Charities Held to Account as Year Draws to an End

December 31, 2007 at 6:25 PM EDT
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As the holidays come to an end, many charities are being held accountable for their fund raising and expenditures amid recent concerns about how some nonprofit organizations are run. Philanthropy experts consider the rules and regulations surrounding charities.

RAY SUAREZ: Now, in 2007’s final hours, an end-of-the-year look at charitable giving amid recent concerns about how some nonprofit organizations are run. Margaret Warner has the story.

MARGARET WARNER: For many charities, this is a busy time, as hundreds of thousands of Americans rush to make tax-deductible donations before the end of the year. But once again, there are reports raising questions about how charities use their money.

For example, earlier this month, the American Institute of Philanthropy rated 20 out of 29 veterans charities with grades of D or F. Just seven groups received an A.

The bad ratings included well-known groups like the Purple Heart Service Foundation, AMVETS, and the Disabled Veterans Association. It said the eight worst performers gave less than one-third of their donations to veterans of Iraq and Afghanistan.

The report cited the worst for poorly managing their funds, paying high overhead and costly fees, or compensating their directors too handsomely. Other news accounts raise questions about whether charities actually receive the full donations when retailers promised customers they’ll give a portion of their sales to charity.

So what do donors need to know and watch out for in their end-of-year giving?

For that, we turn to Art Taylor, president and CEO of the Better Business Bureau’s Wise Giving Alliance, which monitors charities and publishes evaluations on the Web site, and Stacy Palmer, editor of the Chronicle of Philanthropy, a publication that tracks charities and nonprofit organizations.

Welcome to you both.

Mistakes, corruption both at issue

So what should we make, Art Taylor, of these latest reports? I mean, are these new abuses or the same old ones?

ART TAYLOR, Wise Giving Alliance: Well, in the case of charities that are involved with veterans -- and we also track badge scams with police and firefighter organizations -- there's really nothing new, although people may be surprised to find how poorly some of these organizations perform.

The real trouble is that many of these groups rely on outside fundraising groups that are very expensive, particularly telemarketers, to raise funds, and so most of the American public does not realize that 80 percent to 90 percent of a telemarketing dollar will end up with the telemarketer as opposed to the charity.

And so we like to inform donors that they should give directly to a charity if they're interested, rather than through a telemarketer.

MARGARET WARNER: In general, if you look at the veterans groups and what criticism was raised about them, is the general problem with problem charities, is it mismanagement or are they outright scams?

STACY PALMER, Chronicle of Philanthropy: It's a little bit of both, and that's the hard part for donors to be able to tell. Some people go into the charity business because it's pretty easy to pull off a scam. There aren't all that many laws. There's not a lot of regulation, and it's pretty easy to pull on people's heart strings.

That's why it's often these kinds of charities that raise money for emotional causes -- dying children, the firefighters -- those kinds of things that you can barely say no to, that's where, unfortunately, most of these scams come. And that's where you have to be especially alert.

So in those kinds of cases, sometimes it's people actually wanting to line their own pockets or the pockets of their friends. In other cases, it's naivete. People have a terrific idea. They're passionate about wanting to help a particular cause.

Veterans, for example, everybody wants to do something to help them. But they may not know how to do it. They may not know how to raise money. And so they may fall prey to some of these telemarketers, as Art says, who just say, "Oh, well, we'll give you 10 percent; 10 percent is better than you had before. You had nothing before. You don't have to hire a fundraiser. We'll do the work for you."

Charities difficult to judge

MARGARET WARNER: So how should charities be judged by an organization, by you? Is it just by the percentage of the money they take in that they actually give to the recipients or are there other tests?

ART TAYLOR: Well, clearly, finances is important to most donors, but it can also be a false positive. We've studied organizations and have found that, while very few fail to meet our financial ratio test for overhead, they fail to meet many more of our standards which go into areas such as how they're governed, whether they have conflicts of interest on their boards, how they deal with areas such as cause-related marketing and a host of other areas.

So we caution donors: Don't be fooled just because you find a charity has low overhead into thinking that that charity is one that you should support.

MARGARET WARNER: And, in fact, sometimes aren't problems -- take what happened with the Red Cross and Katrina -- that they don't spend enough money on managing all their volunteers and managing the money.

ART TAYLOR: Well, it is important for an organization to spend money on overhead. You can't really operate well if you're not providing overhead; you can't be accountable to your donors; you can't get your true message out, unless you're doing some overhead spending.

So we want to encourage some overhead spending. We just don't want it to be excessive.

MARGARET WARNER: What about effectiveness, Stacy Palmer? I mean, you could have an organization that sends 80 percent of their receipts out -- let's say, a relief organization -- but how does one know if the stuff just doesn't sit in a warehouse and rot? I mean, how does an organization like yours monitor effectiveness?

STACY PALMER: That's the really tricky part, but the most important thing -- while it's terrific that groups are providing good governance, and that's the sort of the thing -- what we want to know is, are they actually doing their job? Are they helping people?

And so, as a donor, you need to ask them. You need to look at the annual reports on their sites. One of the best things you can is see if a third party has evaluated them in some kind of way. A lot of charities are doing that now, especially because they see that donors are more skeptical.

So if there's somebody that's looked at them from the outside and said, "Here, you're doing a terrific job or you're not doing such a hot job, these are the kinds of things you need to do better."

