Mary Alice Seville
OREGON STATE UNIVERSITY

THE EVOLUTION OF VOLUNTARY HEALTH AND WELFARE ORGANIZATION ACCOUNTING: 1910 – 1985

Abstract: This article chronicles and compares the attempts made over the years by Voluntary Health and Welfare Organizations (VHWO), accountants and accounting bodies to determine VHWO accounting principles. Also discussed are the events that led to the recognition of the need for generally accepted accounting principles for VHWOs. The article highlights the need for more attention to VHWO accounting by accountants and accounting researchers and provides a foundation for understanding VHWO accounting in the past.

INTRODUCTION

What are generally accepted accounting principles (GAAP) for Voluntary Health and Welfare Organizations (VHWOs)? This article examines how the concept has evolved over this century. Perhaps, however, the first question should be, what are VHWOs? As displayed in Figure 1, VHWO’s constitute part of the nonbusi-ness universe.1 According to the Financial Accounting Standards Board (FASB), the distinguishing characteristics of nonbusiness organizations include:
(a) receipts of significant amounts of resources from resource providers who do not expect to receive either repayment or economic benefits proportionate to resources provided, (b) operating purposes that are primarily other than to provide goods or services at a

Acknowledgement: The author wishes to express her appreciation to Maureen Berry and the anonymous reviewers who reviewed earlier drafts. Any deficiencies which remain are the sole responsibility of the author.

1Since VHWOs are one of the more inclusive nonbusiness organizations, much that has been written about nonbusiness accounting in general also applies to VHWOs. Thus to help the reader understand VHWO accounting, I found it necessary to discuss studies that applied to nonbusiness organizations in general as well as those applying specifically to VHWOs.

profit or profit equivalent, and (c) absence of defined ownership interests that can be sold, transferred or redeemed or that convey entitlement to a share of a residual distribution of resources in the event of liquidation of the organization [FASB, 1980, p. i].

Nonbusiness organizations are the primary providers of social, health, education, and safety programs and services: all recog-nized as desirable by society but not furnished by the business sector. As such, they play a vital role in the society of the United States, at the same time offering people a chance to be involved in “worthy” projects. Within the nonbusiness universe, nongovernmental health and human service programs are primarily carried out by VHWOs; they are the means by which individuals contribute directly to social programs they consider most worth while. The American Institute of Certified Public Accountants (AICPA) has defined VHWOs as:

2The terms nonbusiness, nonprofit, and not-for-profit are often used inter-changeably to refer to the same organizations. There appears to be a trend toward identifying the nonbusiness universe as above and reserving the term nonprofit for the nongovernmental nonbusiness entities.

Organizations formed for the purpose of performing voluntary services for various segments of society. They are tax exempt (organized for the benefit of the public), supported by the public and operated on a “not-for-profit” basis. Most voluntary health and welfare organizations concentrate their efforts and expend their resources in an attempt to solve health and welfare problems in our society [AICPA, 1974, p. v.].

In addition to serving a needed social role in the United States, VHWOs play a major economic role, with almost 40 billion dollars in receipts in 1982. The Internal Revenue Service lists approximately 350,000 such organizations, and The Urban Institute estimates about 120,000 are active. If hospitals and universities are included, the charitable service nonprofit en-tities employed approximately 6.5 million people in 1982. “… the sector accounted for 5% of gross domestic product, employed five times as many people as the automobile industry and accounted for one of every five service workers in the United States” [Salamon, 1984, p. 17]. VHWOs are, for the most part, young — two out of every three organizations in existence in 1982 were formed since 1960.

Because of the role of VHWOs, both socially and economically, as well as the fact that they compete with business and other nonbusiness organizations for support, it is not surprising that people are interested in what the organizations have achieved and how they have used their resources. Thus it is important that resource providers have the accounting information necessary to make decisions about these organizations. As the number of VHWOs has increased, and the amount of available funding decreases, the pressure for accountability has stepped up. Accounting and reporting for VHWOs, as well as other nonbusiness organizations, has been characterized as complicated and “fuzzy” [Gambino and Reardon, 1981], due to the lack of well-defined GAAP, and therefore of limited use.
Listro [1976] had already presented evidence that GAAP for VHWOs is not well defined. During mid-1975, he conducted an opinion survey of CPAs and VHWO chief accountants concerned with both current usage and the principles and practices considered appropriate for nonprofit organizations. Some of the answers, summarized below, are enlightening.

