics focused on its least successful events (Pallotta, 2008). For example, in 2001, while PTW reported that average event costs for the nine 3-day walks averaged a then-acceptable 40%, walks in Atlanta, Colorado, Los Angeles, and Seattle had costs ranging up to 49% (PTW, 2002). Local media in those areas would naturally focus on local results. According to Avons executive director I was starting to get articles from not only the public but colleagues and people within the industry. . . that I had to share with senior management at the company and the Foundation board of directors. It was of great concern to us. (Walas in JAMS, 2005).
5 Komen is the primary beneciary of 3-day walks conducted by National Philanthropic Trust. Komen reports only the net proceeds it receives in its nancial statements, not any of the associated costs. For a critique of this net basis accounting, see Tinkelman (2007).

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494

489

In April, 2002, Avon decided not to renew its agreement with PTW. Dan Pallotta attributes this decision in large part to public focus on fund-raising ratios (Pallotta, 2008). In August, Avon announced a new series of eight 2-day walks for 2003, the Avon Walk for Breast Cancer (AWBC). Certain features of the AWBC could be expected to reduce cost ratios. The eight cities chosen included some of the most successful locations from the 2002 season. The shorter events would have lower food and staff costs. The route is circular, so tents do not have to be moved from place to place, and some walkers sleep at home. The event producer was paid less than PTW. Avon sponsored 30 AWBC events through 2006. The events never achieved the level of net funds raised by the 2002 PTW events, either in total or on a per event basis. Avons decision cost PTW its major customer. PTW temporarily shut-down operations (Pallotta, 2008), which affected the remaining three events of the 2002 season and caused confusion among the walkers. PTW ceased operations altogether after 2002. In 2002, due in part to PTWs temporary shut-down, event expenses rose to $71.9 million, or about 49% of event receipts (Avon 2002 nancial statements). Even so, the net dollars raised per event averaged $5.7 million. Avon changed its accounting in 2002 to show the approximately $72 million in event expenses as fund-raising expenses on the statement of activities and as a single line in the statement of functional expenses. Transparency decreased: costs and expenses by event were not disclosed. A footnote explains that, due to the cessation of operations of PTW, Avon was unable to obtain the information needed to determine if some of the costs should have been allocated to other categories.6 Program spending as a percent of total expenses was only 41%, far below the 65% level specied by the BBB. In 2003, Avons ability to meet BBB guidelines was under a variety of pressures. The new BBB standards went into effect in 2003. Since the events had not historically normally held expenses under 35% of receipts, Avon needed to them to do much better than in the past. Changing to a 2-day format, focusing on a smaller number of events, and negotiating a lower fee with its event producer did reduce expenses. Estimated event expenses for the eight 2003 walks were around $18 million, far below the $71 million for the thirteen 2002 events. Of course, reducing the number of events also had the adverse effect of reducing the total dollars raised. Unfortunately, the 2003 AWBC events averaged far fewer walkers in total and per event than the 2002 walks, and gross receipts fell over 80%, from $145 million to $27 million. The disruption caused by the replacement of PTW as event manager is a likely factor in the poor results for 2003. As discussed above, the average fund-raising ratios of the walks are heavily dependent on volume. Pallotta (2008) estimates Avons eight walks in 2003 drew about 8100 walkers, or slightly more than 1000 per event. This is far less than the 2001 average of almost 3000 walkers. The low number of walkers affected Avons compliance with the fund-raising ratio. Avon also had difculty meeting the BBBs minimum 65% program ratio standard. Avon management informed me that, to help ensure that the organization maintained a prudent reserve for possible litigation losses to PTW, Avon reduced its grant awards from $46 million in 2002 to $30 million in 2003. This reduction in gross program spending and the increase in spending on management and general necessitated by the legal fees in the PTW case7 made it more difcult to meet the BBB standard. From 2003 to 2006, pressures on reported results became less severe. AWBC receipts increased from $27 million in 2003 to $46 million in 2006 (AWBC, 2006). The AWBC has not been as successful through 2006, in terms of raising money for cancer research, as were the earlier PTW events. The average amount gross amount raised for each event through 2006 is about $4.9 million, or about half the $10 million average for the 3-days. The average net amount raised per 3-day event, after all event costs, ranged from $5.6 to $6.4 million from 2000 to 2002; from 2003 to 2006, the best performance by the AWBC was in 2006 when the eight events cleared an average of $2.8 million after expenses, about half the amount of the earlier series of events.

