How To Evaluate a Charity Before You Give, and Why There's Little Government Regulation

Some recommendations from CharityWatch, an independent charity watchdog, if you're considering a donation:

Know your charity

Charities have an obligation to provide detailed information to interested donors. Never give to a charity you know nothing about. Request literature and a copy of the charity’s latest annual report, including its annual consolidated financial statement. These often can be found on an organization's website.

A consolidated audit provides a more complete picture of a nonprofit's operations because it includes the financial activities of multiple legal entities and eliminates interorganizational transactions. Charity tax filings frequently contain self-reported information intentionally designed to frame the charity’s financial activities in the best possible light. Audited financial statements are more reliable sources since they are produced by third-party certified public accountants.

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If a charity does not provide you with the information you requested, you may want to think twice about giving to it. The best charities typically encourage your interest and respond to your questions.

Find out where your dollars go

Ask how much of your donation goes for general administration and fundraising expenses and how much is left for the program services you want to support. Most highly efficient charities spend 75% or more on programs.

You can calculate a nonprofit's cost to raise a dollar, a common metric used to calculate fundraising efficiency. Divide the total spent on fundraising (included in the consolidated financial report) divided by the unrestricted revenue raised.

Do not respond to pressure

Do not let yourself be pressured into contributing on the spot. If you are not familiar with a charity, request additional information in writing and inspect it carefully. No legitimate organization will pressure you to give immediately.

Here are some common questions about regulation of charities and their activities.

Are nonprofit fundraising appeals regulated?

Laurie Styron, executive director of CharityWatch, and other leaders of charity watchdogs caution that nonprofits' excessive spending on fundraising has become a national problem, but say government regulators can do little about it.

Fundraising appeals are considered a form of communication involving the dissemination of ideas and advocacy of causes. While they are subject to some regulation, the U.S. Supreme Court has said in a mix of rulings that the rules cannot impinge on free speech.

Do any government agencies regulate nonprofits?

Consumers often assume regulators step in to stop charities from spending too much on overhead, Styron said. But public charities have no government watchdog or oversight by the Securities and Exchange Commission. Loose IRS reporting rules leave much room for financial manipulation, she said.

States' attorneys general and the Federal Trade Commission monitor the fundraising sector for fraud, and the public can check out charities online, “but unfortunately it’s not enough,” Styron said.

What private-sector organizations rate nonprofits?

Charity trackers include organizations such as the Better Business Bureau’s Wise Giving Alliance, GuideStar (now Candid) and Charity Navigator.

Charity Navigator is a nonprofit funded through donations. Other organizations that rate nonprofits, including the BBB's Wise Giving Alliance and GuideStar, are funded by the industry itself, Styron said.

Some fund evaluations by charging the charities they rate annual fees to publicize their ratings, an inherent conflict of interest. Others offer only “robo-ratings” using unaudited charity tax form data that is republished without an analysis of its completeness or accuracy. The data can do more harm than good by giving donors a false sense of security that a charity has been vetted for financial efficiency or impact, when in reality, some charities are simply very good at manipulating their financial reporting, according to CharityWatch.

Many do not closely analyze excessive spending on fundraising. That matters because the portion Americans give every year relative to the country’s gross domestic product doesn’t change much ― and charities that spend wisely and are true to their mission invariably lose out, she said.

“It’s a race to the bottom ethically," Styron said. "Those organizations that are spending an excessive amount of their resources on fundraising often do the best job of getting people to donate… even though others may be accomplishing more to scale.”