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Accountability & Finance

We analyze organizations' governance practices and financial health to help donors find transparent, efficient, and sustainable charities.

This beacon equips donors with information on how charities operate and how they are stewarding the donations they receive.

How We Assess Charities' Transparency and Fiscal Responsibility

 

Throughout the year, we receive the annual tax filings (Forms 990) that charities submit to the IRS. We leverage several fields in the IRS Form 990 to generate scores for charities' Accountability & Finance beacons. Charities need at least three years of data to receive a score.

 

Depending on the size and age of the organization, some additional metrics are included in the assessment. The metrics are detailed below.

Accountability Metrics

Applicable for all rated charities

Audited financial statements provide important information about a charity’s financial accountability and accuracy. An independent accountant should prepare them. In cases where an audit is not feasible, organizations should have their accountant complete a financial review or compilation. 

 

We expect charities with over $1 million in total revenue to conduct an audit. For those with revenue between $500k and $1 million, we expect them to have an audit, review, or compilation. And, for those with less than $500k in revenue, this metric is not applicable. 

 

For well-established, donor-funded charities, we expect them also to have an audit oversight committee. This committee provides an important layer between management and the independent accountant.

Industry professionals strongly recommend an independent governing body to allow for full deliberation and diversity of thinking on governance and other organizational matters. We check to see if the organization has at least three board members and that more than 50% of those members are identified as independent on the Form 990.

 

For well-established donor-funded charities we expect them to have at least five independent board members and those members make up a voting majority.

An official record of events 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 metric, we check if the organization reports on its Form 990 that it retains those minutes.

This policy outlines procedures for handling employee complaints and a confidential way for employees to report any financial mismanagement.  Here we check if the charity indicated the existence of a policy on its Form 990.

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 reports on its Form 990 that it has one in place.

Such a policy establishes guidelines for the handling, backing up, archiving, and destruction of documents. These guidelines foster good record-keeping procedures that promote data integrity. Here, we report that the charity indicates the existence of a policy on its Form 990.

Additional Accountability Metrics

Applicable for well-established donor-funded charities

The IRS requires that the charity lists any compensation paid to the charity's governing body members on the Form 990. Furthermore, all governing body members must be listed whether or not they are compensated. Our analysts verify that the charities complied with the Form 990 instructions and that no board members are compensated simply for being on the board.

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 review the charity's last two Forms 990 to see if the charity has reported any diversion of assets. If the charity reported a diversion,  we verify that the organization described what happened and its corrective action on its Form 990.

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.

 

The IRS 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."  Some state laws go so far as to prohibit loans to board members and officers.

 

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 indicates that the organization is not financially secure. Our analysts check to see if any loans have been made.

Providing copies of the Form 990 to the governing body prior to 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.

This process indicates that the organization has a documented policy that it follows yearly. The policy should indicate that an objective and independent review process of the CEO's compensation has been conducted, including 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.

Donors can be reluctant to contribute to a charity when their name, address, or other basic information may become part of donor lists that are exchanged or sold, resulting in an influx of charitable solicitations from other organizations. Our analysts check the charity's website to see if the organization has a donor privacy policy and if its contents are sufficient to protect the donor’s information.

Charities must list their CEO's name and compensation on the 990, an issue of concern for many donors. Our analysts check to be sure that the charities comply with the Form 990 instructions and include this information.

Our analysts check to see if the charity lists its board members on its website. Publishing this information enables donors and other stakeholders to ascertain the makeup of the charity's governing body. This enables stakeholders to report concerns to the board. While the board members should be reported on the Form 990, the members may have changed since then. The charity’s website will typically reflect the most current list of members.  

Donors and other stakeholders need to know who runs the organization day-to-day. While key staff should be reported on the Form 990, the charity's staff may have changed since then. The charity typically reflects the most current  members on the website.

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. Donors need 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.

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, donors need easy access to this financial report to help determine if the organization is managing its financial resources well.

Additional Accountability Metrics

Applicable for smaller or more recently established charities

Charities act in the public trust, and reporting publicly on activities is an important component of our rating. For this metric, we are checking to confirm that the organization shares its website URL on its Form 990.

Financial Metrics

Applicable for all rated charities

Charities exist to provide programs and services. They fulfill the expectations of givers when they allocate a good portion of their budgets toward their stated missions. While administration expenses are necessary for efficient charity operations, organizations that grossly underspend on their programs and services will most likely not have as strong an impact on their charitable missions. 

 

We calculate the nonprofit's average program expense percentage over its three most recent fiscal years and then assign a numeric score based on an established scale. 

Part of our goal in rating the financial performance of charities is to help donors assess a charity's financial capacity and sustainability. As do organizations in other sectors, charities must manage their total liabilities in relation to their total assets. This ratio is an indicator of an organization's solvency and or long-term sustainability. It can signal potential issues within an organization, and additionally, it displays how well the charity is managing this balance compared to organizations in the same cause area. 

 

This metric helps donors understand if their donations may be used to service debt and/or other obligations rather than servicing the charitable mission. 

 

We calculate a charity's ratio of liabilities to assets by comparing the organization's total liabilities to total assets in the most recent tax year analyzed. Then we assign a numeric score based on an established scale.

Additional Financial Metrics

Applicable for well-established donor-funded charities

As with successful organizations in any sector, effective nonprofits must recruit, develop, and retain talented people and implement operational systems to support the programs. At the same time, they should ensure that these administrative expenses remain reasonable and in line with the organization's total expenses.

 

We calculate the charity's average administrative expense percentage over its three most recent fiscal years and then assign a numeric score based on an established scale.

Givers support charities for their programs and services, not for their ability to raise money. While they must invest in raising funds to support their work, charities should ensure that fundraising expenses stay in line with the charity’s total expenses. 

 

We calculate the organization’s average fundraising expense percentage over its three most recent fiscal years and then assign a numeric score based on an established scale.

Financially effective charities should be efficient fundraisers, spending less to raise more. We calculate an organization's fundraising efficiency by determining how much it spends to generate $1 in charitable contributions. 

 

We calculate the charity’s average fundraising expenses and total contributions over its three most recent fiscal years and then assign a numeric score based on an established scale.

Charities that spend more year over year on their programs and services continue to have a greater impact on their charitable missions. Organizations that demonstrate consistent annual growth in program expenses are able to outpace inflation and thus sustain their programs year to year. 

 

We analyze a charity's annual program expenses growth rate over its four most recent fiscal years, using the standard formula for computing annualized growth. After calculating the annualized growth rate, we assign a numeric score based on an established scale.

Charities depend upon their reserves of liquid assets to survive downward economic trends and sustain their existing programs and services. If a charity has insufficient working capital, it faces the difficult choice of eliminating programs or staff, amassing debts and liabilities, or dissolving. On the other hand, when giving flows, those charities that build working capital develop a greater capability for expanding and improving their programs. 

 

We analyze a charity's working capital ratio by determining how long it could sustain its current programs without generating new revenue. We calculate the charity's working capital for the rated year and its average total expenses over its three most recent fiscal years. We then calculate the ratio between working capital and average total expenses and then assign a numeric score based on an established scale.

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