Avons treatment is required by AICPA SOP 98-2 in such cases. Litigation costs were clearly substantial. Management and general expenses jumped from $0.1 million in 2002 to $8.1 million in 2003 (Avon 2003 nancial statements), of which $5.9 million is categorized as professional services. The litigation settlement is shown as a separate $7.5 million loss in 2005.
7

490

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494

3.2. Avons post-2002 accounting In 2003, Avon began allocating joint costs to its Breast Cancer Crusade program as well as to the management and general and fund-raising categories. From 2003 to 2006, Avon allocated joint costs ranging from $7.8 million to $11.2 million each year to programs. None of the nancial statements discusses the joint cost allocation method. Event receipts from the public for Avon events (not including $3.6 million donated by Avon Products Inc.) were $26.9 million in 2003. Reported fund-raising costs were $10.2 million, or 38% of the public donations. While exceeding the BBBs 35% guideline, 38% represents a marked improvement over the prior two years ratios of 49% and 43%.8 In 2004, 2005, and 2006, as shown in Table 1, the ratio of reported fund-raising expenses to public donations ranged from 23% to 28%, easily meeting the standard and much lower than the reported costs for the pre-2003 Avon 3-day events. Supercially, Avons performance seems much better than the prior years. The apparent improvement is due primarily to cost allocation. Table 1 estimates the ratio of the full costs of the events, including both reported fund-raising expenses and the joint costs Avon allocated to the Breast Cancer Crusade, to related receipts. If the cost ratios are recomputed, characterizing the costs allocated to programs and management as fund-raising, for the four years 2003 through 2006 the fund-raising ratios would be 67%, 46%, 46%, and 52%. All four years would have exceeded BBB guidelines. The ratios compare unfavorably with the average 41% ratios of the 3-day events through 2001. Joint cost allocation was critical to meeting the BBB fund-raising efciency standard. If Avon had allocated any less than 82% of the total joint costs of $9.0 million away from fund-raising, it would have failed the 35% test. 3.3. A critique of Avons cost allocations SOP 98-2 (AICPA, 1998) sets rules for the classication of joint costs incurred by non-prot organizations that relate to fund-raising. Briey, there are three relevant rules. Unless program, audience, and content criteria are met, all costs of joint activities that include fund-raising must be categorized as fund-raising. The allocation method must be rational and systematic; it must be consistent and must provide reasonable allocations. Total joint costs and the amounts allocated to each function must be disclosed. SOP 98-2 requires, that, for an activity to be considered to serve a program purpose: the activity must be substantive; and it must motivate the audience to perform some specic action (other than donating money) that advances the non-prot organizations mission. Simply telling people about the cause that the organization addresses is not a substantive activity as dened by SOP 98-2. I believe Avon fails the purpose criterion. During the PTW litigation, three marketing experts testied for days on the similarities and differences between the Avon 3-day advertising and the AWBC advertising. Not one discussed the sort of specic call to action required by SOP 98-2 (JAMS, 2005). Specic calls to action were simply not an important feature of the walks marketing. At best, the AWBC provides some information that incidentally includes recommendations related to breast cancer. The AWBC may also fail the audience criterion. Paragraph D-10 says that in cases where the audience is required to make a contribution, the evidence that the audience has been selected, not for fund-raising, but for its need to use or reasonable potential to use the specic action called for by the program activity must be overwhelmingly signicant (AICPA, 1998). The walkers at the AWBC

8 If the donations from Avon Products were considered public donations, the BBB guideline would be met. The 2003 donations from Avon Products were higher than in prior years, which could be seen as another operational action that helped the Foundation report meeting monitor guidelines.