MARGARET WARNER: But how does a group, an outside group, let's say with real expertise assess effectiveness, short of going to, you know, Bangladesh or wherever the group is operating?

STACY PALMER: Right. There are a lot of fledgling efforts now to try to do a better job of evaluating charities, but it's very hard. And that's why there are a million charities in this country. Not all of them are ever going to be evaluated by these third parties or anybody who can really dig in and answer those questions.

So as a donor, we have to do our own due diligence to try to answer those questions. One thing to do is to just get online and look at what's been written about the charity. Has it appeared in news reports? Because a lot of times journalists are looking into whether a group is effective or not.

So do as much reconnaissance as you can do, depending on the size of the gift, too. It's not worth it, you know, if you're not making a terribly large gift, you might not have the time to do it. But if you're giving a very big gift, then you're going to want to do as much research as you can.

MARGARET WARNER: Well, that is an issue. Let's say you're someone who gives normally to a couple dozen charities. It's not really realistic, is it, to -- you're expected to read the annual reports of each? I mean, what's a person like that to do?

ART TAYLOR: Well, it depends on, I guess, a person's stomach for being duped. If you are very trusting, you may not want to do a whole lot of investigation, regardless of how much money you're giving.

And most people, you're right, if they're only giving a small gift, they won't do a whole lot of homework. They'll rely on a friend or, if they've had an experience with the charity and it's been good, they'll maybe continue to give.

MARGARET WARNER: So you mean, if you know the charity on the local level and you know they're doing good work, that's a good test?

ART TAYLOR: That's a good test. Local charities are fine, because you can go visit them. However, the large national and international groups may not have the same local presence, and so you'll want to have to rely on third-party evaluations such as ours and others to give you some sense of whether that group is worthwhile.

On the question of effectiveness, Stacy's right. There are fledgling efforts. A few years ago, we came up with two standards that began to look into whether charities are assessing their own effectiveness.

And we've seen a lot of changes as a result of that. Organizations are being more open about their own effectiveness, looking for ways to get that information to donors.

And we plan to do a lot more. We'll be convening some leaders of some major charities in the next months to try to figure out a way to get a universal way of looking at an organization's effectiveness.

Everyone's reputation suffers

MARGARET WARNER: And, Stacy Palmer, what do the charities that have been identified as badly performing, what do they say in their defense? And is there anything to it?

STACY PALMER: Some of them are quite troubled by the reports, obviously because they don't want their reputation tarnished. Some of them say they really did have no choice. They didn't know how to raise money. They got scammed. And, you know, they're very sorry.

MARGARET WARNER: You mean, they went to an outside party?

STACY PALMER: Right. So some of them say that they just didn't know what to do. There wasn't any other chance for them to raise money.

That doesn't really hold up so much, because plenty of charities that are new operations that maybe are raising money sometimes for controversial causes, not even something like veterans where everybody wants to give to support that kind of cause, they raise this money in a very efficient way. So that doesn't hold up, but that's part of what the excuse is.

In other cases, some of the people that have been accused haven't been really wanting to account to themselves in the press and they've been evading Congress, as well. So we haven't really heard from all of the ones that have been named.

The charities that do help veterans all say that they've got lots of donors calling them and asking more questions. So even the legitimate groups say that they're getting lots of calls. They're very worried that their donations are going to drop just because now everybody is skeptical.

So I think we have to be careful not to have an overreaction.

MARGARET WARNER: And a lot of people don't look at the whole list. They just think...

STACY PALMER: It's good to be careful, but sometimes people get too careful, so you don't want to be scammed, but on the other hand you still want to do good.

Supermarket scams

MARGARET WARNER: Finally, we have all seen, you know, you go to a store and they say, "We'll give 1 percent to some conservation cause." You go to a restaurant, and they say, "We'll give 1 percent to a homeless shelter." Is that on the up-and-up usually? There were these stories that some of the charities said, "We knew nothing about it." And how do you as a customer know?

ART TAYLOR: Well, very interestingly, in a recent hearing, Senator Menendez asked that very question. And I understand he's proposing legislation to require businesses that do this to inform the charities before they begin using their name.

MARGARET WARNER: It seems like kind of a basic, doesn't it?

ART TAYLOR: Well, it is, but you'd be surprised how many businesses are out there using the good name of charities to promote products. Some of them may even be non-performing products, thinking that, by doing this, they'll get a better return. People would be more interested in looking at those products.

So, you know, we try to police this by requiring charities to disclose to donors, when they know, how much of the purchase price will actually go to that organization and also how long the campaign will run, so people won't be buying things throughout the year expecting that money to go to charity, when there was only really a small window for it.

MARGARET WARNER: Do you think this is a serious problem?

STACY PALMER: It's a problem. It's not as serious as some of the other things facing charities and donors, but it's something important. And it just raises this continuing need for donors to ask as many questions as possible about any kind of charitable giving.

It's your money. You take it very seriously. Ask tough questions, and never feel pressured into giving. There are plenty of great causes. So if it doesn't seem right and you don't feel right about buying the product or making the donation, don't do it. You don't have to.

MARGARET WARNER: Stacy Palmer, Art Taylor, thank you both.

ART TAYLOR: Thank you, Margaret.