American Institute of Philanthropy
Encyclopedia
The American Institute of Philanthropy (AIP) is a 501(c)(3) nonprofit organization, created in the United States
by Daniel Borochoff in 1992, to provide information about charities
' financial efficiency, accountability, governance, and fundraising
. Its official website is known as CharityWatch. Charity financial reporting can be inconsistent, unclear, and occasionally unethical or fraud
ulent, thus the organization acts as an independent clearing house for charitable information.
AIP publishes the Charity Rating Guide & Watchdog Report, containing ratings of the financial efficiency of over 500 United States charities. The ratings are grades ranging from A+ (best) to F (worst) and are based on analysis of charities' financial documents. The ratings include the percentage of a charity's budget that is spent on program services, how much it costs a charity to raise $100, an accountability measure, and the salaries of the charity's three highest-paid employees. The Guide also features articles about problems in the nonprofit field and tips to help donors make wise giving decisions and avoid charity scams. AIP posts its top-rated charities on its website.
AIP also investigates ethical issues surrounding charity spending, including salaries and payouts, financial reporting, telemarketing
and direct-mail
solicitation campaigns, and governance. AIP shares the results of its research with the media and government agencies and works closely with these parties to educate the public about informed giving. AIP President Daniel Borochoff has testified before Congress about veterans charities, the aftermath of Hurricanes Katrina
and Rita
, and the philanthropic response to the 9/11 attacks.
When a survey asked Americans what they believed to be a reasonable amount for a charity to spend on overhead, the average of the responses was 22.4%. However, most Americans assume that charities spend an average of 36.3% of donations on overhead, according to a February 2008 study by Ellison Research, a marketing company. AIP gains exposure by publicizing the amount that charities spend on non-program activities and rating charities on that basis.
(GAAP) or rules for reporting financial information on the IRS tax Form 990. These groups posit that if AIP took the figures as reported in these financial documents, their ratings would be outstanding. While GAAP reporting rules provide guidelines for a charity to report its financial activities, these reporting rules do not measure or claim to measure how efficiently an organization is raising and spending donated dollars.
Charities have wide latitude in how they choose to report activities even within IRS and GAAP standards. In addition, a charity can spend as little as 1% of its budget on its programs and still be in compliance with GAAP and IRS reporting requirements. Direct mail and telemarketing solicitations that contain educational messages and other income-generating activities that accounting rules allow charities to report as program costs, are not considered to be program services by many donors. For these reasons AIP analyzes and makes adjustments to the audits and tax forms of some charities for consistency and to better reflect the goals of many donors who want their donations to be spent on bona fide programs.
Charities poorly rated by AIP for financial efficiency often cite favorable reviews or ratios from other sources of charity information. These other sources typically do not perform AIP’s in-depth level of financial analysis and may accept a charity’s own reporting without question. A study by the National Council of Nonprofit Associations, titled Rating the Raters: An Assessment of Organizations and Publications That Rate/Rank Charitable Nonprofit Organizations, states of AIP's ratings, "Rigorous and fair analysis of objective criteria. Does not simply repeat self-reported analysis from [nonprofit organization]."
Another criticism is that national charity rating organizations like Charity Navigator, BBB, and AIP do not rate the quality of charitable programs. AIP encourages donors to consider a charity’s program accomplishments in relationship to the resources it receives.
Studies of charity watchdogs’ methods have raised concerns about the validity of their ratings and suggest they may not be reliable sources for charity ratings. However, such studies frequently lack independence because they are often published by nonprofit consultants who are paid by the charities that watchdogs oversee or are critical of. AIP rates nearly 550 charities, whereas Charity Navigator rates over 5,400. AIP states on its website that the quality and in-depth level of analysis it performs is time-intensive and limits the number of groups that it is able to review.
Charity rating organizations have been criticized by philanthropy experts for the validity of their evaluation methods and their conclusions. A study developed by nonprofit consultants reported in the Stanford Social Innovation Review—an award-winning magazine covering successful strategies of nonprofits, foundations and socially responsible businesses—gave the opinion that some watchdog groups:
Specifically, this study gave the opinion that AIP’s shortcomings include a “gotcha” mentality and lack of transparency, saying that “AIP is not afraid to fail an organization; in fact, they specifically aim to review nonprofits they feel aren’t spending wisely or performing ethically, to help educate the public.” The study quotes AIP president Daniel Borochoff saying, “We’re really looking at the numbers and what they mean, not just running [tax form] 990 inputs through an equation…At times we actually find that a nonprofit is selling itself short in the way they report numbers, and help them fill out their [tax form] 990 more accurately, but more often we see nonprofits misleading potential donors with the way they report their financials. You have to ask yourself why the other rating organizations aren't seeing the same really bad things going on with the numbers at some of these other charities.” With respect to AIP’s transparency, the report states that “A donor sees the [charity’s] score but only limited explanation, which can cause more harm than good.” The study goes on to say that “While it is true that nonprofits have wide latitude in completing their 990’s (and many go to great lengths to misrepresent their financial information), it is difficult for a donor to understand what specific adjustments AIP made to a given nonprofit’s rating and why.”
