Here's what one reporter looks for in that baffling IRS information return filed by charities. And I'll add a few hints of my own.
St. Louis Post Dispatch reporter Bill Smith passes on his secrets about how to read the IRS Form 990 for a charity, writing in BusinessJournalism.org, a blog sponsored by the National Center for Business Journalism at Arizona State University. Here's a summary:
- Fundraising expenses high.
- Heavy reliance on noncash contributions, which distorts the financial ratios typically employed in evaluating charities.
- Recurring deficits or unusual increases in assets.
- Compensation of officers, directors, etc. (too high and sometimes too low)
- Out of line accounting fees, occupancy fees, or legal fees.
- Relationships among salaried officials (I'll add: hard to tell from Form 990, except when they have common last names or the attachments to the form disclose the relationship.)
- Large amounts categorized as "other expenses," "various" or "miscellaneous," as well as large expenses labeled with vague terms like "program development."
- Boards that are either too small or too large.
- The founder is also the executive director. (Again: Not easy to tell from the Form 990 alone.)
- In fundraising, try to identify the fundraisers and other independent contractors. (Again, not easy with just the Form 990, but a reporter can use the independent contractor information as a key to further investigations.)
- Look at other organizations that receive cash donations from a charity.
- Look closely at a charity's assets, especially property, for ties to officers and staff.
Here's some things that I would add:
- Always look at all of the attachments to the form for the best stuff; that's where they bury the bad news. Especially be aware that there is almost always an attachment that expands on the listing of expenses on page two.
- Beware of large expenses labeled with the name of a program or purpose rather than the nature of the expense.
- If there are in-kind donations, there should be a roughly equal expense line representing the distribution of the in-kind donations.
- In compensation, beware if one staff member receives substantially more than any other, which indicates a lack of internal checks on that person.
- There are three places to look for compensation: in the listing of officers, directors, and key employees, in the listing of other employees on the first page of Schedule A, and in the attachments.
- Lack of a senior financial officer. If there is no financial officer paid more than $50,000, that is a problem with all but the smallest organizations. If there is too large a gap between the compensation of the executive and the senior staff person in finance, that suggests lack of effective controls.
- Check for an attachment that describes compensation received from related organizations.
- It's hard to tell from a single Form 990, but executive directors with over ten years' tenure are as problematic as founders, especially if there is frequent board turnover.
- Long-tenured boards with infrequent new blood are also problematic.
- Check the listing of programs and amounts spent on each to make sure the organization is putting its money where its mouth is.
- Check the level of grants to other organizations on page two. A very high level in an organization that relies heavily on contributions means that the organization is just a pass-through.