In a little noticed move, Charity Navigator revised its financial performance efficiency metrics, which are used to determine one of the three star ratings in its system, by deciding to ignore organizations’ allocation of joint costs when accounting for program, management and fundraising expenditures. Allocation of joint costs in accordance with the American Institute of Certified Public Accountant (AICPA) Statement of Position 98-2 (SOP 98-2) is an established accounting principle used to comply with Generally Accepted Accounting Principles (GAAP). According to SOP 98-2, organizations that combine a fundraising appeal with a call for action and meet specific criteria should book the joint costs of those campaigns between fundraising; management and administration; and program expenses. In fact, the preface note to SOP 98-2 states that “this Statement of Position should be used, or the [AICPA] member should be prepared to justify a conclusion that another treatment better presents the substance of the transaction in the circumstances.” Many organizations choose to combine fundraising and programmatic purposes in a single public outreach campaign in an effort to efficiently carry out multiple functions. When joint costs are properly allocated among the respective functional expense categories, it should help an organization report its expenses more accurately, not less.
Charity Navigator has decided to ignore GAAP requirements, ignore the reality of joint purposes and the inherent cost savings in donor outreach with multiple purposes and instead conclude that if any part of the communication is fundraising, it is all fundraising. This drastic approach is not condoned by the BBB Wise Giving Alliance, but has historically been the approach of the charity bashing American Institute of Philanthropy (now known as Charity Watch) and its self-styled muckraker, Daniel Borochoff.
Charity Navigator’s reasoning is cited below in an excerpt from their Methodology section “How Do We Rate Charities Financial Health?”
Joint Cost Allocation Adjustment
Generally Accepted Accounting Principles (GAAP) allow for organizations that follow SOP 98-2 or ASC 958-720-45 to report their specific joint costs from combined educational campaigns and fundraising solicitations and the IRS requires organizations to disclose this on the Form 990. In most cases, charities utilizing this technique allocate a small percentage of their solicitation costs to program expenses from fundraising expenses. However, we believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it, nor does Charity Navigator. Therefore, as an advisor and advocate for donors, with rare exception, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising.
Although Charity Navigator claims that it reviews tens of thousands of non-profit financial documents “to develop an unbiased, objective, numbers-based rating system,” its decision to ignore key financial disclosures prepared by accounting professionals in accordance with GAAP is yet another demonstration of the bias that infiltrates the Charity Navigator rating system.