Accounting on Us
For organizations forced to shut down due to COVID-19, more than ever, donor support is extremely important to help them through these difficult times.
New charity navigator rating system makes its debut
Colette Kamps, CPA
Some nonprofit organizations, such as in the healthcare industry, may be busier than ever with providing new tele-med services. Other organizations may also be deemed “essential” and operating close to normal. But there are others that had to completely shut down operations due to COVID-19 and are trying their best to offer alternative virtual experiences to the beneficiaries of their programs. For these organizations, more than ever, donor support is extremely important to help them through these difficult times.
One factor donors may consider when deciding where to send their donations is the rating given by Charity Navigator, a well-known nonprofit watchdog group. But one of the limitations of these ratings in the past (the Star Rating System) is that only certain organizations were eligible. The old Star Rating system is not going away (it will remain for those currently eligible), but now Charity Navigator has introduced a new rating system that expands the number of “eligible” charities by approximately 150,000. Smaller nonprofit organizations may now be rated, with the only eligibility requirement being three years of e-filed Forms 990.
This new rating system is called Encompass Rating System. It provides a score between 0 and 100 that is based on four indicators of organizational effectiveness which include finance and accountability; impact and results; leadership and adaptability; and culture and community. They call these indicators the “beacons”. This rating method has come a long way from the days of simply looking at the program expenses percentage. The initial Finance and Accounting beacon includes five metrics: program expense (25 points), audit or review (25 points), board composition (25 points), liabilities to assets (15 points), and website (10 points). Here is an example where a nonprofit organization would have a perfect score of 100 in this Finance beacon:
- Program expense is 74% of total expenses (at least 70%)
- Gross revenue was $3M
- An audit was completed (audit if > $1M)
- The board is made up of ten independent members (must be at least three members)
- Total liabilities are $50,000 and total assets are $300,000 (50% or less)
- The website address is included on page one of the Form 990
Charity Navigator has always utilized the information included on the filed Forms 990 of the organization as input to the tests that determine their ratings and will continue to utilize information in this way for the new rating system. An impressive rating can be leveraged in marketing materials and on the organization’s website to promote their programs and to give assurance and credibility to donors that their dollars will be used effectively towards the organization’s mission. In fact, Charity Navigator will offer a promotional toolkit to those with scores of at least 75 that includes a seal, social graphics, and a sample press release. Nonprofit organizations that will now be rated under this new system can do their homework today to determine what changes they can make to ensure a high score and to use the rating to their advantage in soliciting contributions.
Colette Kamps, CPA, Partner, specializes in non profit tax and accounting services. She can be reached at ColetteK@hhcpa.com or (480) 483-1170.