Reviewing a Charity’s Financials with their 990 – Part 2

In part one, we reviewed how to use a nonprofit's Form 990 to determine it's mission, and to understand program versus operational expenses. We reviewed both the black and white answer, as well as the muddy gray one. In part two we will do the same as we look at four other parts of the Form 990 that can be helpful in determining if a nonprofit is one you wish to support. I have also provided a list of websites that can help you determine if a nonprofit is known to be dishonest, because the information found in an organization's 990 is only as good as the nonprofit that supplied it.

OTHER HELPFUL THINGS TO REVIEW IN A FORM 990

Does the nonprofit use professional fundraisers?  

The Black & White: To find out if a charity uses professional fundraisers, and if so, how much they charge, look at Part I, line 16a, column b. An even more detailed breakdown can be found in Schedule G, line 2b.

The Gray: Most charities do not use outside fundraisers. However, America’s worst charities rely heavily on high-cost solicitors that can charge as much as 90% of every dollar raised. Experts say that charities should not spend more than 35 cents to raise a dollar. 

2. How much does the CEO make?  

The Black & White: Officer and compensation information can be found in Part VII. According to a CEO compensation study conducted by Charity Navigator, CEO salaries vary according to nonprofits' location, mission and size (same as any for-profit company). Check out the compensation study found at (http://www.charitynavigator.org/__asset__/studies/2012_CEO_Compensation_Study_Final.pdf) to find a median CEO salary to compare against the nonprofit you are reviewing. 

The Gray: While reviewing a nonprofit CEOs salary is an important part of your due diligence, it is important to know that this issue is heavily debated, and an emotional one for many nonprofit professionals. Outsiders to the nonprofit sector often state that nonprofit CEOs should expect a lower salary because it is a nonprofit, and accept that lower salary because they are working to help people. Nonprofit sector experts explain that not only can we not run effective organizations without exceptional leaders, but we cannot lure the next generation of great leaders if we don't match the salaries of other sectors. Leaders who wish to enter the nonprofit sector should not have to decide between supporting their family to the best of their ability OR working in a nonprofit; and if they do have to make this choice, the sector will suffer. Do we really want our hospitals, social service agencies, children's programs, family services, environmental protection agencies and others to run less effectively? Keep this in mind as you evaluate the salaries of nonprofit CEOs and staff.

3. Non-cash assistance, or in-kind donations. 

The Black & White: In-kind donations can include clothing, medical supplies or other goods, and even professional labor. For information about a nonprofit’s grants and in-kind assistance, look at Schedule F (outside the U.S.) and Schedule I (inside the U.S.). The schedules can be found toward the end of the 990, listed in alphabetical order.

The Gray: While these in-kind donations are an important part of supporting nonprofits, they have come under increasing scrutiny from regulators. Some nonprofits overvalue their non-cash assistance, making the organization appear to be spending more on its programs than it actually is. Some dishonest nonprofits even claim valuable in-kind gifts that were never donated. For example, Breast Cancer Society of Mesa, Arizona claimed to have in-kind medical supplies valued at more than $36 million donated in its most recent tax filings. The nonprofit said the medical supplies came from two organizations, but both suppliers said they had no record of providing goods to Breast Cancer Society or shipping them on its behalf. Of course reporters discovered the issue, as they often do, which led to the organization being named one of the worst nonprofits in America.

4. Fundraising costs counted as programs. 

The Black & White: Joint costs, reported in Part IX, line 26, refer to activities that combine educational campaigns or programs with fundraising. You can determine the percentage of joint costs in a nonprofit's program expenses by dividing line 26, column b by line 25, column b (total program expenses).

The Gray: Joint costs can sometimes be used to disguise a charity’s true fundraising costs and inflate its program expenses. While many charities have advocacy or education as their mission, or part of their mission, a high percentage of combined fundraising and education should be very closely reviewed. This can be done by simply attending a session and using common sense to determine if the Form 990 is justified and reasonable based on the organization's mission and the program session you attended.

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