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The team from Charity Navigator, the nation's largest independent charity evaluator and leading donor advocate, shares their thoughts on emerging nonprofit-sector issues and offers tips to better inform your intelligent giving decisions.

Wednesday, February 21, 2018

Taking a Closer Look at Charity Navigator's Ratings: Accountability & Transparency

Charity Navigator offer two-dimensional evaluations of more than 9,000 of the nation’s largest charities. Last week we dug into the first dimension, financial health, to explain what we look for and what the numbers say about a charity’s performance. Today we’re going to spend some time looking at the second dimension, accountability and transparency. This facet takes into account a charity’s policies for being open and honest with their constituents and donors, and the structures they have in place to reduce the risk of fraud and wrongdoing.

To calculate a charity’s accountability and transparency score, Charity Navigator’s team of analysts gathers information from an organization’s Form 990 (the form they use to file annually with the IRS) and their website. Our goal is to answer two answer two important questions: Does the charity follow good governance and ethical best practices? Does the charity make it easy for donors to find critical information about the organization?

We collect the following information from a charity’s Form 990:

  • Independent board: An independent board is considered an industry best practice. It allows for diversity and deliberation in governance and management of an organization.
  • Material diversion of assets: A diversion of assets is any unauthorized use of an organization’s assets for other purposes (i.e. embezzlement, theft, etc.). If a charity reports a material diversion of assets, we investigate to ensure they correctly reported this to the IRS and provided an explanation of a corrective action.
  • Audited financials prepared by independent accountant with an audit oversight committee: Audited financials provide a better understanding of an organization’s financial health and accountability. An audit review committee adds a layer of oversight between the organization and the independent accountant.
  • Loan(s) to or from related parties: Making loans is not a standard practice in the sector because it diverts resources away from the organization’s charitable mission. Some states may even prohibit these kinds of loans.
  • Documents Board meeting minutes: Keeping Board meeting minutes ensures a record of previous actions and decisions will be available for future reference. These minutes are not required to be made public.
  • Provided copy of Form 990 to organization’s governing body in advance of filing: This is considered a sector best practice. It allows an organization’s managing body to be fully informed of the charity’s financial position before making decisions.
  • Conflict of interest policy: This policy protects the organization and its constituents from any actions or transactions that may benefit the private interest of a staff person.

  • Whistleblower policy: This policy protects employees by outlining a structure for escalating staff complaints and provides a means to safely report fraudulent or corrupt behavior.
  • Records retention and destruction policy: This policy promotes data integrity by outline procedures for saving and destroying documents.
  • CEO listed with salary: This is required on the Form 990. Our analysts check to make sure the charity is compliant.
  • Process for determining CEO compensation: This helps to ensure an organization uses the same procedure year after year for setting CEO compensation. This should include an objective and independent review of the CEO’s compensation in line with similar organizations.
  • Board list / Board members not compensated: Reporting Board compensation is required on the Form 990. Some Board members, like an organization’s president or CEO, may receive compensation. Generally speaking, however, providing compensation to Board members who are not key staff is not considered a best practice.

We collect the following information from a charity’s website:

  • Board members listed: This information allows donors to better understand the makeup of an organization’s governing body.
  • Key staff listed: Listing key staff helps donors understand who is responsible for overseeing an organization’s day-to-day operations.
  • Audited financials: We look to see that this information is provided on a charity’s website because it is important for donors to have easy access to this financial report to help determine if the organization is managing its financial resources well.
  • Form 990: Like an organization’s audited financials, we check to see that this information is easily accessible to donors on the charity’s website.
  • Privacy policy: A privacy policy clearly explains whether or not an organization shares or sells their donor lists with other organizations or third parties. This practice is not illegal, however we do think it is important that donors know how a charity is using their information.

You can learn more about our Accountability and Transparency ratings and how we calculate them on our website.

Interested in better understanding our financial health ratings? Check out our blog post from last week!

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