Charity Navigator: Understanding the rating

Charities more than most businesses, are under increased scrutiny from donors, the IRS, funders, local and State government, the BBB and with the increased popularity of the Internet, charitable watchdogs like Charity Navigator have created their own formulas to determine whether or not you should support an organization.

While scrutiny is good and keeps organizations on their toes, sometimes the data, rules and regulations create a quagmire that even groups like Charity Navigator have trouble interpreting. When they fail to understand the rules or use a one size fits all approach to rating all organizations, sometimes they end up hurting good organizations by attributing low ratings which in turn results in lost donations for really good charities like NAM that are struggling to meet the overwhelming demand for services in a down economy.

You may have read a few months back when the Houston Chronicle reported that Charity Navigator had rated NAM as a 4 Star Charity based on efficiency and its capacity to raise enough funds to cover program expenses. Inevitably we knew that once Charity Navigator,(a charity watchdog) rec'd our 2008-2009 Form 990 (tax return), our 4 star rating would drop to a 2 star rating and a cursory check over the weekend confirmed we are once again officially a 2 star charity. The reason behind this drastic dip in ratings is due to a little known accounting rule entitled FASB116, here's a synopsis:


One key component of FASB116 is the requirement that all unconditional promises to give (pledges)be recognized in the year the notification of the pledge is received even though the charity does not receive all the cash in year one. This can cause significant fluctuations in the change in net assets of an NFP. For example, if you receive a $1,000,000 award to be paid over the next 5 years you would have to record the entire $1,000,000 in Year 1. This would likely cause a large increase in net assets in Year 1, however; as the funds are spent in Years 2-5 you would likely show a decrease in net assets. These fluctuations can make it difficult to properly budget and are often confusing to the readers of your financial statements and Form 990.

Every three years, NAM has been fortunate to receive a three year pledge of $1.2 million from one source. The first year of the pledge, when we must recognize all the revenue up front even though we only receive 1/3 of the grant, Charity Navigator rates us a 4 star charity, the second year - we typically are rated a 3 star and finally in the third year we drop to a 2 star charity. The reason behind this is because Charity Navigator bases it's rating on efficiency and capacity. So while we are an extremely efficient charity they ding us on lack of capacity in years 2 and 3 of mult-year grants because the tax return shows we spent a whole lot more than what we brought in because the proceeds rec'd in years 2 and 3 must be recorded as expenses, mainly due to FASB 116.



Much to my dismay, I also discovered that under the "Accountability" tab NAM was dinged for:

1) staff and board are not listed on the website. They have always been listed.

2) No audited financial statements. Audited financials are in the Annual Report which is always posted under Facts and Figures.

3) 990 is not on the website. There is a clear link to view our 990 on Guidestar as well that has always been there and we tell people that copies are provided upon request. .

4) They stated our financials are not audited by an independent accountant even though our tax return was prepared and signed by our independent accountant and the 990 indicates an independent auditor performed a single audit.

5) Organization does not have an Audit Committee review the annual audit.



We followed the instructions for the 2008 Form 990, page 39 under Section XI which state that if you are filing a consolidated tax return (we file NAM and NAM Endowment together) answer "No" to the questions that asks if your financials were compiled or reviewed by an independent accountant. Then if you answer "No" to that question, you have to answer "No" to the subsequent question which asks if you have an Audit Committee that reviews the audit performed by an independent accountant. The 2010 Form 990 has been changed to accomodate consolidated returns.

While we have written to Charity Navigator in the past and once again, I have shared my not so happy thoughts with them, I highly encourage each one of you, as NAM aupporters to create a free account on Charity Navigator, www.charitynavigator.org, search for Northwest Assistance Ministries and post a review regarding your thoughts and experiences with NAM. This will help others who would otherwise decide NOT to support us because of Charity Navigator's unfair rating standards.

Thanks in advance for your support and for your advocacy around this issue,

Carole