When vetting a nonprofit that you are thinking about donating to, it is important to think about transparency. When nonprofits operate transparently, they build trust with the people supporting them.
Legally, nonprofits have to disclose certain information to the public and board members must have access to financials to fulfill their role. Ideally, a nonprofit’s commitment to transparency stretches far beyond these legal responsibilities. Doing so demonstrates integrity and a willingness to learn from mistakes.
Virtually all organizations will make financial missteps at times, but it sends an important message when one embraces and learns from a mistake and another tries to hide it. Most charity watchdogs take transparency heavily into account when they look at a nonprofit. Some of the things to look for include:
Posting 990s directly on the organization’s website.
The law states that nonprofits with tax-exempt status must provide copies of the three most recently filed annual information returns, IRS Form 990, upon request. Individuals can usually access these forms directly through the IRS or on charity registrars like GuideStar.
However, nonprofits with a true commitment to transparency will often make it very easy for people to find this information by publishing links to it directly on their website. When organizations do this, it shows that they have nothing to hide.
A handful of nonprofits go even further than this by publishing a copy of their most recent audits. Audits should be prepared by an independent accountant. Having audit information shows that an organization is committed to financial accuracy and accountability.
Aligning practices with the Sarbanes-Oxley Act.
Passed in 2002, the Sarbanes-Oxley Act was Congress’ strategy for addressing the shortcomings in accounting of publicly-traded companies. This legislation was meant to prevent disasters like Enron from occurring a second time. While this outline of best practices is meant for publicly-traded, for-profit companies, many nonprofits have adapted them to ensure complete transparency at their own organizations.
For example, nonprofits can technically make loans to their directors and executives even though the Sarbanes-Oxley Act forbids it for publicly-traded organizations. Doing this diverts money from the central mission of the nonprofits. As a result, many organizations have made policies against this sort of behavior, which could quickly cause serious conflict-of-interest issues.
Organizations also usually include board members and officers in this group. They may further prohibit loans from employees or trustees to the nonprofit.
Achieving a BBB Accredited Charity Seal.
The Better Business Bureau (BBB) primarily deals with for-profit organizations. However, it established the Wise Giving Alliance to help people make armed decisions when it comes to charity.
This Alliance has published the Standards for Charity Accountability, which outlines a number of steps for creating and maintaining a transparent organization. Nonprofits that meet the standards can apply for accreditation to receive the charity seal.
Individuals can visit the BBB website to explore which nonprofits have demonstrated their commitment to accountability by applying for and receiving the charity seal. Looking through the standards that the organization has created in terms of accountability can give potential donors a better understanding of what to look for when vetting nonprofits.
Making organizational information readily available.
The GuideStar website publishes 990 information from the IRS without any input from nonprofits. However, these organizations can help individuals learn more about them by completing a GuideStar profile, since many donors start their research on the website.
Nonprofits can outline their mission and programs, as well as provide information about board members, accomplishments, and needs. Making this information readily available improves an organization’s credibility.
In addition, nonprofits should include key information on their own websites, including a list of board members and senior staff complete with contact information. Some organizations will also post about recent board activity and decisions.
Outlining information about executive compensation.
Today, many potential donors are concerned about executive compensation. According to tax law, nonprofits must include the name and compensation of their chief executive officer on the 990 form. However, not all nonprofits follow instructions and include this information, so it is important to check.
Even beyond these basic facts, nonprofits should detail the policy for determining executive compensation somewhere on their websites. Ideally, this process includes objective and independent review from a third-party organization and is benchmarked against executive compensation at similar organizations.
Protecting the personal data of donors.
Nonprofits should have donor privacy policies published on their websites that clearly state they will not share or sell donor information. Sometimes, charities have privacy policies that require donors to opt out of the list that is sold or shared. Organizations without explicit policies raise some red flags in terms of transparency.