How Do We Rate Charities' Accountability and Transparency?
What We're Looking For
We define accountability and transparency in assessing charities as follows:
- Accountability is an obligation or willingness by a charity to explain its actions to its stakeholders.
- Transparency is an obligation or willingness by a charity to publish and make available critical data about the organization.
We believe that charities that are accountable and transparent are more likely to act with integrity and learn from their mistakes because they want donors to know that they're trustworthy. Generally speaking, charities that follow best practices in governance, donor relations and related areas are less likely to engage in unethical or irresponsible activities. Therefore, the risk that charities would misuse donations should be lower than for charities that don't adopt such practices. When examining accountability and transparency, Charity Navigator seeks to answer two basic questions:
- Does the charity follow good governance and ethical best practices?
- Does the charity make it easy for donors to find critical information about the organization?
What Data We Use
We consider two data sources when examining accountability and transparency:
- Additional information available from the IRS Form 990; and
- A review of the organization's website.
Please note, Charity Navigator's goal is to let donors know whether charities are making certain kinds of important information readily available to donors. We hope to further enhance our methodology and make a qualitative assessment of that information in the future.
Here's what information we collect from each source:
Data culled from Form 990
The IRS expanded the Form 990 in 2008 to collect additional information from charities that can accept tax-deductible donations. Several changes were designed to inform the public about potential conflicts of interest, board oversight, executive compensation, and record keeping. The IRS states that, "by making full and accurate information about its mission, activities, finance, and governance publicly available, a charity encourages transparency and accountability to its constituents." 12 of the 17 Accountability & Transparency categories that we analyze are collected from the expanded Form 990. If a charity fails to submit an answer to any of the following 12 items on the Form 990, then we deduct the points from their Accountability & Transparency score.
- Independent Board: The presence of an independent governing body is strongly recommended by many industry professionals to allow for full deliberation and diversity of thinking on governance and other organizational matters. Our analysts check the Form 990 to determine if the independent Board members are a voting majority and also at least five in number.
Material diversion of assets: A diversion of assets - any unauthorized conversion or use of the organization's assets other than for the organization's authorized purposes, including but not limited to embezzlement or theft - also can seriously call into question a charity's financial integrity. We check the charity's last two Forms 990 to see if the charity has reported any diversion of assets. If the charity does report a diversion, then we check to see if it complied with the Form 990 instructions by describing what happened and its corrective action. This metric will be assigned to one of the following categories:
- There has been no diversion of assets within the last two years.
- There has been a diversion of assets within the last two years and the charity has used Schedule O on the Form 990 to explain what happened and the corrective action it has taken.
- There has been a diversion of assets within the last two years and the charity has not offered any explanation on Schedule O.
Audited financials prepared by independent accountant with an audit oversight committee: Audited financial statements provide important information about financial accountability and accuracy. They should be prepared by an independent accountant with oversight from an audit committee. (It is not necessary that the audit committee be a separate committee. Often at smaller charities it falls within the responsibilities of the finance committee or the executive committee.) The committee provides an important oversight layer between the management of the organization, which is responsible for the financial information reported, and the independent accountant, who reviews the financials and issues an opinion based on its findings. We check the charity's Form 990 reporting to see if it meets this criteria. In the future we also intend to review whether or not the charity has received an unqualified opinion from the auditor.
This metric will be assigned to one of the following categories:
- The charity's audited financials were prepared by an independent accountant with an audit oversight committee.
- The charity's audited financials were prepared by an independent accountant, but it did not have an audit oversight committee.
- The charity did not have its audited financials prepared by an independent accountant.
- Loan(s) to or from related parties: Making loans to related parties such as key officers, staff, or Board members, is not standard practice in the sector as it diverts the charity's funds away from its charitable mission and can lead to real and perceived conflict-of-interest problems. This practice is discouraged by sector trade groups which point to the Sarbanes-Oxley Act when they call for charities to refrain from making loans to directors and executives. And the IRS is concerned enough with the practice that it requires charities to disclose on their Form 990 any loans to or from current and former officers, directors, trustees, key employees, and other "disqualified persons." Furthermore, some state laws go so far as to prohibit loans to board members and officers. And although employees and trustees are permitted to make loans to charities, this practice can also result in real and/or perceived conflict of interest problems for the charity. Furthermore, it is problematic because it is an indicator that the organization is not financially secure.
