Researched by Nicholas Azulay + Isabelle Brauer
Whole Whale does not publicly offer or claim to offer financial and/or legal advice to nonprofits or any organization. Seek independent counsel from an attorney, accountant, or other certified professional on specific issues related to nonprofit financial transparency and accounting. We are not certified financial or accounting professionals. Requirements may vary depending on country, state, and/or tax-exempt status.
We’ve all been there. We see those feel-good stories about amazing fundraisers on our feeds:
We are inclined to participate in this amazing cause, but first we want to do our homework on an organization or viral fund before donating real money. In the case of the above grassroots fundraiser, lots of international press easily verified the fund’s legitimacy.
But how does your audience of potential donors and partners verify your organization’s legitimacy? Read on to learn more about nonprofit transparency best practices!
Why Does Financial Transparency Matter for Nonprofits?
Communicating accountability, responsibility, and impact with the general public should be a priority for any organization. Flashy graphics, blogs, highlight reels and the like are great for most people, but the really cautious (or curious) will want to read an annual report, read about board members, and learn more about the nuts and bolts of your organization. Beyond annual reports, your organization’s commitment to financial transparency, represented by the public release of financial documents and tax statements, will be a welcome (and often essential) inclusion for stakeholders of all types.
Your organization’s public disclosure of financial and tax documents can help instill confidence in donors, yes, but also grant making foundations, future hires, journalists, charity rating organizations, and the general public more broadly.
Not only is public financial disclosure considered a nonprofit transparency best practice (and may be legally required), but it directly impacts your organization’s ability to communicate its mission, values, and financial health to relevant stakeholders.
It’s more important than ever that you and your organization communicate legitimacy to your audience — especially if you hope to cultivate those audience members into donors or partners.
Geography of a Nonprofit Financials Page
When used effectively, nonprofits can leverage financial charity ratings to demonstrate efficacy and win over potential donors. It can be hard to determine what’s essential with so many different rating systems out there—so what charity rating platforms are most important for building credibility and how do they measure efficacy?
Charity rating organizations use varying metrics for evaluating efficacy and impact, but most organizations use Accountability, Transparency, Program Percentage, and Fundraising efficiency as the basis for their ratings.
Charity Navigator is the world’s largest independent charity evaluator and rater. It lists hundreds of thousands of US-based charities with programs worldwide, providing insights into a nonprofit’s financial health and adherence to best practices for accountability and transparency. Charity Navigator reviews organization websites and uses data from their IRS Form 990 to rate how efficiently a charity will use donor support, the health of its programs over time, and its level of commitment to accountability.
Charity Navigator defines accountability and transparency in assessing charities in the following terms:
- Accountability is an obligation or willingness by a charity to explain its actions to its stakeholders.
- Transparency is an obligation or willingness by a charity to publish and make available critical data about the organization.
Charities are rated on a scale of 0-Stars (Exceptionally Poor) to 4-Stars (Exceptional) and will receive graphic badges demonstrating their rating that they can post on their site. In late 2020, Charity Navigator announced significant changes to its rating system. Charity Navigator launched its Encompass Rating System, which currently evaluates nonprofits on two criteria: Finance & Accountability and Impact & Results, but will ultimately include Leadership & Adaptability and Culture & Community.
Guidestar by Candid (formerly GuideStar) is the largest source of nonprofit information. In 2019, Foundation Center and GuideStar joined forces to become Candid, a 501c3 nonprofit organization. GuideStar aims to provide a more neutral, “just the facts” approach to empower better giving practices. Guidestar gathers the following information on IRS-rated nonprofits: verification of registration with the IRS, IRS Forms 990, independent audit reports, mission, and objectives. It’s important for nonprofits to ensure their information is up-to-date and complete in the database because commercial businesses, private foundations, and other grantmakers use Guidestar when they want to quickly get the full financial picture of a nonprofit. Guidestar sends information to 200+ charitable sites, including AmazonSmile and Facebook.
GuideStar is not a nonprofit evaluator, but they do provide Seals of Transparency that give potential supporters insights into the organization.
CharityWatch self-describes itself as “America’s most independent, assertive charity watchdog.”
CharityWatch’s mission is to “dive deep to let you know how efficiently a charity will use your donation to fund the programs you want to support. CharityWatch exposes nonprofit abuses and advocates for your interests as a donor.”
Their approach is different from Charity Navigator in that their rating system is an “A+” through “F” grading system and they don’t strictly focus on financial metrics and ratios. CharityWatch evaluates nonprofits based on their tax statements, audited financials, annual reports, and direct outreach to nonprofits. CharityWatch assesses mutual aid and social advocacy charities that aren’t always eligible to be evaluated by other charity rating organizations due to size or other restrictions like religion.
Better Business Bureau’s Wise Giving Alliance evaluates nonprofits based on four charity areas of accountability: governance, results reporting, finances, and truthful and transparent communications. Organizations that meet the requirements receive a BBB Charity Seal, which they can display online.
