F-Rated Charities Receive Top Ratings & Seals From Nonprofit Trade Associations

Millions of donors regularly search online for ratings of charities before making their giving decisions. This makes sense. Most of us have heard horror stories about charity frauds and scams and do not want to fall victim to a similar scheme.

Unfortunately, these good faith efforts to research charities before donating are sometimes all for naught. Online charity databases such as those hosted by Charity Navigator (at charitynavigator.org) and Candid (at guidestar.org) that offer information on thousands of charities typically use a combination of crowdsourcing and automation, which is what allows them to publish such large volumes of charity ratings and profiles. This sadly leads some donors to rely on ratings and other information that may lack independence, accuracy, consistency, comparability, and/or completeness.

The above chart contains select examples of charities to which CharityWatch (CW) has assigned “F” grades as of 5/19/2023. See Our Process for more information about how CharityWatch’s grades are calculated. Charity Navigator’s (CN) ratings and Candid’s seals were retrieved from those websites between 2/26/2023 and 3/21/2023 and reflect each charity’s current rating or transparency seal as of the date retrieved. Visit charitywatch.org, charitynavigator.org and guidestar.org to view the most current ratings and profiles published on each website.

Nonprofit Trade Associations Exist Primarily to Serve Charities

In a charity’s marketing or fundraising materials you may see a Platinum Seal of Transparency from Candid or 4-star rating from Charity Navigator and assume this means that the charity will use your donations efficiently. This is a false assumption. Candid does not measure a charity’s financial efficiency as part of the criteria it uses to assign its transparency seals. With respect to Charity Navigator’s star ratings, its “Accountability & Finance” beacon comprises only 32% of a charity’s overall score, and of that 32%, it is unclear how a charity’s program expense ratio is weighted within the list of 25 data points that make up this beacon. CharityWatch has spoken to many donors and nonprofit professionals who are surprised to learn that a measurement of how efficiently a charity will use the donations it receives is not a primary measurement reflected in these seals and star ratings.

In practice, organizations like Candid and Charity Navigator function more like nonprofit trade associations that exist primarily to help charities amplify their marketing and fundraising efforts, not independent charity raters. Insofar as such organizations help to support and promote efficient and responsible charities, this can be a good thing. It’s not such a good thing when highly inefficient or irresponsible charities exploit these seals and ratings to gain credibility with donors that may not be deserved. By contrast, the primary function of a charity watchdog like CharityWatch is to serve as an independent resource for donors seeking well-researched ratings of charities and for journalists seeking help with their investigations into wrongdoing in the nonprofit sector. CharityWatch works closely with journalists and symbiotically with government agencies to police the nonprofit sector in ways that nonprofit trade associations are not designed to do.

Crowdsourcing

Data used to compute the charity ratings and seals published by nonprofit trade associations is sometimes crowdsourced directly from the charities being rated. The uploading of data is often treated as an end unto itself. Charities are assigned higher ratings in exchange for uploading information, which is not independently analyzed or measured, not based on how efficiently or effectively they are using donations. Candid, for example, rewards charities for simply logging into an online profile and building out that profile with information. As described on guidestar.org, the Candid “Seals of Transparency” for each level require a charity to upload the following information to its online profile:

Bronze—“Provide basic information to make sure donors find you”

Silver—“Share program(s) information and brand details to guide funding decisions”

Gold—“Upload your financial details (Option A or B), board chair name, and leadership demographics to gain trust and support” (for a 2023 seal, Option A is an audited financial statement for 2021 or 2022, and Option B is to provide the following: fiscal year start date; fiscal year end date (2021 or 2022); contributions, gifts, and grants; total revenue; program expenses; administrative expenses; total expenses; total assets; total liabilities; and net assets or fund balance)

Platinum—“Share your strategic plan, progress, and results (Option A or B) to highlight your impact and boost your funding” (Option A is a strategic plan that must be no older than 5 years, and Option B is to answer the following questions: “What is your organization aiming to accomplish?” and “What are your strategies for making this happen?”)

The Candid “Seals of Transparency” reflect a charity’s willingness to share information about itself with the public—an unquestionably good thing for a nonprofit trade association to encourage. But donors should take note of what is not being said by Candid before misinterpreting a charity’s Bronze, Silver, Gold, or Platinum seal as meaning that the information a charity has shared has been independently vetted. Candid does not claim that its seals measure how efficiently a charity will spend your donations, or that it has reviewed a charity’s audited financial statements to check for misrepresentations or material misstatements. Charities have little incentive to voluntarily circulate unflattering information about themselves on Candid or other websites. As the above chart reflects, many organizations that receive F ratings from CharityWatch for low program spending and/or high fundraising expenses receive Platinum seals from Candid.

Automation

When charity ratings are automated, this is typically achieved by mining unaudited figures from charity tax filings, known as IRS Forms 990. With few exceptions, the financial reporting is taken at face value without the charity rater conducting an independent review of audited financial statements to understand if the reporting is accurate, consistent, comparable, or complete, or making any necessary adjustments to make it so. CharityWatch has been contacted by many donors who are surprised to learn that charities with very low program spending and high overhead are able to achieve top scores from charity raters that rely on automation, either due to a charity’s program expense ratio not being a primary component of the overall rating, or due to the unreliability of the data being used to compute a charity’s score.