On the positive side, the report states that AIP “recognizes the limitations of the 990 and thus develops its financial health ratios by analyzing a charity’s audited financial statements. AIP’s small staff of analysts looks closely at specific calculations, including how nonprofits allocate telemarketing costs, which are often labeled 'education and outreach,' and in-kind contributions which they assert are overvalued, among other practices they think nonprofits use when preparing their [tax form] 990 to cast a more positive light on their financial position."
The study suggested:
A second study, Rating the Raters: An Assessment of Organizations and Publications that Rank/Rate Charitable Nonprofit Organizations, provides a separate assessment of AIP, Charity Navigator, Better Business Bureau Wise Giving Alliance, and other charity information services. The major findings are:
Some groups criticized by AIP, such as Paralyzed Veterans of America
, have pointed out that they meet "all 20 criteria that the Better Business Bureau
Wise Giving Alliance establishes for charities, including that a charity's fundraising costs not exceed 35 percent of contributions, a common standard." The Better Business Bureau Wise Giving Alliance charges charities to use its seal of approval.
AIP appears to agree with many of these criticisms, cautioning donors on its website to be wary of highly automated or overly simplistic ratings that do not provide an adequate analysis of a charity's activities. According to AIP, its analysts "dig deep, carefully scrutinizing the individual finances of charities to give donors a clearer understanding of how their cash donations are being spent." AIP also claims that its ratings are the most stringent in the sector; that it is fiercely independent because over 95% of its support comes from small, individual donations; that it uses reliable information and treats charities consistently and fairly; and that it rates charities that other raters won't.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
by Daniel Borochoff in 1992, to provide information about charities
Charitable organization
A charitable organization is a type of non-profit organization . It differs from other types of NPOs in that it centers on philanthropic goals A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that it centers on philanthropic goals A...
' financial efficiency, accountability, governance, and fundraising
Fundraising
Fundraising or fund raising is the process of soliciting and gathering voluntary contributions as money or other resources, by requesting donations from individuals, businesses, charitable foundations, or governmental agencies...
. Its official website is known as CharityWatch. Charity financial reporting can be inconsistent, unclear, and occasionally unethical or fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
ulent, thus the organization acts as an independent clearing house for charitable information.
About
AIP analyzes charity financial documents to identify charities that are financially efficient, and ones that are not, and publishes its findings. AIP encourages donors to give to charities that will allocate most of their contributions to program services that benefit the people and to causes that donors wish to support. AIP also promotes charity accountability and transparency through its research on the rapidly changing nonprofit field.AIP publishes the Charity Rating Guide & Watchdog Report, containing ratings of the financial efficiency of over 500 United States charities. The ratings are grades ranging from A+ (best) to F (worst) and are based on analysis of charities' financial documents. The ratings include the percentage of a charity's budget that is spent on program services, how much it costs a charity to raise $100, an accountability measure, and the salaries of the charity's three highest-paid employees. The Guide also features articles about problems in the nonprofit field and tips to help donors make wise giving decisions and avoid charity scams. AIP posts its top-rated charities on its website.
AIP also investigates ethical issues surrounding charity spending, including salaries and payouts, financial reporting, telemarketing
Telemarketing
Telemarketing is a method of direct marketing in which a salesperson solicits prospective customers to buy products or services, either over the phone or through a subsequent face to face or Web conferencing appointment scheduled during the call.Telemarketing can also include recorded sales pitches...
and direct-mail
Direct mail
Advertising mail, also known as direct mail, junk mail, or admail, is the delivery of advertising material to recipients of postal mail. The delivery of advertising mail forms a large and growing service for many postal services, and direct-mail marketing forms a significant portion of the direct...
solicitation campaigns, and governance. AIP shares the results of its research with the media and government agencies and works closely with these parties to educate the public about informed giving. AIP President Daniel Borochoff has testified before Congress about veterans charities, the aftermath of Hurricanes Katrina
Hurricane Katrina
Hurricane Katrina of the 2005 Atlantic hurricane season was a powerful Atlantic hurricane. It is the costliest natural disaster, as well as one of the five deadliest hurricanes, in the history of the United States. Among recorded Atlantic hurricanes, it was the sixth strongest overall...
and Rita
Hurricane Rita
Hurricane Rita was the fourth-most intense Atlantic hurricane ever recorded and the most intense tropical cyclone ever observed in the Gulf of Mexico. Rita caused $11.3 billion in damage on the U.S. Gulf Coast in September 2005...
