Many philanthropists struggle with a straightforward question: are their dollars having an impact on the cause they care about? Several initiatives have tried to answer this question. But these initiatives have been either too reliant on financial data or narrowly focused on a handful of causes.
Nonprofits face a related problem: they lack relevant guidance on how to design their programs to achieve greater impact, and how to present their results transparently. These related problems – how to analyze, certify, and report nonprofit impact for donors, and how to analyze programs and make recommendations for nonprofits – represent a significant problem for the sector, limiting the ability of philanthropists and nonprofits to advance causes they care about.
This leads to a basic market failure. In economics, we call this adverse selection. Without accurate information on which charities are good, we end up not giving at all. And then good causes do not get the money they need, and society loses.
An accounting audit serves as a powerful model for a new approach we are starting for nonprofit certification, an impact audit. We are motivated by the role a useful accounting audit can play: it both certifies publicly that an entity manages and reports its finances accurately, and advises privately on how to improve internal controls. Similarly, an impact audit certifies publicly that a nonprofit has appropriate evidence of impact (if it passes) and advises privately on how to increase the nonprofit’s impact (regardless of whether it passes).
The impact audit addresses both the philanthropist’s and nonprofit’s problems. The philanthropist can make funding decisions with guidance from a credible certification, similar to certification systems such as Fair Trade. In the process, the nonprofit receives independent, individualized advice on how to improve its use of evidence to deliver better programs.
The impact audit model offers several benefits over existing rating systems. Impact audits can be conducted for any cause, providing guidance to a range of donors. Granted some causes will be harder than others. ImpactMatters, a nonprofit we created to conduct impact audits, is working on building standards that will vary depending on cause and activity. By creating a public standard for impact certification, any firm can then conduct impact audits of their own, creating high potential to scale up the model across the sector. Finally, in order to encourage nonprofit participation, we are only publishing impact audits for nonprofits that pass, limiting downside for nonprofits that do not pass.
We believe the impact audit model, if implemented and replicated at scale, could transform the nonprofit sector, shifting donor giving toward effective nonprofits and leading to the emergence of “generally accepted impact standards” to improve nonprofit practices. ImpactMatters has released four beta impact audits, available at impactm.org. We welcome feedback from all perspectives to inform the next iteration of the impact audit standard.
ImpactMatters is excited to work with GuideStar as we catalyze the impact audit space. Each impact audit requires the judgment of impact auditors – but much work, and therefore cost, can be reduced with a sound data framework. GuideStar’s work to establish a common data standard will enable impact auditors greater access to the foundational data necessary for an audit – and donors greater access to impact audit certifications. The result will be a faster shift toward what we all care about: greater impact on our cause.
The preceding is a guest post by Dean Karlan, professor of economics at Yale University, president and founder of Innovations for Poverty Action, and founder of ImpactMatters, a newly-launched organization that helps nonprofits use and create evidence to assess their impact.