The reliability of automated ratings is only as good as the quality of the underlying data used to compute them. In other words, garbage in, garbage out. Charity ratings based on automated methods that mine data from charities’ unaudited tax filings may be unreliable for four primary reasons:

1. Accuracy: They don’t account for reporting errors, which are common. Charity tax filings are self-reported documents. The reporting is not subjected to Generally Accepted Auditing Standards (GAAS) and is not required to be presented according to Generally Accepted Accounting Principles (GAAP). As a result, unflattering information may be omitted from a tax filing altogether, or information may be reported in the wrong lines or columns, distorting how efficiently a nonprofit is operating.

2. Consistency: Charities may report the same financial activities in wildly different ways from one reporting year to the next without violating any IRS or audit reporting rules, or without any violations that do exist being caught. Some change their reporting methods just to look better to donors. Even if a charity has not improved its operating efficiency, it can make itself look more efficient in automated charity rating databases by simply changing how it reports certain activities, such as fundraising.

3. Comparability: Similarly, because IRS and audit reporting rules allow charities a lot of freedom to report similar activities, such as fundraising, in wildly different ways, one charity can appear to be operating vastly more efficiently than another. This is not because it is actually more efficient, but rather because it is intentionally reporting its financial activities in more flattering ways than other charities. Charities that are more honest or conservative in their financial reporting may be punished in the form of lower ratings simply for being more forthcoming than other charities about how efficiently they are operating.

4. Completeness: Charities, especially larger ones, may operate more than one related legal entity, often with financial transactions flowing among them. Any single charity tax filing generally contains the financial activities of one legal entity. Meaning, charity raters that pull numbers from the individual tax filings of charities may be disregarding significant fundraising and overhead costs absorbed by a charity’s related legal entities or may be counting the contributions a charity receives from itself (transferred from one legal entity to another) when computing its fundraising efficiency.

Charity Navigator states on its website: “We list all 1.6 million IRS-registered nonprofit organizations on our site. We only rate 501(c)(3) nonprofits, commonly referred to as charities…” It also states: “We currently provide ratings for nearly 200,000 charitable organizations.” With respect to its process, Charity Navigator’s website states that throughout the year it receives “the annual tax filings (Forms 990) that charities submit to the IRS,” and it “leverage[s] several fields in the IRS Form 990 to generate scores for charities’ Accountability & Finance beacons.” Charity Navigator requires at least three years of data “to receive a score,” and it includes “some additional metrics,” depending on a charity’s size and age. Independently analyzing and verifying the financial efficiency and other claims of 200,000 or more nonprofits would require resources well beyond what any nonprofit trade association could provide. For example, spending as little as three hours per charity to conduct a financial analysis and a cursory review of a charity’s claimed program impact would require 600,000 hours of staff time. To do this annually would require at least 288 qualified, full-time analysts.

The “Financial Metrics” portion of Charity Navigator’s “Accountability & Finance” beacon includes several measurements, including a Program Expense Ratio. Charity Navigator states: “We calculate the nonprofit’s average program expense percentage over its three most recent fiscal years then assign a numeric score based on an established scale.” Charity Navigator’s website reflects that its “Accountability & Finance” beacon accounts for 32% of a charity’s overall score. As illustrated in the above chart, CharityWatch has assigned failing grades to many charities that receive 3-star or 4-star ratings from Charity Navigator. CharityWatch typically analyzes a charity’s audited financial statements in addition to the available tax filings of any nonprofit legal entities included in those audits. We make adjustments to account for errors, inconsistencies, incomparability, and/or incompleteness of the reported information so that we can provide useful and comparable information to donors about how efficiently a charity is operating.

A Trade Association Is Not a Watchdog

Nonprofit trade associations may provide charities and others in the sector with valuable services such as professional education, fundraising resources, guidance on maintaining and complying with good governance policies, and more. While this type of support is critical to the success of the nonprofit sector, the audience for it is nonprofits and their staff and board members, not donors. Ratings or seals that are largely a reflection of what charities report about themselves lack the independence necessary to root out bad actors and poorly performing charities.

Also at issue is how such trade associations are funded, which can create conflicts of interest. For example, Bridgespan Group, a firm that earns revenue from nonprofits by providing them with a variety of consulting services, advised philanthropist MacKenzie Scott on billions of dollars’ worth of charitable grants, according to a November 15, 2021 article in The New York Times. One grant recipient was Charity Navigator and another was Bridgespan Group itself, according to The Times article.

A consulting firm that earns revenue by providing services to nonprofits may not be inclined to recommend grants to watchdog organizations like CharityWatch that may criticize its paying clients. Recommending grants to charity trade associations, on the other hand, may better serve its interests since it is easy for charities, including its paying clients, to achieve high ratings on these sites. Candid announced on its website on June 15, 2022 that it received a $15 million grant from Scott, though it did not specifically mention Bridgespan Group as having recommended this grant.

Charity trade associations ultimately do the public a disservice by not sufficiently warning donors about the limitations of the ratings they are providing. Donors may interpret a star rating or transparency seal as meaning that a charity’s financial reporting and program impact claims have been adequately analyzed and independently verified, when this is almost never the case. As a result, those who take pains to research a charity before donating may end up directing their contributions to the very charities they were trying to avoid. In addition, every dollar contributed to a poorly performing charity is a dollar that could have been better utilized by a high impact charity that uses its resources efficiently and responsibly. An independent charity watchdog will always be needed to help create a level playing field for both donors and charities to accomplish the most good with what we give. That is a truth that no star rating or transparency seal can ever override.

Read "Charity Navigator stars can boost donations but charities might game the system."

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