Do You Know Who Is Watching?

, Tags:

The chorus of a popular ’80s song says, “I always feel like somebody’s watching me.” Not-for-profit entities (NFP) have their financial information available on a variety of platforms including, but not limited to, the NFP’s website, the public inspection copy of its Form 990, and perhaps on its state attorney general’s website, if the NFP solicits donations from the public. This public exposure of financial information might have NFPs feeling like somebody’s watching them, and they would be correct!

Potential and existing donors look at an NFP’s financials to understand how the entity is doing overall and how donations are spent on program services before committing to donate. Watchdog organizations also review and assess this information. A watchdog organization is typically a nonprofit group that monitors the activities of governments, industry or other organizations and alerts the public when actions that go against the public interest are detected. It is important that management and those charged with governance understand the watchdog organizations, the rating platforms and the methodologies behind those ratings. There are many of these organizations, but this article will focus on three prevalent organizations: Charity Navigator, Candid and the Better Business Bureau Wise Giving Alliance.

These three watchdog organizations have an enrollment process for nonprofits. Once the application is approved, the nonprofit may provide pertinent information that will be used by the watchdog organization to provide information to the public.

Charity Navigator
Charity Navigator’s mission is to make impactful giving easier for all by providing free access to data, tools and resources to guide philanthropic decision-making. Charity Navigator’s methodology involves ratings, curating lists and providing alerts.

Ratings

Charity Navigator focuses on two objectives in its approach to ratings: helping others and celebrating the work of charities. The types of charities assessed by this watchdog organization are 501(c)(3) tax-exempt organizations, which are U.S.-based organizations commonly referred to as public charities.

Eligible charities receive a zero- to four-star rating determined by the weighted sum of the organization’s individual beacon scores. Charity Navigator’s Encompass Rating SystemTM provides a comprehensive analysis of charity performance across four key domains, referred to as “beacons.” The beacons are as follows:

  • Impact and Results – determines if a nonprofit is making good use of resources to address the issues it aims to solve.
  • Accountability & Finance – evaluates a nonprofit’s accountability and transparency as well as its general financial health, and includes measures of stability, efficiency, and governance.
  • Leadership & Adaptability – evaluates the nonprofit’s leadership practice and ability to respond to change.
  • Culture & Community – evaluates the nonprofit’s overall culture and its connectedness to the constituents and community it serves.

Charity Navigator established this more encompassing rating system to fairly assess nonprofits across domains that influence organizational performance and success. By expanding the assessment beyond financial metrics, donors are provided with a more holistic understanding of nonprofit performance.

To be eligible for an overall rating, organizations must have an Impact & Results score and/or an Accountability & Finance score. Nonprofits that do not or are unable to earn an Impact & Results or Accountability & Finance score at the time of application can still earn scores for Culture & Community and Leadership & Adaptability. Charity Navigator’s rating system is not established to be all or nothing. It is designed to provide potential donors with as much meaningful information about the organization as is available.

The breakdown of the ratings is outlined below:

Rating Score Assessment Description

  • 4 star, 90+, Great Exceeds or meets best practices and industry standards across almost all areas. Likely to be a highly-effective charity.
  • 3 star, 75-89, Good Exceeds or meets best practices and industry standards across some areas.
  • 2 star, 60-74, Needs improvement Meets or nearly meets industry standards in a few areas and underperforms most charities.
  • 1 star, 50-59, Poor Fails to meet industry standards in most areas and underperforms almost all charities.
  • 0 star, <50, Very poor Performs below industry standards and well underperforms nearly all charities.

Curated Lists

In order to help donors navigate their giving, Charity Navigator compiles lists of charities divided into three distinct categories:

  • Where To Give Now – aims to respond to donors’ and media’s existing interest in certain trending topics. The charity needs to have a three or four-star rating, have clear and concentrated efforts responding to the issue as described on its website, and if facing a specific crisis, allows donors to designate their donations to the crisis-specific efforts.
  • Popular Charities – highlights some curated groups of ratings and is often a popular area of interest for donors. These are the most searched for, visited, and supported on Charity Navigator.
  • Best Charities – aims to highlight exciting giving opportunities that donors may not be aware exist. To be included, a charity needs to have a three- or four-star rating and has to run a particularly impactful program based on specific criteria.