Accounting Principles/Practices
Accrual accounting Fixed asset capitalization Fixed asset depreciation
Use of relevant pronouncements by FASB and predecessor organizations

(n = 156) Opinions of Certified Public Accountants (n = 38) Opinions of VHWO Chief Accountants
Whether Appropriate Whether In Use Whether Appropriate Whether In Use
86.5% 48.1% 55.5% 5.5%
97.4 75.0 97.6 57.9
75.6 18.6 97.4 77.8
45.5
86.5
39.5
97.3

The percentages for accrual accounting are particularly interesting. As will be seen in a later section, accrual accounting has been advocated by industry “authoritative” bodies since 1964. Still many accountants do not consider it appropriate, and many more do not believe it is being used. For most of the items there were major differences between what was believed to be appropriate versus perceived current practice. If practices are not carried out, can they be considered generally accepted?

As will be seen in later sections of this article, citizen committees and individuals have strongly recommended that a single set of accounting principles be developed for VHWOs. Some individuals and groups have attempted to develop ac-counting principles for these organizations, but nobody recog-nized as “authoritative” by the accounting profession has done so.

The AICPA Committee on Accounting Principles specifically excluded VHWOs and all other nonbusiness organizations from its Accounting Research Bulletins unless specifically mentioned, and none of them in fact dealt with nonbusiness organizations. The Accounting Principles Board (APB) of the AICPA did not specifically exclude all nonbusiness organizations, but its opinions concentrated on accounting and reporting for business entities. Non-business entities were specifically mentioned in only one of the thirty-one Opinions although six others were relevant to nonbusiness organizations.

The FASB position has been that any of its Statements that are relevant to nonbusiness organizations should be applied to them. But as Anthony points out, this has led to some problems:

Some independent public accountants apply to non-business organizations professional pronuncements that have been developed primarily for business en-terprises, even in cases where the facts and cir-cumstances are dissimilar [1978, p. 3].

Problems with VHWO accounting still exist demonstrated by repeated requests for improvements. This article lays a foundation for those interested in improving accounting and reporting for VHWOs by chronicling the major changes that have occurred during this century, as well as the influences of various individuals, organizations and other external forces on VHWO accounting. This information was gathered by studying the accounting history of several organizations, and by an extensive search of the literature relating to VHWO and nonbusiness organization accounting. Also, telephone interviews were conducted with accounting personnel of national VHWOs, and others interested in VHWO accounting.

The next sections illustrate how accounting for VHWOs has evolved over the years and what forces were instrumental in initiating change.

THE EARLY YEARS

In the early years of this century there was little attempt to standardize accounting for VHWOs or other entities in the United States. One accounting educator, William Morse Cole at Harvard, was concerned about the lack of comparability within any type of similar nonprofit institutions. In Cost Accounting for Institutions, published in 1913, Cole stated that comparisons of accounts when the method of accounting was different were worse than useless. He advocated that all institutions of a given type charge exactly the same classes of item to each account so comparisons could be made. “Only with uniformity, however, can one ever compare significant notes with one’s neighbor and profit by the other’s experiments” [p. 15]. Cost Accounting mainly uses hospitals for illustrations but it was intended for, and could have been used by, VHWO institutions as well.

Cost Accounting was primarily intended to structure the accounting system for internal decision making. Most of the book was concerned with gathering the information needed to adjust prices to service rendered, determine if utmost economy prevailed, and decide whether some tasks should be contracted out. Cole did advocate some accounting principles that applied to external reporting. These included the preparation of a balance sheet to show accountability for the assets entrusted to the institution, recorded at cost adjusted for depreciation. Cole’s balance sheet was classified with long-term assets preceding current assets and capital accounts before long-term liabilities. “Retained Earnings” was designated as Surplus or Deficit and listed as the last item of the Liabilities or Assets as appropriate. He cautioned ,showever, that this information should not be published if it would lead to pressure to tax the institution or to decrease contributions if the institution were perceived to be wealthy.

Cole believed that proper comparisons could only be made when accrual accounting was used and interest, depreciation, and other charges due to capital investment were shown. He defined depreciation as the excess of the “estimated normal wear and tear” over repairs made and this was the amount used to decrease the asset account. If repairs were greater than “estimated normal wear and tear,” however, the asset account was increased by the difference. Fund accounting was proposed for greater accountability. The balance sheet disclosed the fund balances for various restricted and unrestricted funds with the changes in fund balances disclosed in supplementary schedules.

The income statement was a series of four schedules. The first showed whether or not the earnings from services were adequate to pay the expenses of providing those services. The second started with the surplus or deficit from operations and added the income from endowment. The next schedule started with “endowment income” and added contributions. Contributions were considered fairly steady and part of what Cole called “normal current income.” The last schedule started with “normal current income” and added current and capital legacies, two transitory and unreliable elements, to show the final result for the year.
Cole presented a very comprehensive system of cost ac-counting for institutions. However, there were still concerns as evidenced by Ellen Potter’s [1924] call for improved accounting when she was Pennsylvania’s Secretary of Welfare:

Improved business methods in private and public undertakings, combined with a sound social policy, will not only diminish unit costs of operating these institutions, but will tend to maintain self-dependence and self-respect of those who may from time to time be in need of financial assistance … To promote the development of sound business policies a uniform system of cost accounting is necessary in all public and private charitable undertakings [Potter, 1924, p. 146].

