Transparency Top 12: Managing Risk and Disclosure Issues for Charitable Organizations

Luana K. Lewis
Published Date:
Oct 1, 2014

Since the 1920s, the Better Business Bureau (BBB) has developed charity reports that seek to help both public and business donors make more informed giving decisions. This service flows out of the BBB's mission to promote trustworthy business practices, especially in solicitations of any kind. The BBB developed 20 Standards for Charity Accountability that can help charities minimize risk issues and maximize their chances for success. BBB charity reports—about 11,000 across the BBB system, including reports on regionally and nationally soliciting charities—are prepared using these standards, which examine key charity practices in areas such as fundraising solicitations, governance, effectiveness reporting, and finances. 

Most charities that voluntarily undergo a BBB review can meet all of the BBB’s standards; for example, in 2013, 78% of the charities reviewed in metro New York met them all and became BBB accredited. But some charities do not meet certain standards. Examining the top 10 missed standards presents a valuable picture of potential risk factors and lost opportunities that can affect charity performance. These plus a couple more issues that also draw disclosure-related questions from charity leaders and their advisors make up the following “transparency top 12.”

Annual Report

Charities should produce a printable report disclosing the charity’s mission statement; a brief summary of program activities and results; a list of board members and officers; and a financial summary listing total income, functional expense totals for program, fundraising and administrative allocations, and the ending net assets. The annual report is a charity’s chance to tell its results story in donor-friendly language. It does not need to be fancy, and it can even be a page on the charity’s website as long as it can be printed and mailed on request. Failing to provide an annual report is a huge missed opportunity to highlight the charity’s achievements to contributors. A Form 990 might count as an annual report if it contains all the required elements, but it is hardly donor friendly.

Effectiveness Policy

This standard asks a charity’s board of directors to approve a formal policy committing the organization to evaluate and report on its overall performance against mission goals every two years, with recommendations for future actions. Having a formal board-level policy ensures that this key activity will happen regularly. Funders might require reporting on particular programs, but it is also vital for charity leaders to monitor their progress against overall mission in a more holistic, formal way.

Board Oversight

This is the BBB’s critical governance standard, which includes some concepts similar to the recently enacted New York Nonprofit Revitalization Act of 2013. Meeting this standard can help a charity minimize its risk issues. The board must have a conflict-of-interest policy, which should be monitored. It should also formally approve the organization’s budget; review financial statements, Form 990s, contracts, and other key financial documents; and review the CEO’s performance every two years. A voting board member must oversee finances (e.g., a treasurer); however, it is important to remember that the board’s chairperson may not also perform the functions of a CEO, COO, or treasurer.

More broadly, the charity’s board should monitor a charity’s internal controls and ensure that safeguards are in place to prevent and detect problems. Auditors can help charity managers and board members understand how to evaluate and strengthen internal controls in order to help prevent major governance disasters resulting in regulatory actions.

Website Disclosures

Increasingly, fundraising representations are made through websites. The BBB standard calls for charities to provide the same disclosures in a website as in a printed annual report. In addition, the website should clearly disclose mailing address of the charity and its privacy policy and should provide access to the charity’s Form 990, either as a PDF download or as a labeled link. Some charities do not want to post Forms 990 on their websites because they don’t want donors to have easy access to executive compensation details; however, this attitude will not help dispel misperceptions about charity executive compensation, which is a matter of public record in the Form 990.

Effectiveness Reporting

This standard is the corollary to the effectiveness policy standard. The board should receive and approve a written report every two years, showing progress against mission goals with recommendations for future actions. Many charities do not realize that a strategic plan that meets these criteria might satisfy this standard. Ordinary staff updates provided at a board meeting or meeting minutes are not sufficient for this purpose.

Board-Approved Budget

It’s surprising, but many charities lack a board-approved budget that shows income and functional allocations for program, fundraising, and administration expenses, with totals for each. Charities with budgets that only list natural expenses (e.g., salaries, postage, and travel) without any estimated total allocations to programs, administration, and fundraising will have a hard time understanding the true costs of their activities or managing their finances effectively.

Governance Meetings

BBB guidelines continue to regard in-person board meetings as essential for good governance.This BBB standard requires that the board meet at least three times per year, in evenly spaced face-to face meetings, with a majority in attendance. A conference call may serve for one out of the three meetings, but the other two meetings need to be in-person gatherings. Given that technology has evolved, a video conference might count if all board members can both see and hear each other and can participate as if they were in the room together.

