Why Charity Navigator ignores standard accounting practices

Or, perhaps this would be better titled “why does Charity Navigator ignore standard accounting practices?”.

For those blissfully unfamiliar with nonprofit accounting regulations, allow me to burden you for a moment.  When a nonprofit combines fundraising and program activities, it is required to allocate part to fundraising and part to the program expense.  A nonprofit can do this if it meets three criteria:

  • Purpose: does the program part of the expense benefit the mission and societal good?
  • Audience: is the communication going to an audience that needs that communication for the societal benefit?
  • Content: is the content genuinely of value to the mission?

So it is not something done lightly.  But when Charity Navigator does its rankings, it takes out joint cost allocation.

Geoff Peters, in his excellent post Can’t we replace Charity Navigator, puts it thusly:

“Charities are required to follow GAAP Accounting rules and FASB standards in order to receive a clean audit opinion.  Yet when they follow those rules, Charity Navigator reverses the joint cost allocation which is required under audit standards and restates (misstates) the finances of the charity.  Then the media picks up on that misstatement and publishes it as if it were true.  This results in damage to the charity’s reputation and is based on false information but since the media accurately quoted Charity Navigator’s misstatement, they cann300px-prometheus_adam_louvre_mr1745_edit_atomaot be sued.”

The idea that Charity Navigator thinks that it knows better than the IRS, BBB, FASB, GAAP, and many other acronyms in laughable hubris, the type that Greek myths punish with your liver being continually eaten and regrown.

But sometimes the vocal minority has a point.  So let’s look at whether joint cost allocation makes sense.

Charity Navigator says:

We believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it, nor does Charity Navigator. Therefore, as an advisor and advocate for donors, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising.  The exceptions to this policy are determined based on a review of the 990 and the charity’s website (in some cases we review data provided to us from the charity directly).  We analyze these items to see if the organization’s mission includes a significant education/advocacy program or other type of program that would directly be associated with joint costs.  If that is the case, we inspect in further detail the charity’s expenses in regards to those specific programs.”

There are several reasons this logic is spurious:

  • First, is it just me or does this say, in essence, “as an advocate for donors, we think they are stupid.  We think they can’t figure out that if they get a mailing, someone has to pay for it.”?
  • The fact that some people are aware of something is a reason to educate recipients of data, not to judge the providers of it.  For example, I believe not many people know how poor Charity Navigator’s ratings are, so I’m dedicating a week of posts to it.
  • As we stated earlier, in order to count something as a program expense, a nonprofit has to establish that it is an essential part of their mission.  What Charity Navigator is saying by backing it out is that they think that almost all nonprofits are lying about this.
  • In order to ferret out those few CN doesn’t believe are lying, they will analysis the mission and the communications to figure out if it is a legitimate purpose.  Call me crazy, but I think the nonprofit is probably a better judge of this.

This last point is especially true when you consider that CN has six program analysts and rates over 7500 charities.  With a little math, you can figure out that they spend about 90 minutes analyzing any one nonprofit, assuming no bathroom breaks or meetings.  Considering that the nonprofit’s staff, board, and audit committee spends a bit more of time on this than CN, then it’s certified by the federal government (not a strong argument, but one nonetheless), it appears that CN should take the proverbial long walk off a short pier trying to refigure every nonprofit’s mission for them.

It also goes to the question of what a world looks like in which you don’t do this type of allocation.  Let’s say you want to educate people about an important piece of legislation or ways to screen for prostate cancer.  How should you reach these people?

Yes, email is great; that will help you preach to the converted.  How do you reach people who don’t believe in what you do?  Earned media is great.  But if you are failing to recall all of those stories on your local news about how to screen for prostate cancer, it’s probably because they didn’t exist.  Not everyone has a sexy issue.

The truth be told, more people hear about more missions through their mailboxes and phones than through any other means.  

And those are expensive, so they have asks attached to them.  It is natural that all of the fundraising parts of these asks should be considered fundraising.  But we are dependent on people knowing about and acting on our issues in a variety of ways.  And that which is program expense should be program expense.

CN was sincere when they said they didn’t think that mail had a place with nonprofits.  They could not be more wrong.  Choking off joint allocated media doesn’t just strangle fundraising; it also throttles mission.

And thus, their guidance is better off ignored, or better yet repudiated.

Why Charity Navigator ignores standard accounting practices

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