Originally posted on October 31, 2013
Imagine that it’s a cold, rainy, autumn day, and that you’re on the way out of the grocery store. As you pass by the bottle return and walk past the automatic doors, you’re greeted by a young woman. She’s a volunteer, and she’s raising money for a local cancer charity. She politely asks you for a donation. It’s for the “fight against cancer,” she says. You think about it for a second, and then hand her a few bucks. It was an easy enough choice. Who doesn’t want to fight cancer?
Americans are among the most generous people in the world. According to the Center on Philanthropy at Indiana University, we donated an estimated $298.42 billion to charities in 2011 alone.
Unfortunately, not all of this money is used wisely.
97 cents of every dollar to salaries:
This past summer, the Tampa Bay Times wrote a stinging exposé on charitable waste, singling out one Florida-based charity for its inefficiencies. Reportedly, this charity spends less than 3 cents of each donated dollar helping its target audience: kids with cancer. The other 97 cents goes straight to the salaries of its operators and to the for-profit solicitation companies the charity uses for its fundraising ($4.8 million and $110 million respectively over the past decade).
After slamming the Florida charity for its questionable use of funds, the article goes on to list similar examples. One Tennessee-based charity stood out to me for its creative use of donor dollars. This charity, which is supposed to educate children about drug abuse, health, and fitness, supposedly pays 80% of its donations to for-profit solicitation companies. Much of what is left goes to the founder/president’s for-profit video production company so that he can film himself scuba diving. These deep-sea diving videos are then aired on a local Knoxville station to a paltry 3,600 viewers (although according to the Times, the charity’s IRS statements claim that its programming reaches an audience of 1.3 million people). It’s not very clear how these videos further the charity’s mission to educate young people about drugs, health, and fitness. And yet this organization has managed to raise nearly $30 million in the past decade!
While many charities engage in legal, but clearly questionable business practices, others are involved outright illegal activities or dragged into them by rogue employees. A recent Washington Post article exposed numerous cases of employees from very large nonprofits stealing hundreds of thousands – and even millions – of dollars from their organizations. Here are some of the Post’s findings:
- Up to $3.4 million lost by a national health research foundation due to fraud by a former employee;
- About $2 million lost by a national youth service charity after it was “misappropriated” by a former employee;
- $230,000 lost by a national charity that advocates for older Americans due to embezzlement and billing irregularities;
Some may say that this kind of criminal activity is an unfortunate byproduct of large organizations; that it’s only a matter of time before a large entity has to deal with a rogue employee stealing or causing trouble. Yet smaller nonprofits can be just as susceptible to this kind of behavior.
Last fall, a small charity in Massachusetts was set up in the memory of a two-year-old child who had died of brain cancer. The goal of the charity was to help families affected by similar illnesses. The charity grew, and eventually helped twenty local families with their misfortunes.
All was well until the charity’s board of directors attended an event about sound nonprofit financial practices. Using what they learned, the board soon discovered that a person associated with the charity was making numerous unauthorized charges from the charity’s bank account from places like Starbucks and Panera Bread. In addition, this person also made $2,500 in payments to Verizon Wireless and two transfers of $1,000 to another checking account. Once discovered, the individual in question repaid most of the stolen money. Nonetheless, this person is now set to be arraigned on larceny charges in Massachusetts court.
What can be learned from these charity horror stories?
As an estate planning law firm, we vigorously support donating to charity.
Indeed, donating to charity is an excellent way to build your legacy and leave a lasting impact on the world.
Yet, there are many charities that mislead donors and misuse donations (intentionally or not). Therefore, it helps to do your homework before you make any donation. Below are four questions you should ask yourself before opening your wallet.
1. How much of your donation will go directly to the charity’s cause?
While opinions vary, you generally want to donate to charities that use 70 percent or more of their budgets for program expenses. Program expenses are funds that go directly to the charity’s cause; the other two expenses, called administrative expenses and fundraising expenses, don’t go directly to the charity’s cause (they go toward rent, salaries, marketing material, etc.).
A great website to find a charity’s financial breakdown is Charity Navigator. There you’ll be able to search for a charity and research how much of its budget is spent on program expenses, administrative expenses, and fundraising expenses.
You can also check to see if a charity’s website has this sort of information, but use a third party tool first.
If you’re looking to donate to a smaller charity, their financial breakdown may not be available online, so be sure to give the charity a call and ask them how much of their budget goes toward program expenses. If they refuse to disclose this information, don’t donate to them.
2. Does the charity have a shady financial history?
If there’s anything worse than donating to a charity that spends money poorly, it’s donating to a charity that is outright corrupt and fraudulent. Here are some great resources that you can use to evaluate the financial history of a charity:
- CharityWatch: A website from the American Institute of Philanthropy that rates hundreds of charities based on their financial dealings.
- Guidestar: A website that collects charities’ 990 forms (nonprofit financial disclosures) and additional public financial data for many charities. If a charity reports a significant financial diversion on their 990 form, that is a red flag.
- GiveWell: A website that reviews hundreds of charities.
- Washington Post Charity Investigation: This list has 1,000 charities that reported significant financial diversions on their form 990s.
Note: you may not be able to research smaller charities using these web tools. That’s not necessarily a red flag. In such cases, be sure to ask around about the charity’s reputation and do a Google search for its history. Has the charity or its employees engaged in unscrupulous dealings? Are there questionable individuals on their board? Always look for red flags.
3. How does the charity raise funds?
Does the charity raise funds with its own staff and volunteers, or does it use outside solicitors? If the charity uses outside solicitors, it’s very likely that a significant amount of the charity’s incoming donations go right back to the solicitors — not to the needy.
4. Does the charity have a track record of success?
Don’t donate to a dud. Ask around, look at the charity’s website, and use Google to determine if the charity is actually getting things done.
We hope that this article didn’t leave you too jaded about philanthropy. There are so many charities out there doing important work for our society. Most of these charities are run with efficiency and integrity. By taking the time to evaluate where your donation is going, you can ensure that your hard-earned dollars are going to high-quality organizations.
Let us know if you have any questions; we would be glad to hear from you.
Jonathan Fouch is the Marketing Director of Shea Aiello. His previous positions at the firm include being an Operations Manager and a Paralegal.
Jonathan also has extensive experience in the nonprofit sector. In May 2011, he co-founded Excellence for Detroit, a nonprofit that provides free college counseling to youth in Detroit. He currently does the organization’s fundraising and sits on its board of directors.