Alerts
When a charity is reported to engage or confirmed to have engaged in misconduct or questionable practices, Charity Navigator posts an alert on the charity’s profile page to raise awareness and help inform donor’s giving. In issuing an alert, Charity Navigator’s Alert Issuance Committee considers the following:

  • Credibility (based on a media outlet that Charity Navigator deems reliable) and timeliness of information
  • Nature, scope, and seriousness of the allegations or convictions
  • Whether or not the allegations have been proven
  • Other factors on a case-by-case basis

Charity Navigator has the following four levels of alerts:

  • Review Before Proceeding – this alert is given if matters of concern relating to the organization have been reported, but to Charity Navigator’s knowledge, no legal proceeding has commenced, or the matter is not of a legal nature.
  • Proceed with Caution – this alert is given if a credible media outlet has reported that a government agency or a private third-party has filed charges or brought a claim as part of a pending legal proceeding, alleging that the organization or its managers have engaged in illegal conduct, including but not limited to financial wrongdoing, discrimination, or violation of data security laws.
  • Proceed with Increased Caution – this alert is given if a credible media outlet has reported that the organization is engaged in bankruptcy proceedings or the organization has been found, through a legal proceeding, to have engaged, or have managers who have engaged, in illegal conduct including, but not limited, to financial wrongdoing, discrimination, or violation of data security laws.
  • Giving Not Recommended – this alert is given if the organization lacks 501(c)(3) status or a credible media outlet has reported that the organization has engaged, or have managers who have engaged, in substantial fraud or misrepresentation relating to the organization’s charitable purposes or activities, as determined through a legal proceeding.

Candid
Candid, a nonprofit that provides comprehensive data and insights about the social sector, was formed with the 2019 merger of GuideStar and Foundation Center. GuideStar was a public charity that collected, organized and presented information about every IRS-registered nonprofit organization. The Foundation Center collected and communicated information on U.S. philanthropy, conducted research on trends in the field and provided education and training on the grant-seeking process. Candid continues to operate both of these arms.

Candid’s mission is to find where the money nonprofits spend comes from, where it goes and why it matters. To fulfill this mission, Candid works with nonprofits to identify funders who support the organization’s work by listing their information in its Foundation Directory. On the flip side, funders use GuideStar to verify and research nonprofits aligned with their focus.

  • Foundation Directory
    Candid’s Foundation Directory gives nonprofits access to information allowing them to be smart and strategic with funding requests. Nonprofits can choose from either the Essential plan or the Professional plan. The Foundation Directory allows nonprofits to enter a phrase for what it is looking for and, based on that phrase, a results page is produced that includes Grantmakers, Grants, and Recipients. Grantmaker profiles provide a powerful summary overview of the funder’s work along with all the pertinent details nonprofits need to find and approach great prospects.
  • Tools for Funders
    Candid offers various tools funders can use to research the operations and financials of nonprofits. In order for this information to be available, nonprofits must have an account with Candid. Once the nonprofit’s profile is approved, the nonprofit can tell its story through its profile. The Candid platform is driven by each nonprofit and the information they decide to showcase. Using the profiles created by the nonprofits, Candid provides the following tools for funders:

    • GuideStar Pro – Funders use Candid’s nonprofit profiles for research, due diligence, and, increasingly, as part of the grant application process. Search for information on more than 1.8 million nonprofits, including mission, vision, values, programs, leadership, staff and board demographics, and finances.
    • Charity Check– Validate nonprofits’ status and ensure compliance with Charity Check, which is compliant with all IRS requirements. Get alerts on nonprofit status changes and monitor organizations. Funders can quickly understand key elements of a nonprofit’s operations through Candid’s Seals of Transparency which is part of the Charity Check. The levels of seals are as follows:
      • Bronze Seal – this is awarded to a nonprofit with a profile that includes its mission and contract details, donation information, and leadership information.
      • Silver Seal – this is awarded to a nonprofit with a profile that includes the information at the bronze seal level and additional information regarding program information, grantmaker status and brand details (website, social media, logo).
      • Gold Seal – this is awarded to a nonprofit with a profile that includes the information at the silver seal level and its audited financial report or basic financial information, and its Board Chair names along with leadership demographics.
      • Platinum Seal – this is awarded to a nonprofit with a profile that includes the information at the gold seal level and includes its strategic plan or strategy and goal highlights, and at least one metric demonstrating its progress and results.
  • Data Integration and Partnerships – Candid provides comprehensive social sector data through its Application Programming Interfaces and custom data services. Candid also partners directly with organizations that share value of transparency.
  • Improve Your Community Foundation’s Performance – Council on Foundations Insights helps members assess and improve their community foundation’s organizational performance through peer benchmarking. Candid also creates connections to others in the field who are interested in sharing knowledge and increasing impact.
    For more information, please visit Candid

Better Business Bureau Wise Giving Alliance
The Better Business Bureau (BBB) Wise Giving Alliance (WGA) is a standards-based charity evaluator that seeks to verify the trustworthiness of charities publicly soliciting donations. The BBB WGA helps charities build trust and donors give wisely.

