Philanthropy can be something of a dilemma.
On the one hand, doing good is an integral part of the human experience. We’re all driven to give back and to collaborate with our fellow humans in order to strive for a better, more equitable world. Even babies under two years old, too young to have been taught manners and politeness, are naturally altruistic: they will try to help adults find lost objects or open doors. There’s also evidence to suggest that humans have evolved to be empathetic and generous, to favor cooperation over competition.
On the other hand, organized charity, however commendable, can be rife with pitfalls. On a regular basis, we hear news of fraud and financial wrongdoing. Unfortunately, this is the norm, rather than the exception.
All the same, it is possible to understand and avoid corruption in the nonprofit space. Don’t simply donate to the first organization that cold calls you.
What does charity fraud look like?
Charity fraud can take quite a few different forms. One of the most common schemes involve deliberate misuse and kickbacks. For example, a charity will pay extremely high, inflated compensation to key executives, be it salary, consulting fees, or other large payments for services of dubious value.
At other times, a charity could spend its limited budget on perks and benefits that are unrelated to its mission (or towards the organization’s drive to achieving its mission). According to the Association of Certified Fraud Examiners (ACFE), the most common types of fraud suffered by charities were check tampering (35 percent), billing (32.5 percent), and expense reimbursement (32.5 percent). Unfortunately, all of the aforementioned abuses are difficult to spot, especially without strong internal controls and transparency.
Follow the money
Thankfully, many charities are required by law to release their financial records. While this differs by nation (or even region), for the most part, one condition of nonprofit (or not-for-profit) status is that charities track and release their budget and spending.
For the general public, this is useful as well. By examining how a charity allocates its spending, an observer can determine the answers to a few questions. How efficient is the charity? How much of its spending actually goes towards furthering its cause? What percentage is instead spent on day-to-day maintenance?
One great resource is Charity Navigator, which promotes financial transparency in the nonprofit sector. It covers a wide range of charities, from multinationals like the American Red Cross to more local groups. Charity Navigator and similar sites scour any publicly available documents, such as tax returns and financial disclosure statements, in order to paint a picture of the nuts and bolts behind each nonprofit’s spending habits.
Look at the financial performance metrics, which are divided into several broad categories: program, administrative, and fundraising expenses, among others. In the best case, a nonprofit would divert most of its cash towards program expenses, the services that are the core of its mission. Equally important is fundraising efficiency: the more efficient a charity, the less money it spends in order to raise money in contributions.
Take the American Red Cross, an incumbent, yet trusted charity with a global brand. While the Red Cross is very well rated for accountability and transparency, its financial score is subpar. For every $1 it raised, it spent some 27 cents in marketing and fundraising.
Source: Charity Navigator
On the metrics that matter the most (program and administrative expenses), the Red Cross scores very highly. 89 percent of its budget goes towards international services, from disaster relief to preparedness, with only 4.2 percent going towards admin costs. These are still enviable numbers, and they speak to the dedication and long organizational experience of the American Red Cross.
Determine executive salaries
This is something of a tricky, but necessary, indicator. Just how much do you pay a nonprofit CEO? After all, while it is charity, it is still a job: nonprofit executives must still manage a huge range of difficulties, from coordinating aid across different time zones to running and staffing a huge, multinational organization.
Still, we are speaking about the nonprofit world, which does pride itself on improving the lot of ordinary humans rather than making a dollar. Donors, unlike shareholders, expect that their hard-earned cash will make a positive difference in the lives of others–not to line the pockets of executives.
At times, it seems their trust may be misplaced. In 2014, 32 British executives were found to be earning over 200,000 GBP in annual salary, a huge amount given that nonprofits constantly struggle with funding for programs and paying the rest of their staff workers. That same year, ten nonprofit leaders made over 1 million USD.
Still, this scandal may be rarer than one thinks. According to Charity Navigator, CEOs who made over 200,000 GBP per year (and over 1 million USD) are very uncommon: in 2016, the median salary of a nonprofit CEO was $123,362, a 3 percent raise over 2015. Obviously, some bigger organizations offer higher compensation (and some CEOs living in big cities draw higher salaries), but on average, most CEOs seem to receive reasonable compensation. Certainly, many of them are being paid far less than what a CEO at an equivalent, private sector organization would make.
Ultimately, though the charity world is seen as being riddled with scams and overpaid executives, it’s easier than ever for potential donors to scout out reliable, efficient organizations that dedicate themselves wholeheartedly to good causes. Don’t let the fear of fraud stop you from donating to others; instead, just be sure to do your research first.