Also, Charles Mather, CPA [1929] expressed concern that the public did not really know what was being done with their contributions to charitable organizations. He advocated that such organizations present an audited statement of income and expenditures to the contributors at least annually. The statement would be on the cash basis and disclose that no undue proportion of the funds was spent on fund raising and general administration.

Several organizations voluntarily developed their own ac-counting systems to report to contributors. One such organiza-tion was Near East Relief. Its system, developed in the mid-1920’s, accrued receivables and payables but did not capitalize property and equipment unless there was an offsetting reserve. Budgets were used as a control device, and expenditures were reported by function so that fund raising and administrative expenses could be separated from program expenses [Caffyn, 1928]. Morey, CPA, developed an accounting system for the Chicago YMCA in the late 1920’s. That system relied heavily on budgetary control. It also capitalized property and equipment and recommended charging depreciation. “Funding” of depreciation charges, so there would be money available for replacement, was implied [Morey, 1929].

Some national VHWOs also developed accounting standards for their affiliated groups, and the national YMCA was one of the first. In 1916 a YMCA Business Administration Commission stressed the importance of developing better business methods for YMCAs. The first accounting guide was published in 1919. It was followed by more accounting guides and manuals in 1925, 1928, 1945, 1950 and 1954 [YMCA, 1954].
In financial reporting the YMCA in its early days followed the tradition of business . . . [then it] began to develop accounting methods and reports adapted to its own needs [YMCA, 1950, p. 77].

However, local associations still used methods more appropriate to profit motivated business than a YMCA where finances were only a tool for accomplishing purposes. The 1950 manual was intended to guide the development of record keeping that accurately reflected what was being done, and reporting that consistently revealed directions since “careful and convincing accounting for what is done with the money received by the Association is expected everywhere today …” [YMCA, 1950, p. 11]. The accounting provisions of the 1950 YMCA manual are summarized in Appendix 1.

THE MIDDLE YEARS VHWO accounting was the target of a burst of activity starting in the 1950’s. About this time regulatory and funding agencies became concerned with comparability of VHWOs’ financial statements. Also, the accounting profession became interested in defining GAAP for all non-profit organizations. This was a result of the issuance of Statement on Auditing Procedures #23 which required the auditor to state clearly what type opinion he was giving and whether or not the statments were in conformity with GAAP [Blough, 1951]. This requirement posed a significant dilemma because of the lack of authoritative sources of GAAP for the non-business sector. For businesses, it was widely agreed that the Accounting Research Bulletins (ARB) constituted GAAP. Nonprofit organizations, however, were not covered by the ARBs .Did the auditor have to give a disclaimer of opinion for nonprofit organizations because they did not follow business GAAP and often reported on the cash basis? Several writers opined that there were sources of GAAP other than ARBs. Hill [1953], a partner in Haskins & Sells and Chairman of the Committee on Auditing Procedures, expressed the view that the nonprofit auditor could give an opinion that cash basis state-ments fairly presented and, in some cases, were in accordance with GAAP.

He believed, however, that the standard short form opinion should not be used in such cases because cash basis statements could not purport to show financial condition and results of operations. Sprague [1956], a partner in Arthur Andersen, believed that the auditor should be able to report on nonprofit organizations even if they did not follow business GAAP as long as they followed procedures recommended by an authoritative accounting group, or accounting procedures generally followed in their particular field. He also wanted the standard short form amended so that the terms “financial position” and “results of operations” were avoided. Morey [1958] believed that the auditor had to use judgement as to what was GAAP. Queenan [1957], a partner in Haskins & Sells, went even further. He said that if nonprofit cash basis accounting had the sanction of an authoritative body, there was no reason to vary from the standard short form. The terms “financial position” and “results of operations” could be used and there was no need to specify the source of GAAP.
The October 1957 Statement on Auditing Procedure #28 settled some of the controversy. With respect to nonprofit organizations it said:

If the statements are those of a nonprofit organization they may reflect accounting practices differing in some respects from those followed by business enterprises organized for profit.