, and the philanthropic response to the 9/11 attacks.
Exposure
AIP’s ratings have received wide exposure from Congress and the media; particularly AIP’s appearance on the front page of The Washington Post, on editorial pages of The New York Times, and on ABC and CBS News programs. This has resulted in loud complaints about AIP’s rating system from a number of organizations.When a survey asked Americans what they believed to be a reasonable amount for a charity to spend on overhead, the average of the responses was 22.4%. However, most Americans assume that charities spend an average of 36.3% of donations on overhead, according to a February 2008 study by Ellison Research, a marketing company. AIP gains exposure by publicizing the amount that charities spend on non-program activities and rating charities on that basis.
Governance and operations
AIP is governed by a five-person Board of Directors which includes its founder and president, Daniel Borochoff. In 2008, AIP spent $437,650, mostly on salaries related to carrying out its research and other programs. AIP's stated goals are, "To research and evaluate the efficiency, accountability and governance of nonprofit organizations; to educate the public about the importance of wise giving; to inform the public of wasteful or unethical practices of nonprofits and provide recognition to highly effective and ethical charities; to advise AIP members and conduct special investigations and evaluations of nonprofits; to expand and re-define our programs periodically to meet the continuing challenge of keeping the contributor informed."Criticism of AIP and other charity raters' methodology
The major criticism from low rated charities is the claim that AIP’s rating system does not follow Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles
Generally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards...
(GAAP) or rules for reporting financial information on the IRS tax Form 990. These groups posit that if AIP took the figures as reported in these financial documents, their ratings would be outstanding. While GAAP reporting rules provide guidelines for a charity to report its financial activities, these reporting rules do not measure or claim to measure how efficiently an organization is raising and spending donated dollars.
Charities have wide latitude in how they choose to report activities even within IRS and GAAP standards. In addition, a charity can spend as little as 1% of its budget on its programs and still be in compliance with GAAP and IRS reporting requirements. Direct mail and telemarketing solicitations that contain educational messages and other income-generating activities that accounting rules allow charities to report as program costs, are not considered to be program services by many donors. For these reasons AIP analyzes and makes adjustments to the audits and tax forms of some charities for consistency and to better reflect the goals of many donors who want their donations to be spent on bona fide programs.
Charities poorly rated by AIP for financial efficiency often cite favorable reviews or ratios from other sources of charity information. These other sources typically do not perform AIP’s in-depth level of financial analysis and may accept a charity’s own reporting without question. A study by the National Council of Nonprofit Associations, titled Rating the Raters: An Assessment of Organizations and Publications That Rate/Rank Charitable Nonprofit Organizations, states of AIP's ratings, "Rigorous and fair analysis of objective criteria. Does not simply repeat self-reported analysis from [nonprofit organization]."
Another criticism is that national charity rating organizations like Charity Navigator, BBB, and AIP do not rate the quality of charitable programs. AIP encourages donors to consider a charity’s program accomplishments in relationship to the resources it receives.
Studies of charity watchdogs’ methods have raised concerns about the validity of their ratings and suggest they may not be reliable sources for charity ratings. However, such studies frequently lack independence because they are often published by nonprofit consultants who are paid by the charities that watchdogs oversee or are critical of. AIP rates nearly 550 charities, whereas Charity Navigator rates over 5,400. AIP states on its website that the quality and in-depth level of analysis it performs is time-intensive and limits the number of groups that it is able to review.
Charity rating organizations have been criticized by philanthropy experts for the validity of their evaluation methods and their conclusions. A study developed by nonprofit consultants reported in the Stanford Social Innovation Review—an award-winning magazine covering successful strategies of nonprofits, foundations and socially responsible businesses—gave the opinion that some watchdog groups:
- Rely too heavily on simple analyses and ratios derived from poor-quality financial data;
- Overemphasize financial efficiency while ignoring program effectiveness; and
- Do a poor job of conducting analyses in important qualitative areas, such as management strength, governance quality and organizational transparency.
