NONPROFIT

CHARITY NAVIGATOR PART II: HOW CHARITY NAVIGATOR HAS REVISED ITS SCORING SYSTEM - A BEFORE/AFTER OVERVIEW
By Jeff Holt, CPA - Partner, Assurance & Advisory Practice

ACCOUNTING HOT TOPICS

 CHARITY NAVIGATOR PART II: HOW CHARITY NAVIGATOR HAS REVISED IT'S SCORING SYSTEM - A BEFORE/AFTER OVERVIEW

Jeff Holt, Partner, Assurance & Advisory

On September 20, 2011, Charity Navigator, the website which helps potential donors evaluates Nonprofits, unveiled a more in-depth rating system used to evaluate Nonprofits. Entitled "CN 2.0", the new rating system still uses the old Financial Health evaluation categories (Organizational Efficiency and Organizational capacity, now retitled Financial Efficiency and Financial Capacity), which is comprised of 7 Performance Metric ratios designed to analyze how a Nonprofit manages its finances day-to-day and how well it can sustain its programs and services. Under the prior system, only these financial health metrics were taken from the Nonprofits 990 return and scored in aggregate, with the resulting metrics tracked and ratings scale used as follows: 7 Performance Metric Ratios (Measuring Financial Health) 1.ProgramExpenses Program expenses/Total Functional Expenses 2.AdministrativeExpenses Administrative Expenses/Total Functional Expenses 3.FundraisingExpenses Fundraising Expenses/Total Functional Expenses 4.FundraisingEfficiency Fundraising Expenses/Total Contributions 5.PrimaryRevenueGrowth Revenue Growth formula using a 3-year trend 6.ProgramExpenseGrowth Expense Growth formula using a 3-year trend 7.WorkingCapitalRatio Unrestricted Net Assets/Total Functional Expenses Ratings Scale Greater 50-60 40-50 25-40 than equal to 60 4 stars 3 stars 2 stars 1 star Less than 25 0 stars

With the new system, however, Charity Navigator now uses the same Financial Health metrics and ratings scale above, and adds a new Accountability and Transparency dimension to its rating system. Using data culled from the "new" 990 and from the organization's website, this new area tracks metrics used to determine a Nonprofit's willingness to explain its fiduciary responsibilities towards its shareholders, as well as its willingness to publish and make available critical data about the organization. 12 of the 17 Accountability & Transparency categories that are analyzed by Charity Navigator are collected from the expanded Form 990, which are: Independent Board are the Board members a voting majority and at least 5 in number? Material diversion of assets the last 2 990's are reviewed to see if there has been any unauthorizeddiversionofassets(forexample,embezzlementorfraud) Audited financials prepared by independent accountant with an audit oversight committee Loan(s) to or from related parties strongly discouraged and even prohibited in some states DocumentsBoardmeetingminutes while they do not have to be made publicly available, CN willcheckifminutesarekept Provided copy of Form 990 to Board in advance of filing best practice that is tracked onthe990 Conflict of interest policy if one in place Whistleblower policy is a policy in place to handle employee complaints? Records retention policy if one is in place CEO listed with salary a requirement to list the CEO's name and compensation Process for determining CEO compensation the organization has a documented policy for a yearlycompensationreview Compensates board not illegal but should be rare The remaining 5 categories analyzed are taken from the Organization's website, as follows: Board members listed does the website list the Organization's Board members? Key staff listed who runs the organization on a day-to day basis? Audited financials are the audited financials available on the website? Form 990 is the 990 or a link to it available on the website? Privacy policy does it have a written donor privacy policy published on its website? How are these Accountability and Transparency metrics scored? Each charity starts with a base score of 70 points, and various point deductions are made for charities that do not meet the individual performance metrics listed above. A perfect score would of course, be a "70". To read Part 1 - "Charity Navigator...Friend or Foe", by Lewis Sharpstone, [Click Here]

Jeff Holt - Los Angeles JHolt@singerlewak.com Stephen P. Carter - Silicon Valley SCarter@singerlewak.com

Lewis Sharpstone - Los Angeles LSharpstone@singerlewak.com Rob Schlener - Orange County RSchlener@singerlewak.com