How does joint cost accounting affect charities’ reported program percentages?
Executive summary
Joint cost accounting lets nonprofits split the expenses of multi-purpose activities (like a mailer that both educates and solicits donations) between “program” and “fundraising” categories, and that splitting can materially raise a charity’s reported program percentage—even though the underlying cash outlay is unchanged [1] [2]. Critics and state regulators say the rules are sufficiently vague that charities can, intentionally or not, inflate program ratios by assigning large slices of solicitation costs to programs; defenders say the treatment was created to fairly reflect genuinely dual-purpose outreach [3] [4].
1. What joint costs are and when they apply
Joint costs arise when one activity serves more than one function—program, management, or fundraising—so accounting guidance (AICPA SOP 98-2, now codified in FASB ASC 958-720) permits allocation between categories when the activity meets Purpose, Audience, and Content criteria, such as an outreach piece that both educates and asks for support [1] [2] [5].
2. How allocations change reported program percentages
Because program percentage is calculated as program expenses divided by total expenses, allocating a portion of multi-purpose solicitation expenses to “program” increases the numerator and often reduces the apparent share of fundraising expense, producing a higher program-spending ratio without increasing mission work or reducing fundraising costs in cash terms [6] [2].
3. Why the practice is controversial—flexibility versus transparency
The rules require a “rational and systematic” allocation method applied consistently, but they do not prescribe a single formula, so charities and auditors exercise judgment; that judgment creates variation across organizations and allows tactical choices that may make program percentages look better even when the underlying activity is largely a solicitation [3] [7]. CharityWatch and several state regulators warn this discretion can be used to “disguise” fundraising as program services and thereby mislead donors who expect direct mission spending such as sheltering or clinical services [8] [3] [9].
4. The incentives: ratings, donors, and managerial pressure
Program-spending ratios are a widely used shorthand of efficiency and influence donor and grantor decisions, and some rating systems and funders reward charities with high program percentages, creating pressure to minimize reported fundraising costs and motivating aggressive joint-cost allocations [10] [11]. Charity management naturally prefers allocating more costs to programs, and watchdogs caution that this incentive structure can skew reporting even when allocations technically comply with GAAP-style guidance [12] [3].
5. How auditors, charities, and regulators respond
Professional guidance and auditors require documentation and consistency—methods like time studies or content analysis can justify allocations—but watchdogs and state attorneys general have increased scrutiny, reviewing solicitation materials and allocation rationales and sometimes concluding allocations were improper when the fundraising message predominated [5] [13] [9]. Conversely, defenders (including charitable-sector guides) note the original intent was fairness for organizations that legitimately conduct program work through solicitations and that proper application is an accepted accounting practice [1] [4].
6. What this means for donors, reporters, and policymakers
Donors and journalists should treat headline program percentages as accounting outputs shaped by allocation judgment rather than direct measures of cash spent on frontline services; comparing organizations requires examining notes, solicitation content, and allocation methods, while regulators and raters can narrow ambiguity by demanding clearer disclosures or standardized allocation approaches to improve comparability [3] [7] [2]. If allocation is applied to appeals where the primary intent is to raise funds rather than advance public education or advocacy, watchdogs argue the entire cost should be fundraising—an approach that would lower program percentages but arguably align numbers with public expectations [3] [1].