In an economic climate that’s already impacting the flow of donor dollars to the nonprofit sector, Canadian charities, foundations and nonprofits are crying foul over the recent launch and national media coverage of a charity appraisal search engine by a self-appointed watchdog organization that casts a shadow over them all.

The group, Charity Intelligence Canada (Ci), itself a charity, released news of its online engine on November 15 in a press release — followed by stories in both The National Post and The Toronto Star — that caught the attention of the sector, not necessarily for its usefulness, but for what many sector experts are calling a naïve analysis of data and lack of knowledge of CRA guidelines and how nonprofits in Canada actually work.

CharityVillage® has twice reported on Ci over the past two years. Readers interested in the organization should read these articles for more information.

The current hubbub is focused mainly on two key assumptions made by Ci’s number-crunching: first, that there is a lack of financial transparency in nearly a fifth of the 100 “major” charities researched, and secondly, that many of the top fundraising charities exceeded the CRA’s fundraising guidelines.

Transparent to the max

On the former, Ci claims that 19 of the Major 100 Canadian charities — defined as having the most fundraising revenue — refused to give the group audited financial statements to help it populate its new online tool. Some of the names on the list are ones familiar to many Canadians: The War Amps of Canada, The Children’s Wish Foundation, The Royal Ontario Museum Foundation (The ROM), and the Aga Khan Foundation of Canada, to name a few.

As to the latter, the organization reported that 14 of Canada’s 100 “richest charities” spend more on fundraising than the Canada Revenue Agency (CRA)‘s recommended limit of 35% of revenue. Names on this list include, the Canadian Diabetes Association, the Canadian National Institute for the Blind, the Canadian Cancer Society and the Multiple Sclerosis Society of Canada.

Kate Bahen, managing director of Ci told CharityVillage® in an email that all the charities contacted in the report “received at least three contacts over the summer” via email, telephone and a live conversation, asking for the audited financial statements from the contact information provided on the charity’s website.

Additionally, Behan wrote that each charity involved received Ci’s report between July and August 2011 “to review and provide comment and correction. Eleven of the original 30 charities asked how they could improve their transparency score and have subsequently posted their audited financial statements online; 19 charities have not.”

“We believe that Canada’s charitable sector can be improved with better transparency. We believe that each donor is in the best position to make their personal giving decisions. We only hope that having information helps Canadian donors,” she stated.

Bahen also defended the Toronto Star article, saying it “perhaps correctly represents the desire” of Canadians.

“Do you really believe Canada’s largest charities should not provide this information to Canadians while receiving such a large public benefit?” she asked rhetorically.

Charities speak out

Some of the charities mentioned in the Ci report were eager to give CharityVillage their version of the story.

Regarding provision of audited financial documents, the Children’s Wish Foundation of Canada (CWFC) said its policy was and is to provide audited financial statements upon request. Paul St. Germain, CWFC’s director of communications, said his organization’s annual report, “including a condensed statement of the Foundation’s financial position” is always available in the media section of its website.

“Our supporters demand and deserve transparency and accountability. Those values have been essential to our success,” he said. “As such, Children’s Wish was an early adopter and builder of Imagine Canada‘s Ethical Code Program. The Foundation performs its due diligence regarding its financial and fundraising activities on an ongoing basis. The Children’s Wish Board of Directors, the Finance and Audit Committee and management continue to monitor administrative and fundraising costs against established benchmarks to ensure optimal effectiveness and fiscal responsibility.”

Jennifer Pepall, director of public affairs at the Aga Khan Foundation of Canada (AKFC), said her organization was doing all it could to find new ways to make itself more transparent to donors.

“We certainly applaud any effort to provide Canadians with information to help guide them in making donations, as long as it is comprehensive and properly contextualized,” she said. But like others, she stressed that Ci’s assumptions about her foundation’s funds and motivations were off the mark, even though the actual revenue information gathered on the foundation was accurate.

She added that AKFC has always “been pleased to share” audited financial statements to all who request them. The number of requests has increased over the last few years and as such the organization is now “exploring ways to make this and other information about AKFC more readily accessible so that Canadians can have an even fuller understanding of our organization, its goals and its impact.”

The War Amps of Canada, via a written response, said that Ci’s portrayal of its administrative and fundraising activities — particularly as outlined in The Star‘s article — was innaccurate.

“The numbers [Ci] associated with The War Amps are misrepresentative of our charitable activity,” the charity wrote. It added that it does not use “professional fundraisers, receive government grants, solicit by phone or door-to-door, sell or trade your name/address, spend more than 10% on administration or tie up funds in long-term investments.”

Furthermore, it stated, Ci was told it could find all of the organization’s “detailed financial information” in their T-3010. So any allegation that it “refused” to hand over audited financial statements is misleading.

Ostensibly, Ci’s search engine exists to fill in an information gap for donors to help empower them when considering where to best channel their money, according to the group. But experts question whether its new tool is really helpful.

Questioning the investment matrix

On its website, Ci admits it is using methods of quantification that aren’t necessarily the best ones out there. The organization says it applies “investment analysis techniques which are, by no means, the best tools, but are the only ones we knew how to use.”And it’s precisely this point that has people like Toronto charity lawyer Mark Blumberg and Malcolm Burrows, head of philanthropic advisory services for ScotiaBank, concerned.

In a point by point dismantling of Ci’s report on Blumberg’s Canadian Charity Law blog — he notes that there are misleading statements being put out by Ci, though likely not intentional.

