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74% of Charities Not Making The Grade

April 15, 2013

In a recent article by ESPN’s “Outside the Lines” (“Athlete charities often lack standards”), the charities of high-profile, celebrity athletes came under fire for a variety of reasons. Some failed to show efficient and effective use of money donated and others flirted with highly deceptive and unethical behavior that could even be illegal. While a great deal of attention was given to the “bad” charities such as NBA forward and Kardashian husband Lamar Odom’s charity Cathy’s Kids (supposedly started to raise money for cancer research but has failed to give any money to cancer research in its eight-year history and has instead primarily existed to finance two elite youth basketball teams), one little fact within the article escaped wider scrutiny. The author of the article, Paula Lavigne, says according to Charity Navigator’s guidelines, 74% of the 115 athlete charities investigated fell short of one or more acceptable nonprofit operating standards. Moreover, according to Ken Berger, the president of Charity Navigator, who was cited in the article, this percentage is in line with what Charity Navigator sees among ALL charities. If 74% of all charities are failing to meet basic guidelines for running efficient and effective organizations, isn’t it time to demand change?

What exactly are these guidelines that 74% of ALL charities are failing to adequately meet? Charity Navigator, one of the highly acclaimed and trusted watchdogs in the nonprofit world evaluates organizations in two general areas: financial health, and accountability and transparency. For financial health they analyze seven key areas to assess the financial efficiency and capacity of an organization. They look at program expenses, administrative expenses, fundraising expenses, fundraising efficiency, primary revenue growth, program expenses growth, and working capital ratio. Financial ratings tables are used to compare an individual organization’s numbers against what is expected for other organizations of the same type. This means that the argument of “but we’re different” doesn’t apply as variation and differences among organizations is accounted for and controlled in the analysis. The basic idea is that organizations need to be responsible with their money. It’s not okay to spend more on administrative costs than programs. It’s not okay to consistently have fundraising expenses that exceed fundraising revenue. The goal is not to scrutinize the expense of every last penny but rather to just ensure money is being handled in a reasonable way that aligns with an organization’s mission. It’s alarming to think so many charities are failing to meet these basic standards.

The evaluation of accountability and transparency is equally basic. Accountability is defined by Charity Navigator as “an obligation or willingness by a charity to explain its actions to its stakeholders.” And transparency is defined as “an obligation or willingness by a charity to publish and make available critical data about the organization.” Not only are these simple concepts that every charity should have built into their core processes, they’re also in-line with the legal expectations of organizations benefiting from non-profit tax-exempt status.

The questioning of non-profits is likely to grow as stories such as the one featured by ESPN make their way into mainstream media. Non-profit hospitals in Illinois are currently under fire as communities and governments question whether they are truly charitable organizations. This just might be the tip of the iceberg. The larger community is not demanding more from charities and non-profits, they’re simply demanding that charities and non-profits meet their basic requirements to provide real value and hold themselves accountable to fundamental practices of good stewardship.