Fundraising Scrutiny: How to Deal with Watchdog Agencies

Nonprofit watchdog agencies have become a fact of life in the nonprofit world. Well-publicized scandals at large nonprofit organizations in recent decades have had two notable results: greater government regulation and a proliferation of private watchdog groups.

One of the most notorious scandals erupted in the 1990s at the United Way, whose ex-CEO was sentenced to several years in jail for financial misdeeds. Scandals damage any organization because they increase public distrust and decrease donations. This can happen even if a nonprofit proves is has done nothing wrong.

The key for nonprofit leaders is to avoid even the appearance of wrongdoing. Nonprofits that manage their affairs prudently will always be well positioned to earn and retain the public’s trust and attract financial support from foundations, donors and other benefactors.

Whether your organization is new or seasoned, you should always monitor the news and learn more about how organizations run afoul of regulators and watchdog organizations. This will give you an idea of the situations and problems your organization should work to avoid. You’ll also have a better grasp on the factors these agencies consider most important.

Know thy Watchdog

Besides government entities, a variety of nonprofits exist solely to track and report on other nonprofits. You cannot afford to ignore them because major benefactors use watchdogs’ ratings to decide which organizations to support. Three leading nonprofit rating agencies to follow are Guidestar, Charity Navigator and CharityWatch.

There also are voluntary nonprofit associations often organized on the state level, such as the Connecticut Association of Nonprofits and Maryland Association of Nonprofits. In many areas, the Better Business Bureau rates nonprofits through its Wise Giving Alliance.

Pay especially close attention to which watchdogs follow your organization and the characteristics those groups consider important. That can differ considerably from group to group. The Connecticut accounting firm J.R. Cohn, which has a nonprofit advisory service, says nonprofits should ensure their financial and other data are reported consistently from year to year. Inconsistent data is a red flag to watchdog agencies, the federal Internal Revenue Service (IRS) and state tax authorities. Take particular care with the information you file on you IRS Form 990. This is the federal financial disclosure form for nonprofits, and your data needs to be simple and straightforward.

Make Yourself Transparent

Hesitating to release data about your organization looks suspicious, even if you have nothing to hide. The information technology explosion enables organizations and individuals to share more data than ever before. This raises public expectations about the level of data nonprofits and for-profits alike should disclose.

What’s more, as you go about the daily business of running your nonprofit, be sure to pay attention to what the numbers mean in relation to the results your organization achieves. When it comes time to release quarterly or annual data, you’ll be better able to quell complaints if your story is both forthright and positive.

Stay focused on results

Most criticism of nonprofits focuses on outsized expenditures on overhead, including facilities, meetings and events, and salaries. When your organization emphasizes its mission and its results, it is more apt to avoid such criticism.

Expenditures on IT, infrastructure and talent are inevitable, but make sure expenses are always kept reasonable, prudent and, most important, central to your mission and work. This will help quell criticism from watchdogs and reassure your benefactors.

Don’t stash excess cash

While excess cash is great news for people and companies, unused funds can be problematic for nonprofits. Charity watchdogs generally think current programs are the best use of these monies. The BBB’s Wise Giving Alliance offers this helpful benchmark: unrestricted net assets available for use should not exceed three times the size of the past year’s expenses or three times the size of the current year’s budget, whichever is higher.

Avoid tax audits

An IRS audit of your organization is guaranteed to catch the eye of watchdog organizations and other regulatory bodies. It might even unsettle your donor base. No matter what catches the interest of the IRS, an audit will be time-consuming and disruptive to your core operations.

Beware of activities that are apt to make your organization more audit-prone. These include running games of chance as a fundraiser, engaging in joint ventures with for-profit companies and taking part in political activities. Moreover, one of the most common reasons is also entirely avoidable: failing to file required forms with the IRS, or filing incorrectly.

Treat your employees well

While nonprofit watchdogs typically work to rein in imprudent spending by nonprofits, they’ve also begun to single out nonprofits for how they treat their workers. Low pay, substandard or nonexistent employee benefits, unsafe or unhealthy workplaces and overwork are sure to provoke criticism.

If your organization’s finances require you to keep pay modest, look into ways to compensate employees in other ways. For instance, flextime, telecommuting arrangements and training opportunities rank high on most people’s wish lists — yet are kind to your organization’s bottom line.

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