8. Industry Standards for Accountability and Transparency

So, what should a donor know before making a contribution to a charitable organization? Naturally, you’ll want to know whether or not the charity is fulfilling its charitable mission in an effective manner. Information contained in the Annual Report on Charitable Solicitations or the charity’s registration and financial statements can go a long way toward reassuring you of an organization’s ability to carry out its mission. Several organizations have established industry standards intended to help you evaluate a charity and feel confident about your giving decision.

The BBB Wise Giving Alliance, affiliated with the Council of Better Business Bureaus, has established a set of 20 non-binding Standards of Charitable Accountability to help donors make sound giving decisions and increase public trust in charities. According to its website, the Standards for Charity Accountability were developed with professional and technical assistance from representatives of small and large charitable organizations, the accounting profession, grant making foundations, corporate contributions officers, regulatory agencies, research organizations and the Better Business Bureau system. The BBB Wise Giving Alliance also commissioned significant independent research on donor expectations to ensure that the views of the general public were reflected in the standards.

Some of the key BBB standards include:

With respect to an organization’s finances, charities should spend at least 65% of total expenses on program activities, i.e., Total Program Service Expenses divided by Total Expenses should be at least 65%.
Charities should spend no more than 35% of related contributions on fund raising, i.e., Total Fund Raising Expenses divided by Total Related Contributions should be no more than 35%. Related contributions include donations, legacies, and other gifts received as a result of fund raising efforts.
Charities should avoid accumulating funds that could be used for current program activities. To meet this standard, the charity's unrestricted net assets available for use should not be more than three times the size of the past year's expenses or three times the size of the current year's budget, whichever is higher.
Upon request, charities should make available complete annual financial statements prepared in accordance with generally accepted accounting principles.
A charity should include in the financial statements a breakdown of expenses (e.g., salaries, travel, postage, etc.) that shows what portion of these expenses were allocated to program, fund raising, and administrative activities.
Financial statements should include a breakdown of expenses that shows what portion of these expenses was allocated to program services, fund raising, and administrative activities.
Accurately report the charity's expenses, including any joint cost allocations, in its financial statements. For example, audited or un-audited statements which inaccurately claim zero fund raising expenses or otherwise understate the amount a charity spends on fund raising, and/or overstate the amount it spends on programs will not meet this standard.

CharityWatch, formerly known as the American Institute of Philanthropy, is another well-known charity watchdog group that makes similar recommendations, including:

Percent spent on charitable purpose. To achieve a satisfactory or “C range” rating, a charity should spend 60% or more of its Total Expenses on its charitable programs, with the remaining percentage being spent on Fundraising and General Administration. CharityWatch believes that most highly efficient charities are able to spend at least 75% on programs.

Cost to raise $100. It should not cost more than $35 to raise $100 of funds. In other words, Total Fundraising Expenses divided by Total Related Contributions should be no more than 35%. CharityWatch defines related contributions as money that is brought in as a result of fundraising activities. CharityWatch is critical of charities that erroneously compare their cost to raise money with total income, which, according to CharityWatch, can include patient revenue, investment income, sales proceeds and other items that are not affected by fundraising outlays. CharityWatch believes this faulty comparison makes a charity’s fundraising efficiency appear better than it actually is.

Years of available assets. CharityWatch examines a charity’s reserves of available assets to determine how long it could continue to operate at current levels without any additional fundraising. It defines a charity’s “years of available assets” as funds currently available for the charity’s use, including investments that the charity has set aside as a reserve but could choose to spend if it wanted to do. CharityWatch recommends a reserve of less than three years and gives a failing grade to the “least needy” groups with reserves of more than five years, believing that the public’s donations are most urgently needed by charities that do not have large reserves of available assets.

Charity Navigator, founded in 2011, measures a charity’s financial health, and an organization’s commitment to accountability and transparency, and (as of January 23, 2013) results reporting. It is best to visit the Charity Navigator website for a discussion of its rating system, since Charity Navigator rates charities with different resource and spending requirements differently. The site is a valuable source of data on charities and includes detailed discussions about how to rate charities and measure their impact.

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