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494

491

must do fund-raising. Question 29 in the FAQ section of the AWBC web site asks Why are walkers required to raise $1800? Wouldnt more people walk if they didnt have to raise so much money? The goal of the Avon Walk is to raise as much money as possible to provide access to care and fund research leading to a cure for breast cancer. . . (AWBC, 2006). Avons press releases after every 2003, 2004 and 2005 walk refer to the money raised (AWBC, 2006). They never speak of any specic call to action. According to SOP 98-2, the content of the message or activity must advance the program purpose, but the AWBC ads and promotional materials are devoted to fund-raising. Ads produced during the PTW litigation were designed to attract walkers, and included no calls to action unrelated to fund-raising, although sometimes they gave statistics about the cause. The information for walkers on the AWBC web site in the fall of 2006 included much information on logistics and fund-raising; it included nothing that meets SOP 98-2s denition of a specic call to action. The following excerpt from the web site (AWBC, 2006) is telling. 3.3.1. Your commitment to end breast cancer In order to participate as a Walker in the Avon Walk for Breast Cancer, each person commits to raising a minimum of $1800 towards the ght against breast cancer. That may sound like a lot, especially if youve never even raised a dime before. Our goal is simple to raise as much money as possible to provide access to care and help nd a cure for breast cancer. But dont worry were right by your side the entire time to help you succeed! Trust us! You will become a fearless fundraiser! Even if Avon could justify some allocation of joint costs to functions other than fund-raising, its allocations to program services from 2003 to 2006 are unreasonably high. Avon reported from $9.0 million to $14.7 million in joint costs in these years, and allocated between 79.9% and 87.3% of the joint costs to programs. On average, it allocated 83.4% of joint costs to programs. Jones and Roberts (2006) examine 708 reports by 158 charities reporting joint costs in the period 19922000. The mean organization in their sample allocated 53.6% of joint costs to programs, with a standard deviation of 19.4%. Avons average allocation of 83.3% is 1.53 standard deviations higher than the mean. To compare Avon to a more focused peer group, I searched Charity Navigator (2006) for organizations that dealt with disease and cancer, had over $5 million in donations, and showed joint costs. I found 15 organizations, and also included National Philanthropic Trusts results for scal 2005, which contain data from the Komen breast cancer walks. On average, these organizations allocated 44.8% of joint costs to programs, with a range of 11.960.1%. The standard deviation was 16.1%. Avons 83.3% average percent allocated to programs was above the upper limit of the range by 23.2%, or 1.4 standard deviations. It was 2.4 standard deviations above the mean. Avons results should of course be most comparable to NPT. NPT allocated 31% of joint costs to programs in 2005; Avon allocated 85%. As a further check on the reasonableness of the Avon allocation, I analyzed the accounting for advertising. Advertising was a major expense of both the Avon and Komen walks, accounting for over one quarter of the AWBCs expenses every year. In 2003, Avon allocated $5,423,601, or 99.9% of total advertising spending of $5,428,487, to the Breast Cancer Crusade program, classifying only $4886 (0.1%) as fund-raising (Avon 2003 nancial statements). In contrast, NPT allocated only 35% of its scal 2005 advertising to programs (NPT 2005 Form 990). Avon personnel told me that Avon allocates advertising to fund-raising based on the ratio of the number of donors to the total number of advertising impressions made by its ads. This allocation is prima facie unreasonable. In the extreme, if every advertising impression resulted in a donation, Avon would charge all the costs to fund-raising, and say no public awareness had been served. If every impression failed to motivate a donor to give, Avon would claim 100% of the spending increased public awareness. In sum, I believe only aggressive and questionable allocation of event costs to programs allows Avon to claim it meets or exceeds applicable BBB standards.

492

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494

3.4. A summary of Avons defense of its accounting This section is based upon materials I obtained from Avon, and conversations and emails. Avon personnel commented extensively on early drafts of this paper, and provided me with various materials in defense of their accounting. They and the partner of their auditing rm met with me for about three hours in 2007. Avon disagrees with any implication that they adopted their cost accounting allocation in order to achieve any accounting particular result. Avon notes that it has received unqualied audit opinions from two different audit rms during the period. Avon believes that their promotion of cancer awareness meets the GAAP requirements for cost allocation. An internal Avon memo on their compliance with GAAP states that advertising raises awareness for Breast Cancer among the population affected by the disease and therefore fullls the awareness mission of the Foundation. The memo also notes that anyone who calls for information gets a package that includes the Breast Health Resource Guide which reminds them to get a mammogram. AWBC is also an awareness event joining the event raises awareness in general population. Avon sent to me a package of excerpts from its printed and on-line materials with tabs next to items that would increase awareness of breast cancer. I reviewed this material closely, but believe that, with a few incidental exceptions, it does not meet the tough requirements of SOP 98-10 for a specic call for action in each item for which costs are to be allocated. The Breast Health Resource Guide referred to above is an exception it makes specic recommendations for seeking treatment, and lists organizations that can provide helpful guidance. The remainder of the pamphlets and web site materials generally just mentioned the cause, which is insufcient under SOP 98-10.9 Avon also disagrees with my critique of their allocations of advertising. They do not believe that the cost of joint-purpose advertising should be allocated based upon the relative amount of space or words used for program and fund-raising purposes.