“While I agree that larger charities that typically have audited financial statements should place them on their website, it is not a legal requirement,” Blumberg writes, refuting the insinuation by Ci that they were forced to get this information from the CRA to conduct their research.

With regards to the CRA’s fundraising guidelines for charities, Blumberg says that Ci got it wrong when addressing the 35% recommended limit. It’s too simplistic, he notes. The actual guideline is more nuanced, he said, and states the following:

“The CRA recognizes that the charitable sector is very diverse and that fundraising effectiveness will vary between organizations. There can be good reasons for a charity to incur higher fundraising costs for a particular event or in a particular year. As a result, a range of factors will be considered in the course of a CRA review. One of the factors that the CRA will consider is the ratio of fundraising costs to fundraising revenue.”

Additionally, Blumberg notes that Ci’s engine is not the first of its kind on the Canadian scene — the organization boasts it as “ground-breaking.” In fact, Blumberg says, the CRA already makes every T-3010 publicly available. Plus, for the past five years, CharityCan has maintained a searchable database of all financial statements from Canada’s more than 85,000 registered charitable organizations, private and public foundations.

Blumberg also takes issue with Ci’s position that if a charity is not transparent, one should reconsider donating to it.

“I agree that if a large charity is not transparent that you may wish to consider another charity,” he writes. “However to telescope the issue of transparency into disclosure of an audited financial statement on the website of a charity is a simplification of the complexity of the issues. Financial statements only cover 20 to 30% of the important information that a charity should disclose because it does not usually reflect volunteer contributions, impact, programs, etc. An audited financial statement only provides a general overview of the financial information of a charity but contains a lot less detail than the T-3010 or many other reports that charities can and often do prepare relating to their programs.”

Burrows, who praises the impetus behind Ci’s report and engine — the push for more transparency in the sector — also feels Ci may be a bit “misguided, and in certain places not very well informed.” He’s been following their progress for the past few years.

“I sometimes wonder how much [Ci] actually understands the nature of the sector. For one, they haven’t acknowledged that there is a massive range of charities in Canada. The majority of charities in Canada are volunteer-run, mirco-entities. There are large institutional entities. There are foundations with significant endowments and quasi-government entities like large healthcare institutions and universities that have massive reserves,” he said. “Ci seems to want to put all of them into a single space, and I think that does a real disservice. They need to look at that before they make these huge generalizations in public.”

Burrows lamented the lack of nuance in Ci’s reporting on what makes a good charity. “You can’t have a ‘one-size-fits-all’ standard of accountability in the sector.”

Imagine that

Unsurprisingly, Marcel Lauzière, president and CEO of Imagine Canada, also took umbrage at Ci’s report.

His organization, through its Ethical Code Program, has for years advocated for widespread and deeper transparency in the sector. But the methods used for aggregating Ci’s research don’t wash, he said.

It should be noted that Imagine Canada is working to assemble its own online search engine and sector portal, called CharityFocus, which is scheduled to launch in January 2012. That online application will be in direct competition with Ci’s site.

Lauzière said the critical difference between his and Ci’s engine is that Imagine Canada’s will not only improve transparency and accountability via financial statements and T-3010s, it will also allow charities to “describe in a more meaningful way the important work they do and to tell the story of their organization’s impact…and provides charities with the ability to upload additional information that will allow them to contextualize the data.”

As it stands, however, Ci’s seemingly uneducated rankings system of charities, and the media play it received last week, does anything but help the sector or its donors, he said.

“It’s a real disservice to Canadians because the information they’re putting in front of people means nothing if it’s not contextualized. It’s as simple as that,” Lauziere said. “You can’t give a simple answer to people about where they should be giving or volunteering. It doesn’t work that way. If you don’t understand what [a charity] is doing, what type of results it is producing what type of impact it is making, these numbers are not going to tell you anything. I’ve never seen a balance sheet that will tell you anything about impact or results.”

As an example, another point Ci brings up in its report is that many of the country’s major charities have reserve funds that can cover their annual program costs for up to five years.

“Some charities fundraise because they can, not because they can’t meet an unforeseeable need. Some charities can run their programs for years without raising another dollar,” the Ci report states. “From a donor’s perspective, this means that donations will likely be invested, rather than used for charity work in the next year. On the other hand, ‘poor’ charities would grind to a halt without annual donations. Donors who give annually may wish to pick charities that need money for next year’s programs.”

It’s this black or white simplification that makes Lauzière uncomfortable.

Having too much cash on hand, he said, means nothing unless one understands the strategic decisions that volunteer boards have made around where these funds should go. “It may be for a capital expense down the road. It may be because they feel in two to three years they’ll have enough funds to launch a major campaign. So just looking at those numbers doesn’t tell you anything.”

Pepall agrees. She said the AKFC is one of those institutions flagged by Ci for having a lot of banked operational and program cash.

She said while it’s true the AKFC has enough money on hand to cover “several years of programming”; there’s nothing nefarious about it. The fact is, she said, that all of AKFC’s reserves are “fully committed to existing projects over the next five years. We must continue to fundraise in order to sustain our efforts in tackling the root causes of poverty in the developing world.”

It’s not that simple

Lauzière said Canadians should remain critical of the information Ci has provided.

“They’ve taken a [data-gathering] model from the investment world, where you look at inputs and then tell your investors where to put their dollars…it’s not that simple when you’re looking at charities and at their outcomes and impacts.”

Andy Levy-Ajzenkopf is president of WordLaunch professional writing services in Toronto. He can be reached at andy@wordlaunch.com.

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