Accountability Web Site: More Harm Than Good?

By DAN PRIVES

Non-profit groups — and donors who are eagerly looking for information to help them decide which organizations are worthy of support — have been pinning a lot of hope on the Internet. As information about charities becomes easier and easier to obtain with just a few clicks of a computer mouse, the public will be better able to monitor the work of non-profit organizations and to hold them accountable for their use of tax-exempt funds.

But the most prominent effort thus far to put such information online — the one mounted by the GuideStar Web site — may be doing more harm than good. GuideStar, run by a non-profit organization called Philanthropic Research, in Williamsburg, Va., has received millions of dollars in foundation grants and is the charity-search operation used by Helping.org, the AOL Foundation’s giving site. The GuideStar service, so promising in theory, unfortunately is doing little more than creating misunderstanding and confusion among potential donors.

More important, GuideStar’s dominance could slow the adoption of promising new technologies to make more comprehensive non-profit disclosure available to everyone.The problem with the GuideStar approach is that it relies almost exclusively on a charity’s informational tax return, known as Form 990, as the basis of its financial reports. But the form has multiple flaws and limitations that are widely known to charity and financial experts. By encouraging charities to use the 990 — and by teaching donors to use them to compare organizations — GuideStar is leading philanthropy in the wrong direction.

Instead, charities and foundations should work toward posting information that a donor could use to make an informed judgment. This fuller and more accurate online presentation would include three principal elements: audited financial reports, narratives that put the numbers into proper context, and a full list of board members and officers responsible for overseeing a charity’s operations.

The Internal Revenue Service’s Form 990 financial report was a great leap forward when it was developed during the Carter administration. However, it was designed primarily to accommodate a problem of limited computational resources that no longer exists. There is no legal or accounting basis for the particular form of financial reporting used by the I.R.S. Form 990. It is just a compromise that represents the best reporting that was possible in the late 1970’s with paper, pen, and adding machine.

The two major organizations that monitor non-profit groups — the National Charities Information Bureau and the Philanthropic Advisory Service of the Council of Better Business Bureaus — both examine 990’s. However, they make it clear that the basis for evaluating an organization should be an annual financial report and an accompanying narrative account of the non-profit organization’s programs and activities. They also agree that the accompanying financial statement should show how expenses relate to the programs described in the narrative. And they agree that, for all but the smallest organizations, the financial statement should be subject to an independent audit.

The current GuideStar report meets none of those standards because it only reports information from the Form 990. It presents no written explanation of activities over a specific period or tied to specific items in the financial reports. GuideStar does not routinely report whether or not an organization is audited. (The Form 990 is not an audited financial report; as a result, information about fund raising and other activities, for example, is often absent or incomplete.)

Even if the organization has an audited financial statement, it’s not possible to obtain it from GuideStar. A donor who wants to inform herself as fully as the charity-watchdog groups recommend doesn’t have the information she needs.

Donors may also get the mistaken impression that the Forms 990 offer a fair presentation of the financial results of an organization. Often, even that standard is not met, because the Form 990 financial report does not reflect the consolidated results of affiliates and subsidiaries. The I.R.S. requires each charity with revenue over $25,000 to file a Form 990. Many non-profit organizations incorporate more than one entity and file separate Forms 990 for each one.

On the other hand, the standard approach in compiling financial reports is to consolidate the affiliated and subsidiary operations to eliminate any double counting of revenue or expenses. Unless a donor is aware of that, she will not realize, for instance, that the “American Cancer Society” Form 990 represents only one of three organizations that are part of the consolidated entity most people know by that name. (The other ones cover the charity’s national headquarters and its foundation.)

GuideStar makes several other unfortunate mistakes. It simplifies the data on the Form 990 far too much. As a result, it makes it tempting for donors to compare figures like the program expenses or administrative overhead as a percentage of the total budget. Without the overall context, however, ratios cannot be a fair basis on which to judge an organization’s effectiveness.

A capital campaign, for instance, would produce huge variations in income and expenses throughout the period of the campaign. A potential donor can separate the capital campaign from the regular operation results only with the full account provided by the notes to the financial statement and a narrative of the organization’s activities. Only a narrative can describe the results of charitable spending, which is what most donors are really interested in.

If non-profit groups had a resource that provided financial reports and accompanying narratives, they would be better able to help people understand such numbers. The standard notes that accountants use would show what is really happening with an organization financially, and the narrative account would relate that to its program accomplishments.

It’s not technically very hard to present the information contained in a standard annual narrative and financial report online — and the interactive features of the Internet make such reports potentially more useful than in print.

The same new technology that retailers are using to put their catalogs online can be used to provide easily generated reports to board treasurers, independent auditors, grant makers, and regulators. There are already efforts along this line in for-profit financial reporting. Non-profit groups could use that technology to build on those efforts, making modifications to take into account the different formats and terminology in non-profit financial reporting. What is needed to accomplish this reporting is agreement on standards of presentation, so that accounting software can be configured to produce reports readable online. With standards in place, it will be much easier for donors to get much of the information they need and to compare data among charitable organizations using the Web browser tools that have become part of everyday Internet use.

It would not be so difficult to move to an online approach that relies on annual reports, both narrative and financial, instead of the 990. The non-profit universe is not as vast as GuideStar would have us believe. GuideStar claims to report on more than 640,000 organizations, but only about 200,000 groups have annual revenue of at least $25,000 and therefore must file 990’s. More important, three-quarters of private donations go to about 60,000 groups — so that’s where we need to concentrate our effort, instead of in providing superficial reports on 10 times that number of charities.

The GuideStar approach to charitable reporting is well-meaning, but it does not even come close to setting a real standard for non-profit accountability. Charities and foundations should be willing to commit time and money to build a system that truly encourages full and accurate reporting in cyberspace.

Dan Prives has for the past decade helped to set up accounting and office systems at non-profit organizations in Baltimore. Last year, he served as the interim director of the National Council of Nonprofit Associations.