It is recognized that in many cases generally accepted accounting principles applicable to nonprofit organizations have not been as clearly defined as those applicable to business enterprises organized for profit. In those areas where the auditor believes generally accepted accounting principles have been clearly defined (as indicated by authoritative literature and accepted practice, etc.) he may state his opinion as to the conformity of the financial statements either with generally accepted accounting principles, or (alternatively, but less desirably) with accounting practices for nonprofit organzations in the particular field (e.g., hospitals, educational institutions, etc.), and in such circumstances he may refer to financial position and results of operations; in either event, it is assumed that the auditor is satisfied that the application of such accounting principles and prac-tices results in a fair presentation of financial position and results of operations or that he will state his exceptions thereto. In those areas where the auditor believes generally accepted accounting principles have not been clearly defined, the other provisions of this statement apply [AICPA, 1957, par. 11].

Attention subsequently focused on defining GAAP for nonprofit organziations determine what authoritative bodies existed. Morey [1958], Robert Dickens [1958],and Thomas Holton [1959], a partner in Peat, Marwick, Mitchell, all believed that GAAP for municipalities, hospitals, and colleges and universities had been defined, but no mention was made of VHWOs. At about the same time that the accounting profession was awakening to the accounting problems of nonprofit organizations in general, contributors and other resource providers, as well as regulators, were showing increased concern about charitable organizations (VHWOs) in particular. In Attitudes Toward Giving, Andrews [1953] voiced the sentiments of many contributors when he asked for better reports of what was done by an organization and how the contributions were spent.

In the early 1950’s the Los Angeles Board of Social Service Commissioners became concerned about the lack of uniformity in accounting principles followed by the VHWOs reporting to it, believing that this hindered the Board’s ability to make rational allocations between the organizations seeking its funds. The Board commissioned the California Society of Certified Public Accountants to prepare accounting principles for those organizations. The perceived benefits of such principles were:

1. More accurate and informative statements of the use made of contribution income will be available to the public,

2. Financial statements of various similar organizations will be more comparable than at present,

3. Social Service organizations will be aided in reporting to government agencies, and

4. The record of social service organizations will reflect and report financial transactions in conformity with generally accepted accounting principles

The accounting principles recommended by the Board are summarized in Appendix 1.

In 1954 the State of New York passed a law that required charitable organizations (VHWOs) soliciting funds in New York to file annual financial reports which were to be made available to the public. The report was to “clearly set forth the gross income, expenses and net amount incurring to the benefit of the charitable organization” [Wasser, 1956, p. 709], verified by an independent public accountant, so that readers could form reliable accounting judgements with respect to the particular charitable organization. The report form was simple and, unfortunately, sacrificed some accounting principles appropriate to nonprofit organizations. (See Appendix 1 for a summary.) During the next seven years, the New York report form was amended three times. By 1961, contribution revenue was still to be reported on the cash basis but other sources of revenue could be reported on the accrual basis if accrual accounting records were maintained. Expenses could be accrued and were to be reported on a functional basis showing administration, fund raising and program costs. Joint costs were to be considered primarily fund-raising. Although fixed assets were to be treated as an expense of the year in which acquired, they could be capitalized for record keeping purposes. However, depreciation was not to be recorded because this would involve a duplication of charges for the same outlay. Only one fund was to be used, with footnote disclosure of any restrictions [Perlman, 1961].

In response to resource provider and regulatory agency concern about VHWO accounting, some of the national VHWOs wrote or revised accounting manuals for their affiliates in the mid-1950s. These included the YMCA which prepared a revision of its accounting guide in 1954; the American Red Cross which published “Suggested Method for Keeping Chapter Financial Records” in 1956; and the Community Chests and United Funds which in 1956 revised their manual originally published in 1944.

Although the Community Chest manual was primarily a “how-to” bookkeeping guide, some information on accounting principles was given. Community Chests were advised to produce simple and understandable financial statements, the purpose of which was to:

1. Supply information which will aid the board of directors, the budget committee and the staff in understanding, controlling, and carrying out the broad objectives of a program which carries with it the responsibility for sound operation and accoun-tability to the contributing public and to the member agencies, and

2. Supply the factual material which can be interpreted to the public as a part of the public relations program [United Community Funds, 1956, p. 18].
In 1957 the New York Community Trust, a group represent-ing resource providers, commissioned Louis Englander, CPA ” . .to determine whether a system of financial recording and reporting could be designed for all philanthropic institutions” [Englander, 1957, p. 2]. To determine current accounting practices, he studied reports of 100 VHWOs and sent a questionnaire to 25 national VHWOs. Some of his major findings were:

1. Fund accounting was used with a general fund and one or more other funds,

2. Contributions were accounted for on the cash basis but other revenues, such as allocations from United Funds, were accrued,

3. Buildings were capitalized and depreciated, or capitalized and not depreciated, or expensed upon acquisition,

4. Equipment was either expensed upon acquisition or capitalized,

5. Income was reported as restricted or unrestricted,

6. Expenses were classified by function and allocations of expenses between functions were made,

7. Financial statements generally consisted of a balance sheet and operating statement but the format of the statements varied greatly.

