F-Rated Charities Receive Top Ratings & Seals From Nonprofit Trade Associations

Millions
of donors regularly search online for ratings of charities before
making their giving decisions. This makes sense. Most of us have heard
horror stories about charity frauds and scams and do not want to fall
victim to a similar scheme.

Unfortunately,
these good faith efforts to research charities before donating are
sometimes all for naught. Online charity databases such as those hosted
by Charity Navigator (at charitynavigator.org) and Candid (at guidestar.org)
that offer information on thousands of charities typically use a
combination of crowdsourcing and automation, which is what allows them
to publish such large volumes of charity ratings and profiles. This
sadly leads some donors to rely on ratings and other information that
may lack independence, accuracy, consistency, comparability, and/or
completeness.

CharityWatch
(CW) has assigned failing grades to many charities that receive top
scores from others, such as Charity Navigator (CN) and Candid. Some
examples are illustrated in the chart below:

The above chart contains select examples of charities to which
CharityWatch (CW) has assigned “F” grades as of 5/19/2023. See Our Process for more information about how CharityWatch’s grades are
calculated. Charity Navigator’s (CN) ratings and Candid’s seals were
retrieved from those websites between 2/26/2023 and 3/21/2023 and
reflect each charity’s current rating or transparency seal as of the
date retrieved. Visit charitywatch.org, charitynavigator.org and
guidestar.org to view the most current ratings and profiles published on
each website.

Nonprofit Trade Associations Exist Primarily to Serve Charities

In
a charity’s marketing or fundraising materials you may see a Platinum
Seal of Transparency from Candid or 4-star rating from Charity Navigator
and assume this means that the charity will use your donations
efficiently. This is a false assumption. Candid does not measure a
charity’s financial efficiency as part of the criteria it uses to assign
its transparency seals. With respect to Charity Navigator’s star
ratings, its “Accountability & Finance” beacon comprises only 32% of
a charity’s overall score, and of that 32%, it is unclear how a
charity’s program expense ratio is weighted within the list of 25 data
points that make up this beacon. CharityWatch has spoken to many donors
and nonprofit professionals who are surprised to learn that a
measurement of how efficiently a charity will use the donations it
receives is not a primary measurement reflected in these seals and star
ratings.

In practice, organizations like Candid and Charity
Navigator function more like nonprofit trade associations that exist
primarily to help charities amplify their marketing and fundraising
efforts, not independent charity raters. Insofar as such organizations
help to support and promote efficient and responsible charities, this
can be a good thing. It’s not such a good thing when highly inefficient
or irresponsible charities exploit these seals and ratings to gain
credibility with donors that may not be deserved. By contrast, the
primary function of a charity watchdog like CharityWatch is to serve as
an independent resource for donors seeking well-researched ratings of
charities and for journalists seeking help with their investigations
into wrongdoing in the nonprofit sector. CharityWatch works closely with journalists and symbiotically with government agencies to police the
nonprofit sector in ways that nonprofit trade associations are not
designed to do.

Crowdsourcing

Data
used to compute the charity ratings and seals published by nonprofit
trade associations is sometimes crowdsourced directly from the charities
being rated. The uploading of data is often treated as an end unto
itself. Charities are assigned higher ratings in exchange for uploading
information, which is not independently analyzed or measured, not based
on how efficiently or effectively they are using donations. Candid, for
example, rewards charities for simply logging into an online profile and
building out that profile with information. As described on
guidestar.org, the Candid “Seals of Transparency” for each level require
a charity to upload the following information to its online profile:

Bronze—“Provide basic information to make sure donors find you”

Silver—“Share program(s) information and brand details to guide funding decisions”

Gold—“Upload
your financial details (Option A or B), board chair name, and
leadership demographics to gain trust and support” (for a 2023 seal,
Option A is an audited financial statement for 2021 or 2022, and Option B
is to provide the following: fiscal year start date; fiscal year end
date (2021 or 2022); contributions, gifts, and grants; total revenue;
program expenses; administrative expenses; total expenses; total assets;
total liabilities; and net assets or fund balance)

Platinum—“Share
your strategic plan, progress, and results (Option A or B) to highlight
your impact and boost your funding” (Option A is a strategic plan that
must be no older than 5 years, and Option B is to answer the following
questions: “What is your organization aiming to accomplish?” and “What
are your strategies for making this happen?”)

The
Candid “Seals of Transparency” reflect a charity’s willingness to share
information about itself with the public—an unquestionably good thing
for a nonprofit trade association to encourage. But donors should take
note of what is not being said by Candid before misinterpreting a
charity’s Bronze, Silver, Gold, or Platinum seal as meaning that the
information a charity has shared has been independently vetted. Candid
does not claim that its seals measure how efficiently a charity will
spend your donations, or that it has reviewed a charity’s audited
financial statements to check for misrepresentations or material
misstatements. Charities have little incentive to voluntarily circulate
unflattering information about themselves on Candid or other websites.
As the above chart reflects, many organizations that receive F
ratings from CharityWatch for low program spending and/or high
fundraising expenses receive Platinum seals from Candid.

Automation

When
charity ratings are automated, this is typically achieved by mining
unaudited figures from charity tax filings, known as IRS Forms 990. With
few exceptions, the financial reporting is taken at face value without
the charity rater conducting an independent review of audited financial
statements to understand if the reporting is accurate, consistent,
comparable, or complete, or making any necessary adjustments to make it
so. CharityWatch has been contacted by many donors who are surprised to
learn that charities with very low program spending and high overhead
are able to achieve top scores from charity raters that rely on
automation, either due to a charity’s program expense ratio not being a
primary component of the overall rating, or due to the unreliability of
the data being used to compute a charity’s score.

