Hurricane Sandy was unique in its devastation, but the predictable popping up of charity scams in the aftermath was typical. In a bold move, the New York attorney general asked nearly 100 charities to publicly account for how much money they raised and where the money was being spent. Unfortunately, such transparency is sorely needed on a more regular basis. And it needs to start with the groups that are supposed to keep charities honest.
Donors can have a hard enough time wading through the scores of charities that exist for any given issue. Similar-sounding groups can be worlds apart when it comes to how well they are run. The Breast Cancer Research Foundation, for example, gets an A-plus rating from CharityWatch. The Breast Cancer Relief Foundation gets an F.
How these grades get established depends on which rating agency you're using. With several competing services, such as Charity Navigator, the Better Business Bureau and CharityWatch, each group has its own focus. Charity Navigator has user-submitted reviews and some face-value financial analysis, the BBB has a 20-point system that looks at governance, and CharityWatch is focused on financial efficiency.
But, as the old saying goes, who watches the watchdog?
Charity ratings are meant to give donors insight, but even watchdogs may turn out to be useless lap dogs. The Better Business Bureau Wise Giving Alliance takes as much as $15,000 a year from some of the very groups it rates. This licensing revenue provides 67 percent of the WGA's revenue, and tax returns indicate the group would run a $1 million annual deficit without it. From an ethics standpoint, this provides a clear conflict of interest.
Charity raters don't always agree. Some of the groups the BBB accredits (and takes money from) are graded poorly by CharityWatch. The BBB finds that the Children's Food Fund meets its standards, yet CharityWatch (which takes no money from it) gives the group an F. Similarly, the BBB has approved the Blinded Veterans Association, which gets an F from CharityWatch. And the controversial Humane Society of the United States (which is not connected to your local animal shelter) while approved by the BBB also gets a D from CharityWatch. The President of CharityWatch told USA Today, "If you like getting those mailings (from HSUS) and want to pay for more of them, support the Humane Society."
A key issue -- and one that donors are generally in the dark about -- is what constitutes spending on charitable programs. Under an accounting rule, a charity can write off fundraising costs as "program" spending on the charity mission. The result is that often the professional fundraisers keep most of the money donated while the charity gets a tiny percent. Too often, the charity passes the smell test for spending a high percentage of its budget on program activities because they claim their appeals for money are "educational."
While CharityWatch docks nonprofits for using this trick, the BBB looks the other way (Charity Navigator also excuses it). If the BBB took a harder line, it wouldn't make as much money off selling its seal of approval. And that's an obvious problem for the BBB staff: The seal approvals provide 67 percent of the charity rating budget.
A few years ago the BBB's rating system was also criticized for a being a pay-to-play clearinghouse for commercial business operations. Investigative journalists were able to find out that after simply paying a membership fee, one could get a business (even one named after a Middle East terrorist group) an A rating.
If you want to protect your money it takes more time than an instant reaction to emotional appeals. Even armed with charity watchdog ratings, the best advice may be to "Trust, but verify."
Jeffrey Joseph is a former vice president of domestic policy at the U.S. Chamber of Commerce.