Are You the Target of a Watchdog Agency?– March 18, 2014

Did you know there are numerous watchdog agencies, or charity evaluators, that analyze the information you report on your 990 and issue a “report card” as a result? Individual donors are becoming more educated and using such services when deciding which organizations they will support.While there are a few different agencies offering these services, Charity Navigator is the most widely used. Below is an overview of their process and evaluation criteria.

Who is being graded?

Organizations can fall under the microscope if they:

  • Are granted tax-exempt status under section 501(c)(3) of the internal revenue code, for any charitable purpose.
  • File a Form 990, and have seven or more years of Form 990s available.
  • Depend on support from individual givers, meaning they actively solicit donations from the general public.
  • Have public support in the amount of $500,000 or more and have total revenue more than $1 million.
  • Are based in the United States.

What information is used in the grading process?

Organizations are given a rating of 0-4 stars (with zero being very poor and four being excellent) in the categories of financial health, accountability and transparency, and overall. In 2013, a third category of results reporting has been added but not applied yet to all rated organizations.

  • Financial Health: This category includes seven key areas that assess an organization’s financial efficiency (program expenses, administrative expenses, fundraising expenses and fundraising efficiency) and capacity (primary revenue growth, program expense growth and working capital ratio) as compared to performances of similar organizations.
  • Accountability & Transparency: This category evaluates whether the charity follows good governance and ethical best practices, and if the charity makes it easy for donors to find critical information about the organization. Here is where the governance questions you answer on your Form 990 will have an impact. While answering a question “no” may not have a specific and immediate impact, it will affect the scores awarded by watchdog agencies. These agencies will also use your organization’s website to determine how readily available certain information is to donors.

Based on the results from above, donor advisories are posted on the watchdog websites when serious concerns are raised about an organization.

Most of these watchdog agencies offer the public a searchable database of rated organizations, and the trend seems to be gaining in popularity in the donor community. It may be a good idea to check your organization’s report at one of the websites listed below to find out what information your donor pool is viewing and in what areas you may need to consider improvements.

Contact a member of your service team for more information or to discuss your nonprofit. For more details on ratings, what goes into each calculation and to view organization listings, visit Charity Navigator, BBB Wise Giving Reports or CharityWatch.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.