Privacy Practices

Charities that solicit donations on their websites should clearly post a privacy policy that clarifies which information is being collected and how it will be used, explains how to contact the charity to review and correct information, gives details about how to inform the charity that a participant does not want information shared, and notes the security measures in place to protect private donor data. A privacy policy is a legally binding promise to the donor and website user, so charities are discouraged from simply cutting and pasting another charity’s policy. For this reason, charities should train staff and monitor privacy practices to help ensure that policies are followed. At least once per year, soliciting charities using written appeals should offer previous donors a means of opting out and letting the organization know when they do not want their information shared.

Compensated Board Members

BBB’s standard states that not more than one person or 10% of voting board members, whichever is greater, can be directly or indirectly compensated. In addition to paid staff members, additional items for review under this standard include board members who have a direct family member (spouse, parent, child, sibling) who is a member of the charity’s paid staff. (A separate BBB standard addresses related-party transactions, such as purchasing services from a board member’s firm.) The Nonprofit Revitalization Act also contains specifics about conflict-of-interest policies and procedures, independence issues, and related-party transactions. Charity leaders in New York need to learn about and comply with these important legal requirements, which might not always be identical to BBB guidelines.

Fundraising Costs

According to BBB standards, charities should not spend more than 35% of related contributions on fundraising expenses. BBB looks at fundraising expenses in relation to overall contributions revenue raised during the past fiscal year, rather than at an individual campaign, such as a single charity gala. The BBB standards will include in-kind contributions of goods and services as part of the contributions calculation, as long as the charity follows GAAP requirements for when such donations are recognized and how to determine their fair-market value properly.

The overwhelming majority of charities can meet the BBB’s expense ratio standards; however, donors have a tendency to rely too heavily on expense ratios when making their giving decisions. To help address this problem, BBB Wise Giving Alliance joined forces with GuideStar USA and Charity Navigator in June 2013 to declare that, taken by themselves, “overhead ratios” are not appropriate indicators of charity performance. All the same, charities should keep spending reasonable on overhead (fundraising and administrative) costs. State charity regulators look closely at such costs out of concern about whether fundraising representations might potentially mislead donors about the use of their donations.

Accurate Solicitations

All charitable solicitations should be accurate, truthful, and not misleading (in whole or in part). Results, stories, and photos should be up to date; performance claims should be accurately stated; graphic depictions in solicitations should not be misleading; and information about the charity’s finances should be correct. Whether large or small, charities can stumble in this area. As recent enforcement actions have revealed, it is the board’s responsibility to ensure that solicitations are conducted accurately and transparently. Certain types of appeals are especially likely to trigger a BBB request for verification or proof of accuracy—for example, “100% of your donation will be used for X purpose” or “We have zero fundraising or administrative expenses.” Charities making such claims should be prepared to back them up with documentation (potentially financial in nature). Follow this rule for any solicitation claim: if you can’t prove it, don’t say it.

Cause Marketing Appeals

We see an increasing number of cause-related marketing promotions that use a charity’s name without giving the consumer adequate information about how a purchase will trigger a benefit to the charity. New York State regulates this type of “commercial co-venture” activity, and charity leaders should consult the Charities Bureau website for details. BBB standards in this area require disclosure. At the point of solicitation, a cause-related marketing appeal should give specifics about the actual or anticipated amount that will benefit the charity from the sale of a product or service. When applicable, the disclosure should also identify the duration of the campaign and whether the charity will receive any minimum or maximum contribution. BBB carefully reviews cause-related marketing promotions; in New York, the state’s regulator recently brought attention to its enforcement activities concerning these promotions.

Lesson Learned: Remain Accountable to Donors

Charities should ensure that all their activities keep the best interests of their donors in mind. This is one of the fundamental principles behind the BBB’s accountability standards. Even well-intentioned charity leaders can sometimes lose sight of this guiding concept, which might put their organizations at risk. Good governance and nonprofit management practices don’t just protect donors; they also help to protect the charity from serious missteps.

Luana K. LewisLuana K. Lewis is the senior vice president of programs and services at the Better Business Bureau Serving Metropolitan New York. Formerly she was the director of proposals and research at the Ad Council, where she also served in media development and fundraising roles. She can be reached at

Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.