7. Industry Standards for Accountability and Transparency
So, what should a donor know before making a
contribution to a charitable organization?
Naturally, you’ll want to know whether or not the charity is fulfilling
its charitable mission in an effective manner.
Information contained in this report or the charity’s registration and
financial statements can go a long way toward reassuring you of an
organization’s ability to carry out its mission. Several organizations have established
industry standards intended to help you evaluate a charity and feel confident
about your giving decision.
The BBB Wise Giving Alliance,
affiliated with the Council of Better Business Bureaus, has established a set
of 20 non-binding "Standards of Charitable
Accountability" to help donors make sound giving decisions and increase
public trust in charities. According to
its website, the
"Standards for Charity Accountability" were developed with professional and
technical assistance from representatives of small and large charitable
organizations, the accounting profession, grant making foundations, corporate
contributions officers, regulatory agencies, research organizations and the
Better Business Bureau system. The BBB Wise Giving Alliance also commissioned
significant independent research on donor expectations to ensure that the views
of the general public were reflected in the standards.
Some of the key BBB standards include:
- With respect to an organization’s finances, charities should spend at least 65% of total expenses on program activities, i.e., Total Program Service Expenses divided by Total Expenses should be at least 65%.
- Charities should spend no more than 35% of related contributions on fund raising, i.e., Total Fund Raising Expenses divided by Total Related Contributions should be no more than 35%. Related contributions include donations, legacies, and other gifts received as a result of fund raising efforts.
- Charities should avoid accumulating funds that could be used for current program activities. To meet this standard, the charity's unrestricted net assets available for use should not be more than three times the size of the past year's expenses or three times the size of the current year's budget, whichever is higher.
- Upon request, charities should make available complete annual financial statements prepared in accordance with generally accepted accounting principles.
- A charity should include in the financial statements a breakdown of expenses (e.g., salaries, travel, postage, etc.) that shows what portion of these expenses were allocated to program, fund raising, and administrative activities.
- Accurately report the charity's expenses, including any joint cost allocations, in its financial statements. For example, audited or un-audited statements which inaccurately claim zero fund raising expenses or otherwise understate the amount a charity spends on fund raising, and/or overstate the amount it spends on programs will not meet this standard.
CharityWatch, formerly known as the American Institute of Philanthropy, is
another well-known charity watchdog group that makes similar recommendations,
- Percent spent on charitable purpose. To achieve a satisfactory or “C range” rating, a charity should spend 60% or more of its Total Expenses on its charitable programs, with the remaining percentage being spent on Fundraising and General Administration. CharityWatch believes that most highly efficient charities are able to spend at least 75% on programs.
- Cost to raise $100. It should not cost more than $35 to raise $100 of funds. In other words, Total Fundraising Expenses divided by Total Related Contributions should be no more than 35%. CharityWatch defines related contributions as money that is brought in as a result of fundraising activities. CharityWatch is critical of charities that erroneously compare their cost to raise money with total income, which, according to CharityWatch, can include patient revenue, investment income, sales proceeds and other items that are not affected by fundraising outlays. CharityWatch believes this faulty comparison makes a charity’s fundraising efficiency appear better than it actually is.
- Years of available assets. CharityWatch examines a charity’s reserves of available assets to determine how long it could continue to operate at current levels without any additional fundraising. It defines a charity’s “years of available assets” as funds currently available for the charity’s use, including investments that the charity has set aside as a reserve but could choose to spend if it wanted to do. CharityWatch recommends a reserve of less than three years and gives a failing grade to the “least needy” groups with reserves of more than five years, believing that the public’s donations are most urgently needed by charities that do not have large reserves of available assets.
Charity Navigator, founded in 2011, recently expanded its rating
system, so that in addition to measuring a charity’s financial health, its rating system now looks at an organization’s
commitment to accountability and transparency, and (as of January 23,
2013) results reporting. It is best to visit the Charity Navigator
website for a discussion of its rating system, since Charity Navigator rates
charities with different resource and spending requirements differently. The site is a valuable source of data on
charities and includes detailed discussions about how to rate charities and
measure their impact.