March 12, 2013

Nonprofits and Marketers Plan Protest of Watchdog Group


Nonprofit groups and the companies that raise money for them are getting more aggressive in fighting efforts by a major charity watchdog to take a more rigorous approach to evaluating how much groups spend on programs and the costs of solicitations.

At a meeting of the Direct Marketing Association, nonprofit officials criticized Charity Navigator for using new nonprofit ratings they say are “suspect and lack credibility.”

At issue is Charity Navigator’s decision to challenge a longstanding accounting practice that allows nonprofits to count some money they spend on activities that involve fundraising, like direct mail or telemarketing campaigns, as program costs on their financial statements or Form 990 tax filings. The watchdog group says the accounting practice allows some groups to mask high fundraising costs.

But nonprofit groups say the watchdog has gone too far by trying to curb a practice that accountants have long blessed.

Members of the Direct Marketing Association say they are working on an official protest of Charity Navigator’s policy, which led dozens of groups to get lower rankings, and also trying to devise a system to replace the rankings.

To demonstrate the way charities see the watchdog, one PowerPoint slide shown during a morning session at the Madison Hotel here pictured Charity Navigator as the mean-looking hall monitor from the animated television show “South Park.”

“Charity Navigator believes that program and fundraising cannot occur as a combined activity unless it is all counted as fundraising,” the South Park slide read.

“They ignore accepted accounting principles, substituting their own rules inconsistent with standards nonprofits are encouraged to follow,” read another slide. “Charities should not endorse Charity Navigator.”

'Doesn’t Pass the Laugh Test’

Direct Marketing Association officials say they hope to devise a system that provides a more complete picture of an organization’s effectiveness beyond the basic calculation of fundraising costs divided by revenue.

“It’s not the be-all-end-all metric,” said Shannon McCracken, a senior director at Special Olympics International and a member of the DMA Nonprofit Federation’s advisory council. “It shouldn’t be.”

This is not the first time the association has criticized Charity Navigator’s new approach. In February, officials of the Direct Marketing Association and others criticized the organization for sullying the use of the “joint costs” method that is permitted by the Internal Revenue Service.

Ken Berger, head of Charity Navigator, defended his group’s policy and said the association is simply trying to protect the interests of the marketing firms that conduct telemarketing and direct-mail appeals.

“There’s a vested interest to do everything in their power to minimize our influence,” Mr. Berger said in an interview. “When you look at some of these cases where virtually all of the fundraising costs seem to be baked into program expenditures, it doesn’t pass the laugh test.”

Showing Results

Participants at the DMA session, titled “The Costs of Fundraising: Building Donor Trust,” expressed frustration with negative media publicity focused narrowly on when fundraising expenses appear excessive without considering other measures of whether a charity is getting good results for its dollars.

Nonprofits need to track and report the impact their services are having on their missions, information that will give donors a full understanding of how their money is spent.

“We have to change public perception,” said Ms. McCracken.

But she also admitted that her employer, the Special Olympics International, still displays its four-star rating from Charity Navigator.

“Our responsible stewardship has been recognized by Charity Navigator,” the Web site states.