4. Discussion and research suggestions This is not a paper about bad events. I do not claim that the Avon walks cost too much, nor am I trying to discourage people from participating. If more people participate, fund-raising ratios will improve, and more money will go to a worthy cause. The paper is about unintended, unfortunate consequences of unreasonable donor and monitoring agency expectations. The Avon walks are highly sensitive to these expectations because they need many motivated people to volunteer, to walk and to raise funds. The BBB ratio standards dont t these walks. The average cost ratios used by BBB and donors to judge organizations are particularly poor guides to donor action because, while high up-front costs affect the averages, marginal fund-raising costs are actually extremely low. The walks involve many participants, requiring mass advertising. Safety and logistical reasons require professional, not volunteer, staff. One consequence of trying to address misguided expectations is costly business decisions. Through 2001, the 3-day events netted large sums for the breast cancer cause. The producers received xed per-event fees, that averaged about 3% of gross receipts (Pallotta, 2008). However, a public perception that fund-raising ratios were too high put Avon under pressure (Pallotta, 2008). After 2002, Avon changed the nature of its events, reduced the number of events per year, and changed event producers. Avons later events may have been able to claim they met BBB standards, but they raised far fewer dollars. Pallotta (2008) computes the difference between the net funds Avons events raised from 2003 to 2005 and what they would likely have earned if they had continued to use PTW, even if the PTW events did not undergo their proposed expansion, as $157 million (Pallotta, 2008, p. 227). Of course, no one will ever know what would have happened.
9 For example, Avon sent me a 13-page printout of 56 Frequently Asked Questions on its Web site as of January 18, 2007, and highlighted only a single line, in the nine-line response to the question where will we spend the night?, that indicates that opportunities to learn more about breast cancer and related issues would be available at the Wellness Village.

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494

493

Societys focus on ratio standards also put pressure on accounting choices and transparency. Prior to 2003, Avon and PTW clearly reported the results of their events. PTWs reports were available on line. The least successful events were visible, and subjected to criticism. In 2003, Avon adopted more favorable, albeit questionable, methods of accounting. By reporting compliance with BBB standards, and not publishing results for individual events, Avon has avoided much of the earlier criticism. Avon has been able to claim to have held fund-raising costs under 35% of event receipts, although the full costs of the events, as a percentage of public donations, since 2003 have never dropped below 46%. Unfortunately, the ability of organizations to use accounting choices to report compliance with the standards adds credibility to the standards, and puts more pressure on other organizations to adopt more favorable accounting methods. See Wing et al. (2004) for further discussion of this effect. The experiences described in this case suggest numerous avenues for further research using archival, survey or experimental methods. Could managers, instead of adopting questionable accounting methods, have defended their actual spending? Are donors tolerant of different levels of efciency? Are donors xated upon past average fund-raising ratios? Does media coverage overemphasize fund-raising efciency? SOP 98-2 was meant to reduce abusive expense allocations, in part by only allowing expense allocation when an organization made a specic call to action. Avon allocates expenses, but without clear calls to action; most of its public awareness efforts merely publicize the cause of breast cancer. How well do non-prot managers understand SOP 98-2? Did SOP 98-2 lead to changes in reported allocations? To what extent have allocations changed? To what extent have organizations added specic calls to action that qualify for expense allocation? SOP 98-2 allows exibility in cost allocation methods. Avon allocated 99.9% of its 2003 advertising costs to programs, while NPT allocated 35%. Avon considers lockbox fees for handling donations to be management costs, while NPT considers them fund-raising. Can both organizations treatments really be reasonable? What methods are actually in use? How are they chosen? Are any methods clearly unreasonable? Tighter BBB standards went into effect in 2003. To what extent did organizations react to the changes in standards? Were there changes in the distribution of reported expense ratios, or in accounting methods? Research on auditor attitudes, training, and procedures on non-prot audits would be useful. How well are auditors trained in non-prot risk areas? Do auditors use any guidelines in judging reasonableness of allocations? How do auditors judge the materiality of mis-allocations of costs? To what extent do auditors review the details of joint activities to ensure the purpose, content, and audience criteria are met?

