Guiding Nonprofits through Charity Evaluator Ratings

IMGCAP(1)]Serving nonprofit clients requires a distinct skillset from CPAs and auditors.

They should understand not only how each organization can meet their filing and audit requirements, but also how they can best position themselves for donors and grant-making organizations.

With that role in mind, CPAs should evolve their approach to consider the impact that charity evaluators now have on the giving environment, and what nonprofits can do to pursue strong ratings.

Certainly nonprofits already operate in a resource-constrained, high-pressure environment that makes it difficult to add new layers of complexity. Charity evaluators introduce additional issues that may not be readily embraced by all nonprofits, but the reality is that they have become a significant factor in how donors assess nonprofits. To compete for funding, nonprofits simply must take the rating systems into account.

The most prominent evaluator is Charity Navigator, but tools such as Charity Watch and GiveWell offer similar services. Knowing the criteria that define the ratings can help CPAs provide critical guidance. For nonprofits, it could mean the difference between capturing new funding sources and being lost among other, more highly-rated organizations.

Charity Navigator currently focuses only on financial health and governance, categories which by their very nature can be limiting for mission-driven organizations. For example, nuances such as volunteer time and joint fundraising campaigns are not considered, and debunking the “overhead myth” continues to be a challenge.

Charity Navigator is changing its system to better capture a blend of finance, governance, and impact ratings, while also evaluating charities below the $1 million revenue mark. The movement towards impact ratings will reflect the acknowledgement that charitable work often shows traction well beyond the initial output.

Until such improvements are made, however, the system clearly falls short of accurately reflecting the full value and strengths of individual nonprofits. In fact, the organization recognizes that some charities that make a tangible impact on society simply cannot be rated under the current system.

For example, Charity Navigator made headlines in April 2015 by placing the Clinton Global Initiative on its “watch list.” The move invited open criticism of the charity, and led some to liken the Initiative’s business model to a slush fund; it also underscored the weight that Charity Navigator has in the sector.

But Charity Navigator maintains that the issue is not that the Clinton Global Initiative is a low-rated or high-risk organization. Rather, the company cannot account for the charity’s model with its methodology. "We…determined that this charity’s atypical business model cannot be accurately captured in our current rating methodology,” the organization states on its website. “Our removal of

The Clinton Foundation from our site is neither a condemnation nor an endorsement of this charity. We reserve the right to reinstate a rating for The Clinton Foundation as soon as we identify a rating methodology that appropriately captures its business model."

Clearly, Charity Navigator and its competitors have an obligation to improve their approach. Even with the imperfections, though, the public has shown that it will continue to use the ratings for guidance until a better solution emerges.

Under the current methodology, evaluators look primarily at three criteria to formulate ratings: audited financial results, the Form 990, and marketing materials. CPAs should help nonprofits leverage these reporting and communications channels to increase their chances for a four-star rating.

Make the Mission Unique and Powerful
As with many issues regarding nonprofits, it all starts with the mission—the core of the organization’s programs, its direction and its fundraising latitude. Many nonprofits view the mission as a static generalization of their goal, but they should be viewing it in a more strategic context. The mission should be clear and concise, and demonstrate a different approach.

Being more strategic about the wording of the mission statement and throughout the Form 990 (especially in the program service accomplishments section) allows nonprofits to differentiate from similar organizations.

Help Nonprofits “Position the Mission”
Of course, nonprofits must also know from whom they are differentiating themselves. Nonprofits will gain insight by reviewing 990s and financial statements of similar or complementary organizations, to ensure they have optimal positioning of their unique offering(s).

When organizations arm their CPAs and auditors with this information, they can then work together to develop strategies that will distinguish them from the field. This will pay dividends in everyday operations as well, as nonprofits can apply what they’ve learned to grant applications and annual appeal letters. In the end, they should use the form as more of a development tool than a required filing.

Stay Consistent
Evaluators hope to find a consistent story to be told about the mission and where donations flow from and to. They consider websites and marketing materials, the Form 990, and audited financial statements with the expectation that the story will be clear and free of contradictions. In fact, evaluators look specifically for easy access to information and cross-referenced materials. Nonprofits should include a hyperlink to the website in the Form 990 (and vice versa) as well as a full list of programs and key employees.

Aligning the message across all materials is no easy task. Form 990s and audited financial results are typically prepared by the fiscal staff and business office, while the program and marketing staff populate the website. That often translates into different information in all three channels.

Nonprofits can avoid this by creating a culture of cross-departmental collaboration. To stay better aligned, teams should operate in an open environment and routinely share any significant changes that are being made.

Communication and transparency are paramount for companies looking to win over advocates, and charity evaluators are no exception. CPAs and auditors can play a pivotal role by steering nonprofit clients to behavior that will positively influence ratings. Providing information that tells a strong story in a clear, consistent way will make an impact not just on ratings, but on the overall health of nonprofit organizations.

Jeff Cicolini is a partner at AAF CPAs who provides accounting, tax and consulting services to both nonprofit organizations and closely-held businesses. He has extensive experience providing solutions for nonprofit organizations and leads AAF’s Human and Social Services Division.