Englander then recommended the following accounting princi-ples for philanthropic institutions:

A. Conventions:

1. Provision of a social service, not earning a profit, is the nonprofit purpose.
2. Dual entity concept; i.e., restricted/unrestricted resources.
3. Annual accounting period.
4. Responsibility for adherence to a budget.
5. Stewardship of unrestricted resources and trus teeship of restricted resources is the accounting goal.

B. Standards of recording:

1. Recordkeeping on the fund accounting basis.

2. Matching of revenue and expenditures

* only for earned income
* relate the contribution to all expenditures made in the same period
* use cash, accrual or modified accrual basis.

3. Expense proration principle

* expenses should not be prorated by account ing periods (e.g., no depreciation) unless related to income earned from sales or services, or if necessary for comparability.

4. Expenses should be classified by function with allocations as necessary.

C. Doctrines of reporting:

* full disclosure.
* budget/actual comparison presented.
* bases of expense allocations between functions included in the report.
* consistency.
* conservatism.

Englander felt that the next steps should have been to test these principles for general acceptance, standardize terminology and revise expense category classifications. However, no formal follow-up was made. (See Appendix 1 for a summary of Englan-der’s recommendations.)

Citizen concern about VHWOs and whether they were meeting the needs of the poor resulted in the formation in 1958 of an Ad Hoc Citizen Committee funded by the Rockefeller Foundation. The committee and its purpose were described as “… a group of private citizens, recognizing the important role of voluntary health and welfare agencies in the United States undertook to reassess the functioning of the agencies in fulfilling their great responsibility” [Hamlin, 1961, p. i]. After working for two years they reached many conclusions, including the following:

It is the firm belief of the committee that every agency supported by contributions from the public is under an obligation of public accountability. It owes the public a full and frank disclosure of its programs and their financing. No agency should claim to be in exclusive possession of a patented method of social salvation.

The obligation of full disclosure and accountability leads to a second recommendation of this committee, namely, that a system of uniform accounting be developed by the American Institute of Certified Public Accountants. This would greatly facilitate the work of budget reviewing bodies, potential contributors and voluntary agencies themselves [Hamlin, p. iv].

The AICPA agreed to undertake the task and planned to form an advisory board of informed citizens as well as gather detailed information on current accounting and reporting in order to determine types of agencies significant to the study, captions in reports, and usual reporting procedures and problems. A News Feature in the Journal of Accountancy in September 1961 summed up the feelings of many at the time with:

A system of uniform accounting and financial report-ing is potentially the most important method for obtaining more objective information about voluntary agencies. It has been discussed for years, but has not been developed because of the difficulty of the task and the fears of voluntary agencies [p. 26].
Individual accountants were also voicing the need for better accounting principles for all types of nonprofit organizations including VHWOs. Williams, a partner in Price Waterhouse, and Leonard [1962] felt that, while better financial reporting in the nonprofit field would bring direct benefits to virtually every citizen of the United States, those organizations were not well serviced by CPAs. There was an admitted need for preparation and availability of intelligent and intelligible reports to tell what had been done with contributors’ money. They believed that the accounting profession needed to provide responsible leadership in the formulation of appropriate objectives for nonprofit accounting. Fluckiger [1963], a manager with Peat, Marwick, Mitchell, also called for the accounting profession to take action to develop standard terminology for all types of nonprofit organizations.

The various states could have set accounting standards for VHWOs because of their power to regulate charitable organiza-tions. However, for the most part there was minimal state regulation, primarily because of a shortage of adequately trained personnel, although the states of New York and Minnesota did take an active regulatory role. The general hope was that when GAAP was enunciated by a professional authoritative body, standards and reporting forms would be developed that would be adopted by all states [Sage, 1965].

Although the AICPA accepted the task of determining principles for VHWOs, several groups and individuals were able to act more quickly to attempt to fill the gap. Overhiser [1962], chairman of the New York Society of CPA’s Committee on Accounting for Nonprofit Organizations, attempted to start the process of codifying the underlying hypotheses from which accounting principles could be derived for nonprofit entities in general. He said that many of the basic postulates of accounting that had been developed for profit entities could be applied to nonprofit organizations, but that nonprofit organizations had some peculiarities. First, the objectives and purposes of nonprofit organizations were to benefit individuals with no vested interest, and therefore the financial activities were directed toward administering and expending resources in attaining social objectives. Second, results of operations must be expressed in terms of attainment of objectives, implying that while sound financial administration was considered to be of vital importance, finan-cial statements may not be the most essential element of reports. Overhiser’s proposed principles are summarized in Appendix 1.

