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Charity Navigator Adjusts Material Diversion of Assets Scoring

November 2, 2019

After connecting with several charities that reported material diversions of assets on their IRS Form 990, Charity Navigator opted to change the way we score for these incidents.  Previously, a nonprofit organization that reported material diversion of assets and properly explained what happened in their Form 990 received a deduction of seven points from their accountability and transparency (A&T) metrics as part of their Charity Navigator rating. This deduction would last for two years - one for the year it was reported and one for the year that followed. After careful consideration, Charity Navigator decided to no longer deduct the points for the year following when the diversion was reported, as long as there aren't any additional material diversions of assets reported.
More on this Adjustment
One of the accountability and transparency (A&T) metrics used in Charity Navigator’s ratings refers to the reporting of a material diversion of assets. We review the IRS Form 990 to see if an organization reported a material diversion of assets (listed on Page 6, Question 5 of the document). Per IRS guidelines, a material diversion of assets is any unauthorized conversion or use of the organization’s assets for purposes other than what they were originally  authorized for, including but not limited to embezzlement or theft. Material is defined as the gross value of the diversion exceeding the lesser of 5% of the organization’s gross receipts for its tax year, 5% of the organization’s total assets as of the end of its tax year, or $250,000. In addition, if a diversion is reported, then the Form 990 must include a description of the diversion including the nature of the incident, the dollar amount, and corrective actions taken to address the issue. 
Historically, as part of Charity Navigator’s methodology, if there was a diversion of assets without an accompanying description (as mentioned above and required by the IRS Form 990 instructions) provided on Schedule O, then a fifteen-point deduction was made to the A&T score. If the organization reported a material diversion of assets but, as per Form 990 instructions, properly includes details on what happened and the corrective actions that were taken, then only a seven-point deduction was made to the A&T score.  
Up until a methodology change, effective November 1, 2019, the deductions for both of these situations remained in effect over two Forms 990.  This means that, once a diversion was reported, the deduction would stand even if the following Form 990 did not report one. The reason was that Charity Navigator wanted to see two consecutive “clean” Forms 990 (ones with no reporting of a material diversion of assets) before removing the deduction. The change we made is that, for the seven-point deduction situation, when a diversion is reported with a description of corrective actions, we will no longer carry that over to the following year’s Form 990 rating, assuming, of course, that there is no new material diversion of assets reported.
Charity Navigator believes that the charities in this situation are demonstrating transparency and responsibility about what happened and have taken corrective actions to prevent its recurrence. We have opted to adjust our policy to require only one “clean” Form 990 to confirm good governance. For any organizations affected by this deduction, we issued a new rating on November 1, which included the removal of the seven-point deduction and therefore and increase to the charity’s overall A&T score by seven points.

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