How do charity watchdogs influence donations? Without proper controls and accountability, your nonprofit may be forced to shut down.
Beware of the Charity Watchdogs. Donors, they have your back.
Nonprofits are subject to audits and submitting IRS form 990. Failing to disclose financials can raise red flags. This happened to a 12-year-old foundation supporting critically ill and underprivileged children and teenagers. Several years of data were missing or not available causing a watchdog group to dig in.
Reports found the foundation had raised $1.8 million but only distributed $281,000 to its charitable causes. The numbers did not add up and eventually the foundation closed its doors.
Role of Charity Watchdogs
And what about extravagant spending on travel and parties? One executive director reportedly spent $3 million dollars of its nonprofit’s money on lavish expenses. Former employees talked about using private jets for attending meetings and staying in $500-per-night hotel rooms.
That’s where watchdog groups like Charity Watch come in. These types of groups typically rate nonprofits based on accountability and transparency. This particular organization got a D rating. Turns out the organization was giving less to the people it serves and more to themselves. According to public records, Charity Navigator reported that the organization spent only 60 percent for its cause. The nonprofit publicly stated it devoted 80 percent of its revenue to services, but the investigation found it was more like 60 percent, leaving a discrepancy of 20 percent.
Charity watchdog organizations are in the charity-rating business. Donors can check out an organization’s financial documents, including annual financial audits and 990 forms. A watchdog group like Charity Navigator rates a nonprofit’s financial health based on both their short-term spending practices and their long-term prospects for success. They give overall ratings of zero to four stars on the basis of short-term spending and long-term viability compared to other organizations in their field.
Methods to Predict Sustainability
Their scoring methods can predict long-term sustainability based on revenue growth and growth in program expenses over a period of time. It can also determine how long a charity could maintain its current level of spending using only its cash reserves.
The charity watchdog organization, GuideStar, gives access to IRS Form 990 for almost every charity that files one. Other watchdog organizations, such as Charity Navigator and Better Business Bureau Wise Giving Alliance, use 990s as the basis of their reports.
Disregard the Overhead Myth
All three watchdog organizations have joined forces to encourage donors to disregard what is known as the “overhead myth” where less spending for administration or fundraising is important for increasing donations. Charity Navigator and Wise Giving Alliance warn donors about “questionable” issues with an organization.
Abandoning overhead measurements as a criteria for mission fulfillment can give nonprofits more control of their spending in order to increase donations and revenue. But the mission of charity watchdogs is to need to prevent fraud and frivolous spending and to make sure a nonprofit’s resources are used to fulfill its mission.
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