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From the President's Office, May 2005

Dear Friend:

The latest issue of Nonprofit Quarterly focuses on transparency and accountability. I was pleased to be asked to contribute to it and to comment specifically on IRS Form 990 and charity evaluators that rely solely on financial data to assess organizations' efficiency. I'd like to share some of those thoughts with you here:

GuideStar receives a lot of calls about organizations' IRS Form 990. Initially, many of the 990 calls had an indignant air to them: "How dare you take my 990 and post it to a public Web site for all to read?" Now the tide has turned. Today, the nonprofits' calls have an air of urgency: "What's taking you so long to post my 990? My donors want to see it before we get our next grant."

Still other callers want to know why an organization doesn't have a 990 posted. Slowly, the public is recognizing the fact that many nonprofits—including organizations with annual incomes of $25,000 or less, most faith-based organizations, and subsidiary organizations, to name only a few—are not required to file a 990. This creates a gaping hole in providing nonprofit data.

Despite the growing public importance of the 990, we still find a significant number of errors in returns. For years, one of GuideStar's most popular speeches has been on "990 Bloopers." (By the way, we now have a sequel called "990-PF Bloopers.") Here are a few examples from that presentation:

  • "Details available on request." More than one 990 on our site uses this phrase in place of the information required. Don't. The 990 is a form submitted to the federal government under penalty of perjury, not a résumé. In IRS-speak, not providing the required data constitutes "failing to provide a complete and accurate return," and an organization can be fined for it.

  • Altering the form. On other 990s, the preparers have crossed out a line here and inserted something there; one form on our site shows the word "Interest" struck out in Part II, line 41, and "Insurance" written in its place. Bad idea, especially since the preparer could have indicated insurance costs just two lines later, in line 43, "Other."

  • Failing to provide a description of your organization's exempt purpose in Part III. This is a common—and, to our minds, completely unnecessary—error. Not only could the organization be fined for failing to provide a complete return but it is also missing a prime opportunity to tell the world about its mission. You never know who is going to access your 990 on GuideStar, so don't give up this golden chance to describe your mission to a new audience.

  • Including private information in public portions of the 990. We've found bank account numbers, aid recipients' Social Security numbers and addresses, and other confidential information in charities' 990s. Although the identity of contributors to public charities (reported on Schedule B) is confidential, the rest of the 990 isn't. We can mask sensitive information that is improperly reported on Form 990, for a small fee, so don't worry if you've made a mistake in the past. Contact GuideStar about how we can help to clean up these mistakes.

All of this leads me to a few conclusions:

  • We need to be more realistic about the strengths and weaknesses of Form 990. Making it available publicly on the Internet has had an enormously positive impact on the effectiveness and efficiency of the sector. But the document is hard for many to complete. The guidelines are open to interpretation and are not consistently followed; mistakes are easy to make; and the information is not always timely.

    Many people are working to improve this situation. Our partners at the National Center for Charitable Statistics have been coordinating efforts for the last fifteen years to improve the form. Independent Sector is working to respond to the Senate Finance Committee on further improvements. The IRS has announced plans to phase in e-filing, which should help to reduce errors. But all of this will take years to complete.

  • The imperfections of the 990 also mean one should be careful about making judgments from it. GuideStar recommends that evaluators look at multiple years before making a conclusion. Better yet, we urge organizations and foundations to provide additional information to give the contextual information necessary to make a sound judgment about an organization. The rating services that make judgments about organizations based on one 990 or, even worse, a few lines on a 990, are being dangerous and reckless and are often unfair to the organizations they are rating.
From the day in October 1999 when we posted the first 990s on GuideStar, we have advocated two things: (a) examine at least three years' worth of 990s for a specific organization and (b) use financial ratios carefully, and always in context.

A 990 is a snapshot of one moment in a nonprofit's history, and the vagaries of nonprofit accounting practices can skew the picture that snapshot presents. For example, nonprofit accounting standards require an organization to declare the entire amount of a multiyear grant the year the grant is awarded. Thus, an organization that receives a $150,000 grant over three years can look flush in year one and as if it is running a deficit in years two and three. Looking at only one 990 can lead to erroneous conclusions that may even prove damaging to the organization.

Ratios without context can be just as dangerous. The best way to use financial ratios is to look at an individual organization's performance over time. Are the indicators improving, declining, or staying the same? How do they compare with other organizations that do the same kind of work? For example, the median program ratio for art museums is 70 percent, whereas that of food banks is 93 percent. Art museums have costs (security, insurance, climate control) that food banks don't. It would be unfair to compare an art museum's ratios to a food bank's.

GuideStar will continue to post nonprofits' 990s. For all of its weaknesses, the 990 is the only document that hundreds of thousands of exempt organizations file each year. This makes it the only common denominator we have for assessing the work of those organizations.

We must always keep in mind that the 990 is merely one source of information on the activities of the nation's exempt organizations. Other information—the way an organization frames its mission, goals, and accomplishments, and whether its programs support its mission—are equally, if not more, important. In the coming months, we must not let our focus on the 990s blind us to the most important measure of all: whether or not an organization accomplishes its mission.

Sincerely,

Bob Ottenhoff
President and CEO, GuideStar

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