The BBB WGA’s foundation is the BBB Charity Standards, 20 standards addressing four themes. Following are the four themes and an overview of each theme and its corresponding standards. For each of the 20 standards noted below, the BBB WGA assigns a finding of (1) standard is met, (2) standard is not met, or (3) unable to verify.

  • Governance and Oversight – The governing board has the ultimate oversight authority for any charitable organization. The standards noted here seek to ensure that the volunteer board is active, independent, and free of self-dealing. To meet these standards, the nonprofit will have:
    • Board Oversight
    • Board Size – Minimum of five voting members
    • Board Meetings
    • Board Compensation
    • Conflict of Interest Policy
  • Measuring Effectiveness – The effectiveness of a nonprofit in achieving its mission is of the utmost importance. It’s key that potential donors know that when they give to a nonprofit, their money is going to have an impact. This is why a section of the BBB WGA’s standards require that nonprofits set defined, measurable goals and objectives, put a process in place to evaluate the success and impact of its programming, and report on the nonprofit’s progress. To satisfy the requirements the nonprofit must have the following:
    • Effectiveness Policy
    • Effectiveness Report
  • Finances – While the BBB WGA believes that a nonprofit’s finances only tell part of the story of how they are performing, the finances can identify nonprofits that may be demonstrating poor financial management and/or questionable accounting practices. The finance standards seek to ensure that the nonprofit is financially transparent and spends its funds in accordance with its mission and donor expectations. If the nonprofit has the following they must be provided:
    • Program Expenses – at least 65% of total expenses are on program
    • Fundraising Expenses – no more than 35% of contributions on fundraising
    • Accumulating Funds
    • Audit Report
      • Audit report if gross income exceeds $1 million
      • A review by a certified public accountant is gross income is less than $1 million
      • Internally produced financial statements if gross income is less than $250,000
    • Accurate Expense Reporting
    • Detailed Expense Breakdown
    • Budget Plan

There are cases where an organization that does not meet the first three standards under finance may provide evidence to demonstrate that its use of funds is reasonable and complies with the standards we have established – and we consider them accordingly.

  • Solicitations and Informational Materials – A fundraising appeal is often the only contact a donor has with a nonprofit and may be the sole impetus for giving. This section of the standards seeks to ensure that a nonprofit’s representations to the public are accurate, complete and respectful. If the nonprofit has the following they must be provided:
    • Accurate Materials
    • Annual Report
    • Website Disclosures
    • Donor Privacy
    • Cause Marketing Disclosures
    • Complaints Records

The BBB WGA also provides a list of charities in alphabetical order. Donors may locate a nonprofit on this list and pull up the charity review published by BBB WGA. The report provides information on the nonprofit, including the finding on each of the 20 standards, including the purpose and programs of the nonprofit, information on governance and staff, fundraising, tax status and financial information.

Finally, the BBB WGA provides “Tips for Donors.” This includes publications to help the donor in its charity donation decisions. While it’s ultimately the donor’s decision, the BBB WGA recommends donors avoid or be extremely cautious when contributing to nondisclosure charities. Charities that do not provide BBB WGA with any of the requested information needed to complete a charity evaluation are called “nondisclosure charities.” While this could be benign, some of these charities could also be hiding something by choosing not to disclose.

For more information, please visit Better Business Bureau Wise Giving Alliance

While nonprofits may feel like someone is always watching with so much exposure to their financial information, watchdog groups, including Charity Navigator, Candid, and the BBB Wise Giving Alliance are working to help donors and nonprofits. Nonprofits should see watchdog organizations as another outlet to provide access to their mission and provide a holistic understanding of the operations of the nonprofit.

© 2023 BDO USA, LLP. All rights reserved. www.bdo.com