By the Book?

Group draws heat for rating Christian charities on fiscal efficiency without accounting for mission or quality of service

A nonprofit group founded by a professional financial analyst has started a Web site that rates the fiscal efficiency of Christian charities and publishes the information on the Internet. The group is receiving praise for its efforts but criticism for its methods.

The rating system, called Ministry Watch, is a product of Wall Watchers, a Charlotte, N.C., group that conducts research on Christian charities. On the Ministry Watch Web site (http://www.ministrywatch.com,) Wall Watchers rates approximately 400 charities using information from either their audited financial statements or the Form 990 informational tax returns that they file with the Internal Revenue Service.

Groups that qualify as church organizations and therefore don’t file Forms 990, such as the Salvation Army, or that decline to provide their financial statements are not included in the ratings.

Wall Watchers’ approach is modeled on the analyses done of for-profit companies by financial-rating firms. “Our goal is to meet the basic informational needs of donors,” said Mark Long, president of Wall Watchers and former research manager at IPAC Securities, an organization in New Zealand that rates mutual funds. “We want to transfer the basic principles of financial analysis to the nonprofit realm.”

But critics say those principles often don’t fit when applied to nonprofit groups because charitable organizations do not exist to make profits, as commercial companies do.

“In the for-profit world, the bottom line is the bottom line,” said Paul D. Nelson, president of the Evangelical Council for Financial Accountability, which sets financial standards that Christian charities must meet to become members. “We don’t think rating systems are readily transferable to the nonprofit world. What’s the bottom line when there is no bottom line?”

Wall Watchers, which takes its name from a Biblical reference to the Hebrew prophet Ezekiel, who blew a horn to warn of impending danger to the Israelites, was founded in 1998 and operates on income generated by a $500,000 contribution from its founder, Howard Leonard, formerly executive vice president of Templeton Investment Counsel, a Wall Street company that manages for-profit mutual funds. Templeton Investment is among the Wall Street firms founded by John Templeton, a renowned mutual-fund manager and a major contributor to many Christian charities. In the early 1990s, Mr. Leonard and his wife, Carolynn, decided to create a Christian ministry dedicated to improving the financial disclosure and accountability of other Christian charities.

Besides Mr. Leonard, four other board members either work for Templeton Investment or have done so in the past. In addition to Mr. Long, Wall Watchers’ staff members include five others with backgrounds in for-profit financial auditing and accounting.

Comparing Groups

To create its rating system, Wall Watchers calculated a series of financial ratios that, in Mr. Long’s opinion, demonstrate a nonprofit group’s efficiency. For example, one ratio compares the percentage of total revenue that an organization spends on fund raising with the percentage of its total revenue that is generated from private sources.

Based on those calculations, each charity receives a rating from one star (the lowest) to five stars, determined by comparing it to the overall average for all charities in the Wall Watchers database. Those that score in the top 10 percent receive five stars, while those in the bottom 10 percent get one star.

Each charity also is assigned two rankings, one showing how it compares to all the charities in Wall Watchers’ database and the other how it compares to charities that engage in similar activities, such as publishing, evangelism, and foreign-mission work.

Under the system, Mr. Long said, groups deemed to be most financially efficient are those that are able to “get the most mission-related activity out of the least amount of financial resources.”

The analysis, he added, is based strictly on an organization’s fiscal data. Whether a group makes good use of the money it spends is not part of Wall Watchers’ equations.

Wall Watchers is negotiating with several Christian-oriented Internet sites to promote its rankings, including Crosswalk.com, a Christian Web site with more than 1.2 million registered users. Wall Watchers also hopes to publish a printed version of the ratings for distribution to financial advisers.

While the group focuses on a charity’s fiscal performance, Mr. Long emphasized that Wall Watchers does not want donors to make giving decisions based on its ratings alone.

“Using the financial parallel, it’s not a buy-sell recommendation,” he said. “The rating makes no attempt to ascertain the social effect of the organization. We also recognize that every donor has a different set of values and a different approach to the criteria they consider relevant when making a giving decision. For some to whom the financial side of things is not that important, this is probably not the kind of information that would interest them.”

Concern About Approach

Although a similar disclaimer appears on the MinistryWatch Web site, some critics worry that won’t prevent visitors from simply looking at how many stars a charity receives and deciding whether it is a worthy recipient based just on that.

“When they see a five-star rating, boy, that’s good. And when they see a one-star rating, you can just see a circle with the charity’s name in it with a big ‘X’ across it,” said Mr. Nelson, of the Evangelical Council for Financial Accountability. “I’m not talking about your sophisticated donors who are giving large amounts. I’m talking about $20-a-month donors, who are really still the lion’s share of donors.”

To become a member of the council, which has operated since 1979, a charity must meet the organization’s standards by providing audited financial statements for review and allowing the council’s staff members to make random field visits to evaluate them. But Mr. Nelson said his organization does not rank charities based on financial formulas because such calculations can be misleading.

While praising the intent of Wall Watchers, Mr. Nelson said that focusing on financial data omits many other factors that affect an organization’s performance. For example, he said, charities may have higher fund-raising costs for reasons over which they have no control, such as “whether they’re a young organization or an old one, or whether they have a natural inclination to reach the public via radio or television or have to raise money through direct mail.”

The head of another nonprofit watchdog group praised Wall Watchers for its effort but also questioned its methodology. “Their formulas give a strong preference to money that’s raised via public contributions,” said Daniel Borochoff, president of the American Institute of Philanthropy, in Bethesda, Md., which grades charities based on how much they spend on program services and how much it costs them to raise funds. “Why would you say that’s better than any other way of raising money?”

Criticism of Ratings

Officials of some Christian groups given low ratings pointed to some factors affecting their financial data that Wall Watchers failed to take into account.

Jim Barr, controller of the Christian Broadcasting Network, in Virginia Beach, Va., said that for the past several years his organization has spent more annually than it received in revenue. The reason, Mr. Barr said, is that the network had received a “financial windfall” when its founder, Pat Robertson, sold International Family Entertainment — the parent company of the Family Channel cable TV station — to the media magnate Rupert Murdoch in 1997. CBN received $136-million from the sale.

“Our donors don’t expect us to hold onto that money in perpetuity,” said Mr. Barr. Instead, the organization has been spending the money to fulfill its evangelical mission, he said. But when that spending is plugged into the Ministry Watch formulas, it lowers the network’s score, which is partially responsible for CBN receiving a two-star rating.

The American Bible Society, in New York, received only one star. Patrick English, acting chief financial officer of the group, which distributes Bibles around the world, said he disagreed with several of the Wall Watchers rating methods. He declined to discuss his criticisms, however, saying he prefers to talk with the rating group privately. Mr. English said he has met with the group in the past, and praised its goals, but added, “They need to go back and rethink their methods.”

Mr. English did, however, point out that Wall Watchers did not account for the fact that the Bible society’s operating budget is paid for almost entirely from returns on its investments. Nearly 100 percent of any donations it receives is spent on its programs.

Mr. Long said Wall Watchers wants to hear any criticisms of its methods and is eager to discuss adjustments to them. The group plans to add several sections to the MinistryWatch site, including a “transparency grade” that will assess how open a charity is about providing financial information; an area for Wall Watchers analysts to provide comments based on more in-depth research into a charity’s operation; and a place for the charity to publish its response to a rating.

“We’re very open to working on this,” Mr. Long said. “We don’t think it’s an end. It’s a work in progress.”