From the December 2006 Watchdog Report
of Inflated Charity Efficiency Claims!
When I founded the American Institute
of Philanthropy 14 years ago, I often said that there is a vacuum
of independent information available to help donors make giving
decisions. Now in 2006, particularly as a result of the Internet,
Americans are being inundated with charitable giving information.
The problem is that most of the information out there is either
directly from the charities who are hesitant to criticize themselves
for fear of losing contributions, or unexamined compilations of
charities' self-reported information.
What makes AIP particularly useful is
that we perform an analysis of a charity's finances to give you
a better understanding of how a group's funds are being spent or
not spent in some cases. Under current nonprofit financial reporting
rules it is still far too easy for a charity to spend very little
on what most donors would think of as a charitable program and purport
to be financially efficient. Some AIP F rated charities even clairn
in solicitations, tax forms or financial summaries that 80% or more
goes to programs or that they have a top rating from a magazine
or watchdog that does not question the quality of a charity's self-reported
While there have been some significant
improvements in charity financial reporting since AIP's founding,
it is still inconsistent, unclear and often incorrect. AIP adjusts
a charity's finances to allow for greater consistency and comparability.
Charities that dispute AIP's ratings are often quick to claim that
they follow GAAP (generally accepted accounting principles). GAAP
reporting offers wide latitude in choosing reporting methods and
may not be the most useful form of reporting for donors wanting
to judge the financial efficiency of charities.
A charity may even count its primary
solicitation activity as a charitable program. For instance, Planet
Aid, a nonprofit group famous for its yellow outdoor collection
boxes, calls the cost of collecting worn clothes, which it later
sells, a program service expense. Its tax form states that its purpose
is "To support development projects ... and protection of natural
habitat through the recycling of used clothing." It would be
like Wal-Mart claiming that its main purpose is to help low-income
people have a higher standard of living by selling them less expensive
merchandise. Planet Aid raises almost all of its funds by selling
the donated items, rather than giving them to needy people. It only
distributed $8,000 of donated goods of the $8.7 million it spent
in 2004, according to its most recently available tax form. Planet
Aid's 2004 audit reports two program service expenses: $6.6 million
of "Clothing collection" and $2 million of "International
Aid." AIP believes the cost to collect used goods for later
sale is a fundraising expense and considers any possible benefit
to the environment to be incidental. Planet Aid reports a 94% program
ratio, whereas AIP believes the ratio earns the group an F grade
There are many other ways for charities
to inflate their program ratios and lower fundraising percentages.
Lots of groups allocate large portions of the cost of direct mail
and telemarketing solicitations to program expenses. Others accept
large amounts of unidentified donated goods that may be of questionable
value to recipients. Some take credit for the contributions and
expenses of another group. The cost of acquiring new donors, the
bulk of fundraising expenses for most charities, may be falsely
identified as a membership program expense in charities' financial
reports. The list goes on and on...
The number one mistake that donors make
when they give is that they are too overly impressed by one or two
accomplishments or good deeds that a charity describes in its solicitations.
Donors need to determine how much good is being done in relationship
to the resources that a charity receives. This is exactly what AIP's
detailed analysis provides in the form of our financial measurements
and letter grade ratings.