Acknowledgements I am grateful for comments made by Dan Pallotta, Randi Priluck, and participants in the 2007 AAA Government and Nonprot Mid-Year meeting and the 2007 ARNOVA conference. I thank Robert Finkelstein, Christopher Allegaert and David Berger for helping me obtain information.

References
AICPA, 1998. Statement of Position 98-2. Accounting for Costs of Activities of Not-for-Prot Organizations and State and Local Governmental Entities that include Fund-Raising. American Institute of Certied Public Accountants, Inc., New York, NY. Avon Walk for Breast Cancer, 2006. <http://walk.avonfoundation.org>. Baber, W.R., Roberts, A.A., Visvanathan, G., 2001. Charitable Organizations Strategies and Program-Spending Ratios. Accounting Horizons 15 (4), 329343. Better Business Bureau Wise Giving Alliance, 2006. Implementation Guide to the BBB Wise Giving Alliance Standards for Charity Accountability. <http://www.give.org/standards/implementation.asp> (accessed 17.06.07). Bhattacharya, R., Tinkelman, D., 2008. How tough are better business bureau/wise giving alliance nancial standards? Nonprot and Voluntary Sector Quarterly (April). doi:10.1177/0899764008316120. Charity Navigator, 2006. <www.charitynavigator.com>. Hager, M.A., 2003. Current practices in allocation of fundraising expenditures. New Directions for Philanthropic Fundraising 41, 3952.

494

D. Tinkelman / J. Account. Public Policy 28 (2009) 485494

Hager, M.A., Pollak, T., Rooney, P., 2001. Variations in Overhead and Fundraising Efciency Measures: The Inuence of Size, Age, and Subsector. Overhead Cost Study Working Paper, presented (revised title) at the 2001 ARNOVA meeting. Published on <http://nccsdataweb.urban.org/FAQ/index.php?category=43> (accessed 17.06.07). Jones, C., Roberts, A., 2006. Management of nancial information in charitable organizations: the case of joint-cost allocations. The Accounting Review 81 (1), 159178. JAMS, 2005. Testimony and briengs related to JAMS reference no: 1420011424, Pallotta TeamWorks, Claimant/Counterclaim Respondent vs. Avon Products Foundation, Inc. Respondent/Counterclaimant, briefs by Avon and PTW, testimony by witnesses Susan Heaney, Randi Priluck, Kathleen Walas, and the decision by Michael Young. Keating, E., Parsons, L., Roberts, A., 2008. Misreporting fundraising: how do nonprot organizations account for telemarketing campaigns? The Accounting Review 83 (March), 417446. Krishnan, R., Yetman, M.H., Yetman, R.J., 2006. Expense misreporting in nonprot organizations. The Accounting Review 81 (March), 399420. Pallotta, Dan, 2008. Uncharitable: How Restraints on Nonprots Undermine their Potential. Tufts University Press, University Press of New England. Pallotta TeamWorks, 2002. Record of Impact (accessed 29.01.09). Parsons, L., 2003. Is accounting information from nonprot organizations useful to donors? Review of charitable giving and value-relevance. Journal of Accounting Literature 22, 104129. Salmon, J.L., 2002. Nonprots show Losses in the Publics Trust; Surveys Find Changes since Terror Attacks. The Washington Post. September 9, 2002 Monday, Final ed., p. A02. Steinberg, R., 1986. Should donors care about fundraising? In: Rose-Ackerman, S. (Ed.), The Economics of Nonprot Organizations Studies in Structure and Policy. Oxford University, New York, pp. 346364. Tinkelman, Daniel, 2007. The Avon and Komen Breast Cancer Walks: Case Studies in Questionable Special Events Reporting (March 3). Working paper Available at SSRN: <http://ssrn.com/abstract=1335252>. Wing, K., Pollak, T., Rooney, P., 2004. Toward a Theory of Organizational Fragility in the Nonprot Sector. Overhead Cost Study Working Paper. Urban Institute. <http://nccsdataweb.urban.org/kbles/542/Toward%20a%20Theory%20of% 20Organizational%20Fragility.pdf> (accessed 17.06.07).