The US organization Charity Navigator is in the process of revamping its rating system of charities to provide more information and weight to the issues of accountability and transparency. Although Charity Navigator does not rate Canadian charities, the issue of transparency and accountability is as big here as in the US and Canadian charities should ensure that they are improving in this area.
Here is a blurb from their website:
How Do We Measure Accountability and Transparency?
What We’re Looking For
We define accountability and transparency in assessing charities as follows:
Accountability is an obligation or willingness by a charity to explain its actions to its stakeholders, including government, donors, beneficiaries, and the public at large.
Transparency is an obligation or willingness by a charity to publish and make available critical data about the organization, such as its finances, governance and effectiveness.
We believe that charities that are accountable and transparent are more likely to act with integrity and learn from their mistakes because they want donors to know that they’re trustworthy. Generally speaking, charities that follow best practices in governance, donor relations and related areas are less likely to engage in unethical or irresponsible activities. Therefore, the risk that charities would misuse donations should be lower than for charities that don’t adopt such practices.
When examining accountability and transparency, Charity Navigator seeks to answer two basic questions:
Does the charity follow ethical best practices?
Does the charity make it easy for donors to find critical information about the organization?
What Data We Use
We consider two data sources when examining accountability and transparency:
A review of the organization’s website; and
Additional information available from the newly expanded IRS Form 990.
Please note that, at this time, Charity Navigator isn’t able to make its own independent assessments of the information charities provide to donors. For now, our goal is to let donors know whether charities are making certain kinds of important information readily available to donors. We plan to further enhance our methodology and conduct our own reviews of that information starting in 2011.
Here’s what information we collect from each source:
1. A Review of the Charity’s Website
All information must be easily accessible on the charity’s website.
Board members listed
Key staff listed
Audited financials: Audited financial statements reflecting at least the fiscal year represented by the most recently filed IRS Form 990.
Form 990: The most recently filed IRS Form 990; a direct link to the charity’s 990 on an external site is sufficient.
Privacy policies will be assigned to one of the following categories:
2. Data culled from Form 990
The IRS expanded the Form 990 in 2008 to collect additional information from charities that can accept tax-deductible donations. Several changes were designed to inform the public about potential conflicts of interest, board oversight, executive compensation, and record keeping: The IRS states that, “by making full and accurate information about its mission, activities, finance, and governance publicly available, a charity encourages transparency and accountability to its constituents.”
Charity Navigator collects the following data from the expanded Form 990 to evaluate accountability and transparency:
Loan(s) to related parties: Making loans to related parties, such as key officers, staff, or Board members, can call into question a charity’s financial integrity.
Material diversion of assets: A diversion of assets - any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to embezzlement or theft, also can seriously call into question a charity’s financial integrity.
Documents Board meeting minutes: An official record of the events that take place during a board meeting ensures that a contemporaneous document exists for future reference.
Provided copy of Form 990 to organization’s governing body: Providing copies of the Form to the governing body in advance of filing is considered a best practice, as it allows for thorough review by the individuals charged with overseeing the organization.
Conflict of interest policy: Such a policy protects the organization, and by extension those it serves, when it is considering entering into a transaction that may benefit the private interest of an officer or director of the organization.
Whistleblower policy: This policy outlines procedures for handling employee complaints, as well as a confidential way for employees to report any financial mismanagement.
Records retention policy: Such a policy establishes guidelines for handling, backing up and archiving documents. These guidelines foster good record keeping procedures that promotes data integrity.
CEO listed with salary: Charities are required to list their CEO’s name and compensation on the new 990, an issue of concern for many donors.
Process for determining CEO compensation: This indicates that the organization has a documented policy that it follows year after year. The policy should indicate an objective and independent review process of the CEO’s compensation with benchmarking against comparable organizations.
Compensates Board: It is rare for a charity to compensate individuals serving on its Board of Directors. Although Board compensation is not illegal, it can call into question a nonprofit’s financial integrity.
Audited financials prepared by independent accountant: Audited financial statements provide important information about financial accountability and accuracy.
Existence of an audit committee: The audit committee provides an important oversight layer between the management of the organization, which is responsible for the financial information reported, and the independent accountant, who reviews the financials and issues an opinion based on its findings.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.