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The Pros and Cons of Financial Efficiency Standards

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Document date: August 01, 2004
Released online: August 01, 2004

Brief #5 from the series "Nonprofit Overhead Cost Project"

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).


Form 990, the reporting document required by the Internal Revenue Service for public charities with at least $25,000 in gross receipts, has a roughly 60 year history. It was first required in the early 1940s, became a uniform reporting document for all states in the 1980s, and became widely available to donors via the World Wide Web in the late 1990s. Since nonprofit organizations are not legally obligated to divulge audited financial statements to the public, Form 990 is the only publicly available document that reports on the finances of the majority of nonprofit organizations.

The availability of Forms 990 and the accessibility of research datasets generated from these Forms have substantially increased the comparison of the finances of nonprofit organizations. While most people acknowledge that nonprofits should be evaluated on the merits of their programs, financial analysts have argued that relative spending on programs or overhead reflects "accountability" and that relative costs of fundraising reflect "efficiency." Without reliable and comparable information on program results, media and charity oversight analysts have progressively turned to these financial measures as indicators of organizational legitimacy.

Financial comparisons gained currency in the 1960s and 1970s in response to highly publicized fundraising abuses. Such comparisons maintain an uneasy popularity today. Periodicals such as Forbes, U.S News and World Report, Worth, and Money have ranked nonprofits according to spending ratios, asserting that organizations that spend more on programs or less on fundraising are more worthy of donations. Both Guidestar and the Combined Federal Campaign, two key entry points for information regarding giving, emphasize the financial position of nonprofits. The Better Business Bureau's Wise Giving Alliance includes spending threshold ratios among its accountability standards; some watchdog groups, such as Charity Navigator, develop profiles and comparisons of charities exclusively on financial information.

As financial comparisons become widespread and commonplace, critics have had more cause to list the shortcomings of the approach. This is a topic where the ground can be sharply divided between advocates of financial comparisons and those who see such comparisons as fundamentally misleading and even dangerous to the sector. In this brief, we summarize both sides of the argument. You decide.

Note: This report is available in its entirety in the Portable Document Format (PDF).



Topics/Tags: | Governing | Nonprofits | Performance Measurement / Mgmt


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