The National Health Council (NHC) and the National Social Welfare Assembly (NSWA), authoritative bodies for their 54 member agencies, acted before the AICPA and published Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organization (Standards) in 1964. Standards put forth rules governing content and quality of financial reports, but not the fundamental rationale underlying them. These rules contained in Standards are summarized in Appendix 1.

Standards was considered a major step forward since it was designed to bring uniformity and comparability to public finan-cial reports of at least the 54 major philanthropies (VHWOs) belonging to the two sponsoring groups [Charity, 1965]. Manser [1966], Associate Director of NSWA, stated that Standards was a “major milestone in the stimulation of efficient administration and fiscal integrity for voluntary organizations which look to the public for their support”. He also believed that agencies were finding that Standards “makes good sense because management control is thereby strengthened, budgeting is facilitated, agency finances are more closely related to agency services, and most important, good faith is kept with the contributor”. It was hoped that Standards would become the necessary and sufficient condition for financial support.

The State of New York adopted Standards for the charities it regulated [Steinwurtzel, 1969], and it was also adopted by several national VHWOs. For instance, United Community Funds and Councils of America urged that its affiliates adopt Standards:

* to inspire public confidence,
* to provide the basis of effective business administration, and
* to discharge basic responsibilities to contributors, to agencies, to board of directors and to staff [United Community Funds, 1967, p. 1].

Standards was adopted by United Community Funds in part because:

… in the past, with each agency recording and re-porting in a different manner, contributors and pur-chasers of services found their financial reports in-complete and misleading. They did not show, for example, from what sources the agency obtains its income, how much is spent on supporting services, such as administration costs and campaign costs, if any. Furthermore, this information was not presented in a uniform and understandable manner [Farley, 1973, p. 30].
Shortly after the publication of Standards, Henke published the results of an APB sponsored study intended to analyze and evaluate accounting and reporting practices followed in the nonprofit3 area in the light of the environment within which the financial data were used. Henke [1965] stated that nonprofit substandard reporting had led to inferences of inefficient operations; lack of objectivity and fairness; incoherent, improperly organized and not articulated reporting; lack of uniformity in organization and presentation; and little way of really measuring operating efficiency. The accounting principles which Henke felt would help correct the substandard reporting are summarized in Table 1. Henke [1966] also authored the first text that had a chapter dealing with VHWOs.
In 1967 the AICPA published Audits of Voluntary Health & Welfare Organizations (Audit Guide) applicable to VHWOs. The Audit Guide was not intended to establish accounting principles, since accounting for VHWOs was considered to be unsettled and in a state of evolution, but rather to discuss the practices that were currently being followed. Although it acknowledged Standards as reducing the variety of reporting practices, the Audit Guide did not endorse it or disagree with it. The accounting practices that the Audit Guide discussed are summarized in and compared to the other attempts at accounting rules in Appendix 1.

THE LATER YEARS

Standards and the Audit Guide did not resolve all the controversies. Many groups including NHC, NASW and AICPA continued to study VHWO accounting and make suggestions. The need for continued efforts is evident from the nature of the controversies still unresolved. A major continuing problem was how to record fixed assets and whether to record depreciation. Early writers on the subject indicated that depreciation would be appropriate only if the rates charged for services were based on costs [Baldassare, 1959] or claimed that depreciation would only cloud the simple picture of receiving and spending money with the amortization of past expenditures [Baldwin, 1963]. As late as 1967 Withey, wrote that depreciation was an allocation of cost and that charging it to current operations would not be useful. The general feeling seemed to be that depreciation was only appropriate for entities which expected to replace their assets through operating revenues. Piersall put forward a different view of depreciation by calling attention to the fact that depreciation should not be confused with a method of obtaining funds for replacement. He went on to say:

Although the fixed assets of nonprofit organizations may not generate revenues, they do generate ac-complishments. Depreciation is one of the measures of the efforts required to produce these accomplishments. For comparability we must have depreciation on donated as well as purchased assets [Piersall, 1971, p. 59].
Completeness of the measure of cost is essential to management’s effort to control costs and society’s need for guides by which to allocate scarce resources [Piersall, 1971, p. 60].

Although there had been a perceptible change in the views of accountants about the desirability of recording depreciation over the years, Gross [1972/73] has highlighted the continuing variations in the handling of fixed assets and depreciation.

More evidence that Standards and Audit Guide had not solved all the problems came from the report of the Committee on Accounting for Not-for-Profit Organizations of the American Accounting Association in 1971. The Committee reported that, although various agencies or associations of different types of not-for-profit organizations had independently set forth guidelines for their own organizations, not-for-profit organiza-tions’ financial reports lacked relevance and freedom from bias and did not provide information for:

* Making decisions about the use of limited resources,
* Effectively directing and controlling the organizations,
* Maintaining and reporting on custodianship of resources, and
* Facilitating social functions and controls.

