“GetInvolved Nonprofit Guide” Article for October 2013 from Cover & Rossiter, P.A.

By Pete Kennedy, CPA, CVA – Director at Cover & Rossiter, P.A.

Charity Navigator

For readers who are not familiar with Charity Navigator, I’ll begin with a quick refresher. Since it first went live in 2002, CharityNavigator.org has been a free nonprofit website whose stated mission is to guide intelligent giving.  Primarily using information from a nonprofit’s IRS Form 990, Charity Navigator synthesizes data into what it hopes are decision-useful metrics to assist donors in making gifting decisions.  Since 2008, the data has been expanded to include information gleaned from nonprofits’ websites in an effort to gauge transparency and accountability.  Many nonprofits put forth considerable effort to attain a coveted “4 Star” ranking.  Many others have howled in protest at less favorable rankings or (worst of all) inclusion in a “Bottom 10 List.”

In my opinion, the information presented often lacks necessary analysis or interpretation.  As an example, at this writing the Reynolda House Museum of American Art appears at the top of the “10 Charities Routinely in the Red” by a wide margin with a Charity Navigator computed ratio of deficit to expenses of negative 131.6%.  It doesn’t take a statistician or a CPA to know that the only way you can have such a ratio is to have the deficit exceed total expenses – not a logical result.  A little digging in this case reveals that the charity’s board made the decision to sell a large portion of its endowment and in doing so realized a large amount of previously unrecognized investment losses – large enough to eclipse all other revenue sources, push the gross revenue amount (as required to be presented on the Form 990) negative … and land at the very, very bottom of a blindly calculated Charity Navigator ratio.

CN 3.0

In its most recently announced initiative, Charity Navigator will attempt to assign ratings based on a nonprofit’s efforts to measure their effectiveness at achieving the desired outcomes.  This has been termed “CN 3.0” and is described as “the third dimension of intelligent giving.” The questions and their interpretation are prominently placed on the Charity Navigator website.

The Holy Grail of nonprofit metrics has always been outcome measurement.  Outcomes by their nature are long-term changes.  Determining a direct cause for a positive outcome is often very difficult. That an at-risk youth winds up going to Harvard may have one primary reason or be the confluence of many factors.  Trying to gauge the accuracy of any charity’s claims of outcomes given the inevitable subjectivity of such information would be next to impossible.  Recognizing this, CN 3.0 does not directly ask nonprofits to measure their outcomes.  Instead, it poses a series of questions or grading areas aimed at determining a nonprofit’s internal efforts toward measuring its own effectiveness.  A “yes” answer gets a green check mark.  A “no” means a red X.

Is the Causal Logic Plausible?

One of the questions asked by CN 3.0 is “Is the causal logic plausible?”  For folks like me that need a translation, it is explained as “Does the charity’s explanation of how it plans to achieve its goals seem possible or likely?”  More plainly still: do a nonprofit’s actions / programs align with their stated mission?

I think it’s only fair to turn the tables and pose the same question as it relates to CN 3.0: does reporting on a charity’s efforts to measure its outcomes (rather than the outcomes themselves) really provide a decision-useful metric of mission effectiveness?  Is it logical that such information can “guide intelligent giving?”

My answer would be yes, but only marginally and indirectly.  Is it a good sign that a nonprofit is diligently attempting to discover from different outside sources the impact of its programs?  Absolutely, and you have to give CN 3.0 credit for providing a roadmap of sorts as to how such an introspective effort might look through the questions that are asked.  In the absence of that Holy Grail metric of nonprofit effectiveness, this is certainly better than nothing.  But is diligent introspection a sure indicator of nonprofit effectiveness?  No.  Most dangerously of all, can the number of green checks vs. red X’s be used as a reliable means to rank the effectiveness of programs among nonprofits? Again in my opinion, no.

The Best Guide to Intelligent Giving

If you want to make gifting decisions based on derived financial ratios and a series of green check marks or red X’s, hey, it’s your money.  But we have made this statement many times before – there is no substitute for direct knowledge of a nonprofit.  The surest possible “Guide to Intelligent Giving” is your own personal experience with a charity.  If you go to events, volunteer to help with programs or even become a board member, then and only then will you have direct first-hand knowledge of how effectively your money will be spent.

If you have questions about intelligent giving or any other nonprofit topic, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.

Cover & Rossiter, P.A. is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.

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