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New CharityWatch Transparency Requirement

Published 03/16/2016

CharityWatch is now asking the charities it rates to be more accountable for their finances. Our new accountability standards require that charities post a current, complete copy of their audited financial statements on their public website. All charities that must have their financial statements audited to meet state registration requirements for donor solicitation need to make their most recent audit publically available on their website in a timely manner. Otherwise, such charities now fail to satisfy CharityWatch’s transparency benchmarks for accountability.

Some donors may be wondering why CharityWatch considers the public availability of a financial audit to be such an important measure of accountability. A couple of the key reasons are independence and reliability. An audit must be conducted and prepared by an independent, licensed professional outside of the charity, and it is performed in order to obtain reasonable assurance about whether financial statements are free of material misstatement. Auditors evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management. Audit procedures also include reviewing internal controls, potential conflicts of interest, and other activities that could significantly impact a charity’s operations. As a result, an audit often reveals information about a charity that the charity itself does not want to, or is not required to, report in its tax filing (IRS Form 990). This is an important distinction as the IRS Form 990, which is not audited, may be self-prepared by an employee of the charity and therefore, may contain financial reporting that is far less reliable than that provided by independent audited financial statements.

Moreover, although a financial audit is legally required for a charity to be registered to raise funds in many states, it is often difficult to find a publicly available copy of a charity’s audited financial statements if not posted on the charity’s website. (This is in contrast to the less reliable IRS Form 990, which can be easily found and viewed from several third-party online sources.) For this reason, and given that a charity’s website has become a primary vehicle used to deliver information to the public, CharityWatch believes that any charity fully committed to transparency and accountability should also make available on its website a current copy of its audited financial statements.

To satisfy CharityWatch’s new transparency requirement, the audited financial statements posted online by charities must be current and complete, including the independent auditors’ report, all financial statement schedules, and the accompanying notes to the financial statements. The notes that accompany audited financial statements are an integral part of the audit that provide details and explanations that are necessary to fully understand the financial statements. The independent auditors’ report discloses key information about the audit such as: the name of the accounting firm or the accountants; the date of completion; and the auditors’ opinion regarding the charity’s financial statements, including any “going concern” opinion that raises questions about the charity’s financial ability to continue operations more than one year out – something any donor should want to know. Given the critical nature of the items included in the independent auditors’ report and the audit notes, CharityWatch is not allowing charities to avoid disclosure of negative or unflattering information by posting summaries of their audited financial statements or only select pages from the audit. Many charities rated by CharityWatch already do make available on their websites current, complete copies of their financial audits, but those that don’t now fail to meet CharityWatch’s new accountability standards.