The committee recommended that:

1. Similarities with profit organizations need to be emphasized, not minimized,

2. Both types of organizations:

a. are part of the same economic system,
b. compete for the same resources,
c. should utilize analytical techniques to ensure the use of resources for the best of society,
d. require information systems for operational ac countability as well as dollar accountability,

3. Data must produce information for evaluation and decision-making over and above fund and budget control, and

4. Report on operational accountability of organization as a whole not just for sub-entities [American

The specific accounting principles recommended by the Committee were: use of accrual accounting; capitalization and depreciation of fixed assets; preparation of consolidated statements, not just fund statements and that budgets not be concentrated on to the extent of ignoring the functions, activities, and programs of the organization.

In the fall of 1973 a Commission on Private Philanthropy and Public Needs was formed and it appointed an Advisory Committee to examine accounting for private philanthropic organizations [Gross, 1975c]. It found that current reports of philanthropic organizations (VHWOs) were difficult to understand because of the use of funds, the difficulty of quantifying the effectiveness of philanthropic organizations, and the lack of a single set of principles. A single set of principles, it was posited, would facilitate comparisons, make it easier for nonaccountants to understand the statements, make the accounting more objective, allow flexibility but maintain reporting of similar transaction similarly, and be based on uniform underlying concepts

The Advisory Committee made two recommendations:

1. That uniform accounting principles be adopted for all.

2. That regulatory bodies adopt a standard reporting format.

The sixteen accounting principles recommended are summarized in Appendix 1.

The report of the Advisory Committee was intended as a discussion document to focus attention, and it was successful in generating discussion, but not all of it was positive. Most people agreed with the principles in theory until they saw the practical effect on their particular organization [Gross, 1975b]. For example, Robinson [1976], a member of the AICPA Task Force on Nonprofit Organizations, commented that the report was receiving widespread attention but that it was not authoritative. He felt that the committee raised false hopes by their efforts which were doomed to failure. One major criticism Robinson voiced was that the report dealt only with private organizations. This meant private and public entities which provided the same services would have different accounting and reporting.

The AICPA published a revised Audit Guide for VHWOs in 1974 which was intended to describe GAAP applicable to VHWOs. It was considered by its authors to be fairly compatible with Standards, then in the process of being revised. Appendix 1 summarizes GAAP as described by 74 Audit Guide and compares it to previous attempts at defining GAAP.

The Audit Guide was hailed as a major step designed to eliminiate a credibility gap and to improve allocation of re-sources to those that need it. It was felt that past permissiveness allowed concealment of part of the assets, that the changes in 74 Audit Guide would result in full disclosure, and that it rep-resented the best thinking of the accounting profession [Gross, 1973].

The National Health Council, National Assembly of Social Workers and United Way of America published a revised version of Standards of Accounting and Financial Reporting in 1975 which was intended to be compatible with 74 Audit Guide. Organizations had invested time and money in implementing Standards, and significant progress towards responsible accounting and financial reporting had been made, but the experience with Standards indicated that there needed to be a revision to reflect the changes in a dynamic field. The 75 Standards was a joint

Seville: Voluntary Health and Welfare Organization Accounting 75
effort by the authors and the AICPA to provide detailed standards for organizations to follow in preparing financial information for reporting to the general public based on 74 Audit Guide. United Way of America recognized 74 Audit Guide and 75 Standards as the basic authorities “for all not-for-profit human service organizations except for hospitals and institutions of higher learning” [1974, p. ix] and based its accounting manual on those two publications.
The only major area where there appears to be a conflict between 74 Audit Guide and 75 Standards is in allocating the expenses of multi-purpose material, particularly between fund-raising and programs. The NHC and other national VHWO groups have started working on another revision of the Standards. It is too early to tell all the issues the revised Standards will deal with, but one major area that will be included is the problem of allocating joint costs. This topic is also addressed by the AICPA Not-for-Profit Organizations Committee [AICPA, 1986].

The next major event for nonprofit accounting came in 1977 when the FASB commissioned a research report by Anthony on accounting for all types of nonbusiness organizations. (The FASB has adopted the term nonbusiness organizations instead of the term nonprofit organizations.) Anthony’s 1978 report focused on users of financial reports and their information needs. His report was not intended to answer questions, but rather to raise the questions that needed to be answered. At about the time Anthony submitted his report (May 1978), the FASB added a project on nonbusiness accounting objectives to its agenda. In December 1980, the FASB issued Statement of Financial Accounting Concepts No. 4: Objectives of Financial Reporting by Nonbusiness Organizations (SFAC No. 4). The concepts statements are not intended to establish accounting principles but to be a framework to build standards on. SFAC No. 4 focused primarily on the needs of present and potential external resource providers such as lenders, suppliers, members, contributors, and taxpayers and recognized that information useful for resource providers was likely to be of service to other groups also. Thus the FASB accepted specific responsibility for accounting for all types of nonbusiness organizations, excluding state and local governments. FASB pronouncements are to be applied to nonbusiness organizations unless circumstances or information needs require a different treatment.