- Documents Board meeting minutes: An official record of the events that take place during a board meeting ensures that a contemporaneous document exists for future reference. Charities are not required to make their Board meeting minutes available to the public. As such, we are not able to review and critique their minutes. For this performance metric, we are checking to see if the charity reports on its Form 990 that it does keep those minutes. In the future, we will also tack and rate whether or not a charity keeps minutes for its committee meetings.
- Provided copy of Form 990 to organization's governing body in advance of filing: Providing copies of the Form to the governing body in advance of filing is considered a best practice, as it allows for thorough review by the individuals charged with overseeing the organization. The Form 990 asks the charity to disclose whether or not it has followed this best practice.
- Conflict of interest policy: Such a policy protects the organization, and by extension those it serves, when it is considering entering into a transaction that may benefit the private interest of an officer or director of the organization. Charities are not required to share their conflict of interest policies with the public. Although we can not evaluate the substance of its policy, we can tell you if the charity has one in place based on the information it reports on its Form 990.
- Whistleblower policy: This policy outlines procedures for handling employee complaints, as well as a confidential way for employees to report any financial mismanagement. Here we are reporting on the existence of a policy as reported by the charity on its Form 990.
- Records retention and destruction policy: Such a policy establishes guidelines for the handling, backing up, archiving and destruction of documents. These guidelines foster good record keeping procedures that promotes data integrity. Here we are reporting on the existence of a policy as reported by the charity on its Form 990.
- CEO listed with salary: Charities are required to list their CEO's name and compensation on the new 990, an issue of concern for many donors. Our analysts check to be sure that the charities complied with the Form 990 instructions and included this information in their filing.
- Process for determining CEO compensation: This process indicates that the organization has a documented policy that it follows year after year. The policy should indicate that an objective and independent review process of the CEO's compensation has been conducted which includes benchmarking against comparable organizations. We check to be sure that the charity has reported on its Form 990 its process for determining its CEO pay.
- Board Listed / Board Members Not Compensated : The IRS requires that any compensation paid to members of the charity's governing body be listed on the form 990. Furthermore, all members of the governing body need to be listed whether or not they are compensated. It is not unusual for some members of the board to have compensation listed. The executive director of the organization frequently has a seat on the board, for instance, and is compensated for being a full time staff member. However, it is rare for a charity to compensate individuals only for serving on its Board of Directors. Although this sort of board compensation is not illegal, it is not considered a best practice.
Please visit our Accountability and Transparency Ratings Tables to see how we score each of the performance categories that relates to the information reported on the charity's Form 990.
A Review of the Charity's Website
Five of the 17 Accountability & Transparency categories that we analyze are from a review of the charity's website. Our analysts check to see if the following information is on the charity's website:
- Board members listed: Our analysts check to see if the charity lists Board members on its website. Publishing this information enables donors and other stakeholders to ascertain the make up of the charity's governing body. This enables stakeholders to report concerns to the Board. Charity Navigator does not cross-check the Board members listed on the website with that reported on the Form 990 because the latter often isn't available until more than a year after the charity's fiscal year ends. In that time, the charity's Board members may have changed and the charity typically reflects those more recent changes on the website. In other words, since the Form 990 isn't especially timely, it can not be used to verify the Board information published on the charity's site.
- Key staff listed: It is important for donors and other stakeholders to know who runs the organization day-to-day. And, for the same reasons outlined above, this information is usually more current than the Form 990.
- Audited financials: We check the charity's website to see if it has published its audited financial statements for the fiscal year represented by the most recently filed IRS Form 990. It is important for donors to have easy access to this financial report to help determine if the organization is managing its financial resources well. We are rating charities on whether or not they publish their audit on their website. In the future, for those charities that do publish their audit online we will also report and rate whether or not the auditor's opinion was qualified or unqualified.
- Form 990: We check the charity's website to see if it has published its most recently filed IRS Form 990 (a direct link to the charity's 990 on an external site is sufficient). As with the audited financial statement, it is important for donors to have easy access to this financial report to help determine if the organization is managing its financial resources well.
Charity Navigator has monitored this metric since 2004, but it was not used in the ratings calculations until the implementation of CN 2.0 in September 2011.
Please view our Accountability and Transparency Ratings Tables to see how we score each of the performance categories that relates to the presence or absence of information on the charity's website.