3 resources that explain the wrong way we look at evaluating charities

This is where we go in order to evaluation a charity's effectiveness. We need something better.

This is where we go in order to evaluation a charity’s effectiveness. Merely do one calculation using the totals at bottom of the functional expense page and you are done. We need something better.

If you want some background describing the wrong perspective used by charities, donors, and self-appointed rating agencies in evaluating nonprofit effectiveness, Marc Gunther at Nonprofit Chronicles points you to three resources you could check out. I discussed this post yesterday. Consider:

  • Dan Pallotta’s TED talk explaining The Way We Think About Charity Is Dead Wrong (post points out it’s already been viewed 3.4M times)
  • The Nonprofit Starvation Cycle by Ann Goggins Gregory and Don Howard explained back in 2009 that charities are pushed to understand on infrastructure which limits the effectiveness. Bragging about the low “overhead” ratio encourages donors to look for low overhead. A self-reinforcing cycle pushes infrastructure spending ever lower.
  • The Overhead Myth is a joint effort of Charity Navigator, GuideStar, and BBB Wise Giving Alliance, arguing that all of us should move away from overemphasis on overhead measurement.

I have known for a long time there is a problem in how we, collectively, look at measuring effectiveness.

Since transitioning to a CPA firm that concentrated on auditing nonprofits back in 1989, I have known that an overemphasis on the functional allocation of expenses was a bad way to assess effectiveness. It isn’t even a good way to evaluate efficiency.

The ease of manipulating the allocation reduces its reliability. Major differences between sectors destroys comparability. In addition I have observed there are some CPA firms that, um, ah, don’t pay particularly close attention to the allocation during their audit.

Check out the above resources if you want to catch up on the overhead issue.

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