In June 1981, a Task Force was appointed for the FASB Nonbusiness Project, to consider the types of information that meet the objectives set out in Statement of Concepts No. 4. In July 1983 the FASB decided that the same concepts should be applicable to both nonbusiness and business organizations. Statement of Financial Accounting Concepts No. 6 Elements of Financial Statements which encompassed not-for-profit organi-zations as well as business enterprises replaced Concepts State-ment No. 3 and amended Concepts Statement No. 2.

The first FASB publication to have VHWOs as its primary focus was: Proposed Technical Bulletin 84-e “Accounting for the Joint Costs of Direct Mailings Containing Both a Fund-Raising appeal and A Program Message”. Unfortunately, the proposal which the FASB had hoped would reconcile “… the differing views of those associated with not-for-profit organizations’ financial statements” [FASB, 1985, p. 2] did not have the support of preparers, regulators and auditors. The Board therefore dropped the project from its agenda.

CONCLUSION

Many changes have occurred in VHWO accounting, espe-cially in the late 1960’s and early 1970’s, but problems still exist as evidenced by the Listro study discussed above. Although accounting can and should be of use to internal and external parties in evaluating the efficiency and effectiveness of organizations, it is not currently as useful as it could be. Little recent research has been done on the needs of these internal and external4 users of information about VHWOs.
Some social work professionals question the benefit of accounting for VHWOs. Many accounting systems do not provide managers with information they can use to make decisions [Hariston, 1985]. VHWOs operate as if there were two completely independent sets of goals — one concerned with clients and one with money. Managers and staff members see little or no direct relationship between financial practice and the central thrusts of agency programs [Lohmann, 1980]. Or as

Teicher [1980] said, “When those with accounting mentalities sit in the driver’s seats, they can scoff at the soft minded, tenderhearted social worker who may have difficulty expressing the value of the social agency in cost effective numbers” [Teicher, 1980, p. 103]. Although not all social work professionals are as negative as Teicher, (Hasen-feld [1983] and Patti [1983]), VHWO administrators often do not relate accounting to internal or external organizational benefits.
Despite the improvements which have occurred in VHWO accounting, research is still needed to make accounting and
4Both Reynolds (1981) and Seville (1983) have studied external users of VHWO Reports.

Seville: Voluntary Health and Welfare Organization Accounting 77
reporting for VHWOs useful to internal and external decision makers.

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APPENDIX 1 Summary of Accounting

YMCA 1950 Fund Accounting
Endowment
Plant
Current
No Depreciation
Cash or Accrual but Cash for Revenue Property Maintenance Reserve
Los Angeles 1955
Depreciation Not Required
Cash or Accrual but Cash for Revenue
Functional Classification of Expenditure
New York 1956 No Fund Accounting No Depreciation Cash Basis Only
Englander 1957
Fund Accounting
No Depreciation
Cash, Accrual or Modified Accrual
Match Revenues and Expenditures for Earned Income Only
Match Contribution and Expenditures in Same Period
Overhiser1962
Fund Accounting
Accrual
Functional Classification of Expenditures
Standards 1964 Fund Accounting
Current
Plant
Endowment
Custodian
Funds Functioning as Endowment No Depreciation unless “Funded” Accrual
Pledges Assets and Revenue when Made Record Donated Materials but not Services No Allocation of Joint Costs Involving Fund-Raising
Henke 1965
Fund Accounting
Depreciation
Accrual
Pledges Assets but may be Deferred Revenue
Audit Guide 1967 Fund Accounting
Current
Plant
Endowment
Loan
Annuity
Custodian
Depreciation Not Required Accrual
Functional Classification of Expenses Pledges Assets but may be Deferred Revenue Record Donated Materials and Services Allocation of Joint Costs Allowed Investments could be Valued at Market
Advisory Committee 1973
Fund Accounting but show across Fund Totals
Depreciation
Accrual
Functional Classification of Expenses
Pledges Assets and Revenue when Made
Record Donated Services
Investments Valued at Market
Audit Guide 1974 Fund Accounting
Current
Plant
Endowment
Custodian
Loan & Annuity Depreciation Accrual
Functional Classification of Expenses Pledges Assets and Revenue when made Record Donated Material and Services Allocation of Joint Costs Including Fund Raising Investments could be Valued at Market