For nearly two decades, Charity Navigator has rated charities in an effort to make impactful giving easier for all. Recently, we expanded our ratings offerings by creating a second rating system—the Encompass Rating System—to capture over 150,000 additional charities, while still maintaining our Star Rating System. With more features (and a brand new year!), some organizations have asked what can be done to improve their Finance and Accountability rating. If your organization is wondering the same, this post is for you!
To get started, it is important to note that we assess Finance, and Accountability and Transparency in both Star and Encompass Ratings, the metrics for which are largely derived from the numbers and line items reported on the IRS Form 990.
On the financial side, there are a few key areas that charities can be mindful of in order to maximize their potential score. Expense allocations are one such category. While administrative and fundraising expenses often provide a necessary backbone for the provision of program services, we do determine whether or not the majority of a charity’s expenses are allocated towards programs, and at what percentage of total expenses. Money spent on programs is of particular importance, as it is a reflection of the money spent towards fulfilling a charity’s mission by investing in the programs and the services that it sets out to do. We recommend charities to continue to be mindful of this when planning and reviewing budgets and/or strategic planning initiatives.
Another financial metric to pay attention to involves the balance sheet, specifically Liabilities to Assets. Much like organizations in other sectors, charities must be mindful of their management of total liabilities in relation to their total assets, as it is an indicator of an organization’s solvency and/or long term sustainability.
Accountability and Transparency Metrics
On the accountability side, there are a few key indicators that extend beyond the numbers and can be readily monitored from year-to-year. First is board independence. We determine if a charity’s independent board members are a voting majority (and at least five in number for Star ratings). The presence of an independent governing body is strongly recommended by many industry professionals to allow for full deliberation and diversity of thinking on governance and other organizational matters. Ensuring that your board adheres to such a structure not only provides assurance of proper governance, but also contributes to a strong rating.
Depending on your organization’s size (above $500k in revenue), we check to see if an audit, review, or compilation was prepared by an independent accountant for a given fiscal year. The expectation is that charities above $1M in revenue (all Star-rated and some Encompass-rated charities) complete an audit, while charities falling in the $500k-$1M range complete either an audit, review, or compilation. Ensuring that your organization falls into the right camp can help to boost your score while providing confidence in the accuracy and the completeness of the information presented in your financial statements.
Form 990 Recommendations
Last and certainly not least: remember to review the Form 990 once your accountant completes it. Pay particular attention to policies, independent board member numbers, and so on. Without proper review, your Form 990 may be subjected to errors that occur due to mere oversight, which in turn may affect your organization’s score. For instance, sometimes policies are overlooked (e.g. an organization does have a conflict of interest policy in place, but that line item was marked “no” on the Form 990 in error). Such errors are completely preventable; proper review from individuals who know the organization best will ensure accuracy prior to filing and can subsequently help to maintain a strong Charity Navigator rating.
Authored by Marisa Andreazza, Program Analyst at Charity Navigator.