Audited Financial Statements
Not all organizations are required to have their financials independently audited. Independent audits are obligatory for all organizations with annual revenue over $250K; auditing requirements are also dependent on how much federal funding is received or what states your organization operates in. Although the revenue thresholds differ from state to state, more than one-third of all states require nonprofits of a specific annual revenue size to have an independent audit conducted if they solicit funds from their state’s residents.
An independent audit analyzes financial statements and accounting records to verify the accuracy of your accounting records and internal controls. After the audit, the auditor releases a report in the form of a letter stating whether your accounting records and year-end financial statements accurately portray your organization’s financial health according to generally accepted accounting principles (GAAP).
Independent audits can be a strategic tool for nonprofits in establishing financial transparency with your current and future donors. Audits can also provide insights into areas of imporvement and opportunities for record-keeping improvements.
IRS Form 990 (For U.S. Nonprofits)
Form 990 is the annual tax form that US-based tax-exempt 501(c)3 nonprofits with $100K in annual contributions or over $250K in assets are required to file. Form 990 is publicly available and can be found on the organization’s page or on databases like GuideStar. The Form 990 evaluates the legitimacy and financial health using the revenue and expenses from the most recent fiscal year to demonstrate how finances have been utilized.
A lot of us dread the creation of an annual report. Annual reports are the kind of document you know you should have but are not convinced that its value is worth it. They can be long, tedious, often expensive to create or design.
We’re here to tell you that yes, you should have an annual report. You have a responsibility to your donors and the general public to be transparent about your organization, especially if it is a public charity. While IRS tax forms are important to make available for public inspection, let’s be honest, they’re difficult to comprehend unless you’re a nonprofit professional.
Annual reports give your nonprofit the chance to highlight the amazing work it is doing. How many students did you help? What pieces of legislation did you support? Did a new grant allow you to expand the programming of a particular project? Shout to the rooftops! Celebrate your work, highlight your beneficiaries, communicate your impact.
Did your organization fail? Did a program fall short? That’s okay too. Be honest about it in your annual report and tell your partners, stakeholders, and donors how you’re going to learn from it. Done right, your honesty will invite trustworthiness from both your supporters and beneficiaries.
Annual reports are also a crucial part of communicating your organization’s financial position to board members, volunteers, high-value donors, grant-making organizations, and the general public. It’s your responsibility to contextualize financial statements into an easy-to-comprehend narrative.
But we are also here to tell you that no, annual reports don’t have to be long and boring! Get creative in illustrating your impact and being transparent with your financials. Check out this list of the best nonprofit annual reports with ideas to steal for 2021! Hint: they’re not all downloadable PDFs!
Annual report template
Save time on design and focus on showing your impact
General Nonprofit Transparency Best Practices
Publicly List Board Members & Key Staff
In the spirit of transparency, it is considered best practice for nonprofits to have board members listed publicly online. While the listing of board members (including uncompensated members of a governing body) is required on the IRS Form 990, it is also considered appropriate to do so on your organization’s website itself. Making available information about individuals leading and governing your organization is key to building trust and conveying transparency.
Principal staff (or all staff) should also be listed. It is important for the public to know who is in charge of the operation and management of a nonprofit. Additionally, listing key staff and board members online provides an outlet for more up-to-date information than that found on the 990.
Assume Responsibility For Donor & Data Privacy
Please note that Charity Navigator grades organizations on the presence of other policies that while not required to be publicly available, will be evaluated by their inclusion on the 990. Such policies include a conflict of interest policy, whistleblower policy, etc. Read through Charity Navigator’s rubric for more information about nonprofit transparency best practices.
What Should a Nonprofit Financial’s Page Look Like?
There’s a goldilocks mechanism when it comes to sharing information with site visitors: too much complex information can be overwhelming, but not including enough facts can feel deceiving.
Here’s our 5-step guide to make your financial page just right
- Summarize the key points – Create easy access to your information to help potential supporters get the most important information quickly
- Provide data visualizations – Break up important info like fundraising vs. program expenses percentages into infographics or illustrations to make information more digestible
- Show your awards – Prominently display your charity ratings, seals, and accolades. (PS. Displaying your charity ratings on your donate page can help build trust with new supporters!)
- Make it easy and fast – Public financial documents should be easily viewed and downloaded from the website so a potential donor can feel empowered to do their own research to make conclusions
- Tell your story – Display your past year’s financial statements and annual reports to help build credibility and demonstrate how your organization has transformed over the years
Here are some our favorite examples from our clients:
Donate Life America
Longtime Whole Whale partner Donate Life America uses its Financial Stewardship page to neatly convey its financial story in an easy-to-read narrative. Donate Life America also publicly lists its board members and senior staff.
World Animal Protection
Whole Whale client World Animal Protection’s financial page similarly adheres to many nonprofit transparency best practices. The organization lists its Global Reviews (consolidated annual reports) alongside its Form 990s and Audited Financial Statements going back five years.