The
reliability of automated ratings is only as good as the quality of the
underlying data used to compute them. In other words, garbage in, garbage out. Charity ratings based on automated methods that mine data
from charities’ unaudited tax filings may be unreliable for four primary
reasons:

1. Accuracy: They don’t account for reporting
errors, which are common. Charity tax filings are self-reported
documents. The reporting is not subjected to Generally Accepted Auditing
Standards (GAAS) and is not required to be presented according to
Generally Accepted Accounting Principles (GAAP). As a result,
unflattering information may be omitted from a tax filing altogether, or
information may be reported in the wrong lines or columns, distorting
how efficiently a nonprofit is operating.

2. Consistency:
Charities may report the same financial activities in wildly different
ways from one reporting year to the next without violating any IRS or
audit reporting rules, or without any violations that do exist being
caught. Some change their reporting methods just to look better to donors. Even if a charity has not improved its operating efficiency, it
can make itself look more efficient in automated charity rating
databases by simply changing how it reports certain activities, such as
fundraising.

3. Comparability: Similarly, because IRS and
audit reporting rules allow charities a lot of freedom to report similar
activities, such as fundraising, in wildly different ways, one charity
can appear to be operating vastly more efficiently than another. This is
not because it is actually more efficient, but rather because it is
intentionally reporting its financial activities in more flattering ways
than other charities. Charities that are more honest or conservative in their financial reporting may be punished in the form of lower ratings
simply for being more forthcoming than other charities about how
efficiently they are operating.

4. Completeness:
Charities, especially larger ones, may operate more than one related
legal entity, often with financial transactions flowing among them. Any
single charity tax filing generally contains the financial activities of
one legal entity. Meaning, charity raters that pull numbers from the
individual tax filings of charities may be disregarding significant
fundraising and overhead costs absorbed by a charity’s related legal
entities or may be counting the contributions a charity receives from
itself (transferred from one legal entity to another) when computing its
fundraising efficiency.

Charity
Navigator states on its website: “We list all 1.6 million
IRS-registered nonprofit organizations on our site. We only rate
501(c)(3) nonprofits, commonly referred to as charities…” It also
states: “We currently provide ratings for nearly 200,000 charitable
organizations.” With respect to its process, Charity Navigator’s website
states that throughout the year it receives “the annual tax filings
(Forms 990) that charities submit to the IRS,” and it “leverage[s]
several fields in the IRS Form 990 to generate scores for charities’
Accountability & Finance beacons.” Charity Navigator requires at
least three years of data “to receive a score,” and it includes “some
additional metrics,” depending on a charity’s size and age.
Independently analyzing and verifying the financial efficiency and other
claims of 200,000 or more nonprofits would require resources well
beyond what any nonprofit trade association could provide. For example,
spending as little as three hours per charity to conduct a financial
analysis and a cursory review of a charity’s claimed program impact
would require 600,000 hours of staff time. To do this annually would
require at least 288 qualified, full-time analysts.

The “Financial
Metrics” portion of Charity Navigator’s “Accountability & Finance”
beacon includes several measurements, including a Program Expense Ratio.
Charity Navigator states: “We calculate the nonprofit’s average program
expense percentage over its three most recent fiscal years then assign a
numeric score based on an established scale.” Charity Navigator’s
website reflects that its “Accountability & Finance” beacon accounts
for 32% of a charity’s overall score. As illustrated in the above chart, CharityWatch has assigned failing grades to many charities that
receive 3-star or 4-star ratings from Charity Navigator. CharityWatch
typically analyzes a charity’s audited financial statements in addition
to the available tax filings of any nonprofit legal entities included in
those audits. We make adjustments to account for errors,
inconsistencies, incomparability, and/or incompleteness of the reported
information so that we can provide useful and comparable information to
donors about how efficiently a charity is operating.

A Trade Association Is Not a Watchdog

Nonprofit
trade associations may provide charities and others in the sector with
valuable services such as professional education, fundraising resources,
guidance on maintaining and complying with good governance policies,
and more. While this type of support is critical to the success of the
nonprofit sector, the audience for it is nonprofits and their staff and
board members, not donors. Ratings or seals that are largely a
reflection of what charities report about themselves lack the
independence necessary to root out bad actors and poorly performing
charities.

Also at issue is how such trade associations are funded, which can create conflicts of interest. For example, Bridgespan Group, a firm that earns revenue from nonprofits by providing them with a variety of consulting services, advised philanthropist MacKenzie Scott on billions of dollars’ worth of charitable grants, according to a November 15, 2021 article in The New York Times. One grant recipient was Charity Navigator and another was Bridgespan Group itself, according to The Times article.

A consulting firm that earns revenue by providing services to nonprofits may not be inclined to recommend grants to watchdog organizations like CharityWatch that may criticize its paying clients. Recommending grants to charity trade associations, on the other hand, may better serve its interests since it is easy for charities, including its paying clients, to achieve high ratings on these sites. Candid announced on its website on June 15, 2022 that it received a $15 million grant from Scott, though it did not specifically mention Bridgespan Group as having recommended this grant.

Conclusion

Charity trade
associations ultimately do the public a disservice by not sufficiently
warning donors about the limitations of the ratings they are providing.
Donors may interpret a star rating or transparency seal as meaning that a
charity’s financial reporting and program impact claims have been
adequately analyzed and independently verified, when this is almost
never the case. As a result, those who take pains to research a charity
before donating may end up directing their contributions to the very
charities they were trying to avoid. In addition, every dollar
contributed to a poorly performing charity is a dollar that could have
been better utilized by a high impact charity that uses its resources
efficiently and responsibly. An independent charity watchdog will always
be needed to help create a level playing field for both donors and
charities to accomplish the most good with what we give. That is a truth
that no star rating or transparency seal can ever override.

Read “Charity Navigator stars can boost donations but charities might game the system.”

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