Specifically, this study gave the opinion that AIP’s shortcomings include a “gotcha” mentality and lack of transparency, saying that “AIP is not afraid to fail an organization; in fact, they specifically aim to review nonprofits they feel aren’t spending wisely or performing ethically, to help educate the public.” The study quotes AIP president Daniel Borochoff saying, “We’re really looking at the numbers and what they mean, not just running [tax form] 990 inputs through an equation…At times we actually find that a nonprofit is selling itself short in the way they report numbers, and help them fill out their [tax form] 990 more accurately, but more often we see nonprofits misleading potential donors with the way they report their financials. You have to ask yourself why the other rating organizations aren't seeing the same really bad things going on with the numbers at some of these other charities.” With respect to AIP’s transparency, the report states that “A donor sees the [charity’s] score but only limited explanation, which can cause more harm than good.” The study goes on to say that “While it is true that nonprofits have wide latitude in completing their 990’s (and many go to great lengths to misrepresent their financial information), it is difficult for a donor to understand what specific adjustments AIP made to a given nonprofit’s rating and why.”
On the positive side, the report states that AIP “recognizes the limitations of the 990 and thus develops its financial health ratios by analyzing a charity’s audited financial statements. AIP’s small staff of analysts looks closely at specific calculations, including how nonprofits allocate telemarketing costs, which are often labeled 'education and outreach,' and in-kind contributions which they assert are overvalued, among other practices they think nonprofits use when preparing their [tax form] 990 to cast a more positive light on their financial position."
The study suggested:
- A more effective nonprofit rating system should have at least four main components: improved financial data that is reviewed over three to five years and put in the context of narrowly defined peer cohorts; qualitative evaluation of the organization's intangibles in areas like brand, management quality, governance, and transparency; some review of the organization's program effectiveness, including both qualitative critique by objective experts in the field, and, where appropriate, "customer" feedback from either the donor or the aid recipient's perspective; and an opportunity for comment or response by the organization being rated.
A second study, Rating the Raters: An Assessment of Organizations and Publications that Rank/Rate Charitable Nonprofit Organizations, provides a separate assessment of AIP, Charity Navigator, Better Business Bureau Wise Giving Alliance, and other charity information services. The major findings are:
- Approaches and criteria are not the same. The methodologies and criteria used vary significantly among the various rating and ranking organizations.
- Evaluation criteria may not be readily apparent. Not all nonprofit rating and ranking groups make it easy for the donor to determine the evaluation method and criteria used.
- Evaluators may use criteria that are overly simplistic. Simple financial ratios and/or measurements that apply in some circumstances may not apply in others.
- Evaluators focus on financial measurements and overlook program effectiveness. Financial "efficiency" is assessed by most third-party ratings groups as a percentage of contributions received. This tends to be their primary focus.
- Competence of the evaluator is critical and difficult to determine. It is virtually impossible for donors to determine the relevant credentials, expertise and experience of the rating organization's staff.
- Evaluators often derive revenue as a result of their rating reports, creating a potential conflict of interest and questioning whether these groups are motivated by the desire to inform potential donors or by the media attention that improves their revenue stream. AIP, for instance, charges a $3 fee for a sample copy and requires $40 membership, which it uses to fund research, as a condition for receiving its annual rating reports. The BBB charges charities it reviews up to $15,000 to use its charity seal to publicize their ratings.
Some groups criticized by AIP, such as Paralyzed Veterans of America
Paralyzed Veterans of America
The Paralyzed Veterans of America is a veterans' service organization in the United States of America, founded in 1946. The organization holds 34 chapters and 61 National Service Offices in the United States...
, have pointed out that they meet "all 20 criteria that the Better Business Bureau
Better Business Bureau
The Better Business Bureau , founded in 1912, is a corporation consisting of several private business franchises of local BBB organizations based in the United States and Canada, which work through their parent corporation, the Council of Better Business Bureaus .The Better Business Bureau, through...
Wise Giving Alliance establishes for charities, including that a charity's fundraising costs not exceed 35 percent of contributions, a common standard." The Better Business Bureau Wise Giving Alliance charges charities to use its seal of approval.
AIP appears to agree with many of these criticisms, cautioning donors on its website to be wary of highly automated or overly simplistic ratings that do not provide an adequate analysis of a charity's activities. According to AIP, its analysts "dig deep, carefully scrutinizing the individual finances of charities to give donors a clearer understanding of how their cash donations are being spent." AIP also claims that its ratings are the most stringent in the sector; that it is fiercely independent because over 95% of its support comes from small, individual donations; that it uses reliable information and treats charities consistently and fairly; and that it rates charities that other raters won't.
External links
- American Institute of Philanthropy official web site