Charity Watch: A Tool to Evaluate Nonprofit Legitimacy

Currently, there are approximately 7,000 military related charities registered with the IRS. Depending on which state you’re living in, you could start the 7001st charity for only $500.

So how do you know which of those 7,000 are truly helping veterans?

With a mission “to maximize the effectiveness of every dollar contributed to charity by providing donors with the information they need to make more informed giving decisions,” Daniel Borochoff, a financial analyst, founded Charity Watch in 1992.  

Unfortunately, “with no SEC or federal government watchdog…the nonprofit sector has little oversight and much room for financial manipulation.” The IRS, which many people view as the only oversight entity, only require nonprofits to file tax forms.  The IRS does not require organizations to report detailed financial information.

Launching in 1992, Charity Watch began conducting detailed analyses of some of the largest, active philanthropic organizations.   Now, Charity Watch evaluates about 600 organizations. Six-hundred entities is a small number of non-profits relative to the total number that exist. This limitation is due to the involved and complex investigation into each organization’s financial statements.   

CHARITY WATCH GRADING CRITERIA & METHODOLOGY

When grading each organization, Charity Watch “performs in-depth evaluations of complex charity financial reporting, including audited financial statements, tax forms, annual reports, state filings, and other documents.”  

Their final grades are based on two financial components that determine the efficacy of the organization’s mission.

1.  Percentage of donations used for charity programs.

2.  How much money it costs the organization to raise $100.

More in-depth information about the criteria and methodology for evaluating charities can be found on CharityWatch.org.

NOT THE ONLY GAME IN TOWN

Even though they are known as one of the most intense and critical oversight organizations, Charity Watch is not the only entity seeking to regulate the non-profit sector.

Two other notable and popular charity evaluating organizations are Guidestar and Charity Navigator.  Both organizations are 4 to 5 times more monthly web traffic than Charity Watch.

THE DIFFERENCES

Guidestar’s model is a popular platform with donors because they present easy-to-access information before requiring payment.

Charity Navigator is one of the oldest evaluators online.  Due to their experience in the game, they have about 8,000 charity evaluations available on their website.  For each organization, Charity Navigator gives a general grade, accompanied by limited financial details.

As mentioned before, Charity Watch differs from other evaluators because of their exhaustive grading criterion.  Due to their tough standards, Charity Watch is occasionally sneered by non-profits, but appreciated by donors.   In-depth analysis of each organizations financial records enables Charity Watch to report on facts that are often overlooked by many other evaluators.  

For example, Charity Watch exposed the deceiving accounting tactic called “Joint Cost,” used by two well-known Veteran organizations; Disabled American Veterans and Wounded Warrior Project.  “Joint Cost” is a term often overlooked during audits.  Joint costing is the method of coupling the cost of fund raising with the cost of “awareness” campaigns.  This accounting coupling will alter the efficacy grade.

An example of joint costing: Mothers Against Drunk Driving calls you to ask for a donation and, in the same phone call, told you not to drink and drive.  They could write part of the cost of that call off as part of their efforts to stop people from drinking and driving. While this method is entirely consistent with Generally Accepted Accounting Practices it can leave a bad taste in some donors’ mouths. Charity Watch will penalize charities for this practice.

In addition to condemning groups for joint costs, Charity Watch also judges nonprofits for having large cash reserves. In fact, any charity with more than 5 years of assets on hand gets an automatic F on the site. 

HOW DO MILITARY CHARITIES RATE ON CHARITY WATCH?

Charity Watch evaluates 65 organization that are classified as “Veteran and Military” programs. Of the 65 military and veteran charities evaluated, only half are available for free on CharityWatch.org.  In 2015, Charity Watch revealed that about half of all veterans’ charities evaluated received an F, including well known organizations like the VFW.

Let’s see how a few of the better-known military charities measure up. The chart below includes Charity Navigators ratings for comparison:

After seeing these numbers, coupled with the low grades of the other half of veteran nonprofits rated, Charity Watch seems harsh on such organizations. I mean the Navy Seal Foundation gets a C+ on Charity Watch but rates a 100 on Charity Navigator!

Though subjectively too harsh for some people, Mr. Borochoff is consistent with his evaluations.  Veteran and military non-profits receive the consistent grading methods as any other nonprofit on the Charity Watch site.  Charity Watch can be a useful tool when researching nonprofits legitimacy, however, if they an organization that you are interested in donating to has a sub-par grade, keep in mind the grading standards may be different than what you expect.