Tools to Separate Good and Bad Nonprofits

By Bill Smith
April 4, 2007 09:05 AM

In the three years since I began covering charities for the St. Louis Post-Dispatch, probably the most common question from both journalists and non-journalists is how to tell a good, well-run nonprofit from a bad one.

The good ones, for the most part, are easy to spot. They are the companies with a hands-on board of directors, who constantly scrutinize every part of a nonprofit's work. They are those nonprofits that are aggressive -- even pushy -- in getting their messages out to the public. They are the charities that squeeze every nickel of their revenue as if it was coming out of their own pockets. They have carefully thought-out missions and they usually are very cautious about straying from their core programs. And they have clear, tough ethics standards, including no-nonsense conflict of interest policies.

But, perhaps more than anything else, they are those nonprofits that are most open about their activities.

Nothing tells more about the quality of a nonprofit than its commitment to transparency. The fastest and simplest way to separate a good company from a troubled one is to phone the director with a direct, challenging question. The better the nonprofit, the more open and direct the response. The good ones will offer to open their records, show you everything, at times even moving beyond your requests. Those that seem as if they have something to hide usually do.

But once you suspect you have a bad nonprofit, how do you go about unraveling it, discovering exactly what is wrong with it?

Following are some steps that have proven to be helpful.

The Watchdogs
National charities are scrutinized by three major watchdog groups: Daniel Borochoff's American Institute of Philanthropy (AIP), Trent Stamp's Charity Navigator, and The Better Business Bureau's Wise Giving Alliance headed by Bennett Weiner. For churches and other religious organizations, check out www.ministrywatch.org. In addition, most communities have local Better Business Bureaus that monitor local charities.

Each of the national watchdog groups has its peculiar weaknesses. For instance, none of the three have found a good way to measure program quality -- just how well a particular nonprofit is getting its service to those who need it. Most focus heavily on financials, looking at such things as management and/or fundraising costs.

Even the Better Business Bureau, which uses a wide-ranging checklist of 20 standards of accountability to judge its charities, falls short in its efforts to provide a thorough evaluation of charities it scrutinizes. For instance, a few months ago, I thought I had a great story when I discovered that many of the local charities that received money from the St. Louis area United Way had not responded to the BBB's request for information. Later, the local BBB charity director acknowledged that those charities didn't bother to respond to a BBB questionnaire largely because they were under even more exacting standards of the local United Way.

Still, despite their shortcomings, the watchdog groups can offer a signal to possible problems. A nonprofit that has a poor showing in two of the groups is definitely worth looking at.

Web sites
Many nonprofits, particularly national ones, have their own Web sites. Some offer in-depth information on everything from their annual reports to information on their next fundraiser. Others are little more than online solicitations for money. Still, you can often tell a lot about a nonprofit from its Web site, including its degree of transparency. Bad nonprofits rarely offer a link to their Internal Revenue Service returns. Bad nonprofits rarely offer online audits. Bad nonprofits almost never encourage public input and questions about their operations.

The IRS
All tax-exempt nonprofits, with an annual income of more than $25,000 (with the exception of churches), are required to file a Form 990 with the Internal Revenue Service each year.

These 990 forms, accessed through Guide Star or The Foundation Center offer a glimpse into the operations of a nonprofit. And while the information is limited, it can offer a wealth of information for the reporter.

First, understand that most 990s posted with Guide Star or The Foundation Center are usually out of date.

If a nonprofit is local, you might simply go to the office and ask to see a copy of their most recent 990 reports, which by IRS regulations must be released immediately. You might also fax or send a written request for the documents, which must be produced within a few days.

Still, what recourse does an investigative journalist have if a nonprofit refuses to give up current information? Unfortunately, the answer is not much. You can appeal to the IRS or get involved in a legal battle, but nonprofits can stall seemingly forever.

Usually, it is best to try to persuade them by appealing to their desire for "transparency," an important word in recent years.

If all else fails, you can request the most current 990s from the IRS itself, but don't hold your breath. Last October, I requested the newest 990s for about a half dozen charities in Arizona that were the focus of an investigation. After several follow-up requests, we finally received copies of the returns in February 2007 -- more than four months later. By that time, the information we had requested already was online. Once you have the most current 990 available, look closely at several areas. Click here for information on where to look.

Other sources
Look closely at a nonprofit's previous 990s or state corporation records to find board members or officials who formerly belonged to the organization, but who are no longer there. Sometimes, they can offer good information on how the nonprofit operated. Get out of the office and actually visit locations. Go to current and former addresses of nonprofits and nonprofit officials and talk to neighbors. The Internet and record searches can offer a lot, but there is still a lot to be said for old-fashioned legwork.

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism