Watchdog Group Scrutinizes Charities

ST. LOUIS — It’s a $144-billion industry with little government oversight. Financial reporting requirements are lax, although millions of Americans are affected by it.

Is this any way to run a business?

No, but it’s the American way to operate a charity. And a small watchdog group working out of a cramped St. Louis office is trying to do something about it.

“There is a vacuum out there for good evaluative information on charities,” said Daniel Borochoff, president of the group, the American Institute of Philanthropy. “Most people feel they don’t have enough information to make a well-informed giving decision.”

No wonder. The growth of nonprofit organizations has been tremendous. This year, about 30,000 new ones joined the 1.2 million existing charities.

“There are over 400 [charitable] organizations with cancer in their name,” said John R. Seffrin, chief executive of the American Cancer Society.

“One value of the AIP’s service is to sometimes separate the wheat from the chaff,” Seffrin said. “You can probably make a more intelligent decision and feel more comfortable that the money you give will make a difference.”

The average family gives over $1,000 each year to nonprofit groups, including churches and other religious organizations. About a third of all giving takes place during the holiday season.

Yet aside from meeting fairly minimal requirements, the government requires little of the charities. Financial reports are hard to come by, and contain broad categories that make it difficult for givers to know if their money is being spent appropriately, Borochoff said.

The AIP comprises Borochoff, three other paid employees and about a dozen volunteers. Borochoff gave up a career as a financial analyst to head the organization, which began operation in 1994. Funded through private donations, the AIP has an annual budget of about $150,000.

Its chief purpose is publishing the quarterly “Charity Rating Guide & Watchdog Report.” The guide gives national charities grades ranging from A-plus to F based on three criteria: the percentage of their budget spent on charitable purposes; the amount spent on fund-raising and the amount the organization has stockpiled rather than spent.

“We can help people better allocate their charitable dollar, to find the most efficient groups, the most accountable groups to give to,” Borochoff said.

While the AIP seeks to root out shady or questionable charities, it has also been tough on some of the biggest names in the nonprofit world.

When several major charities were duped into giving millions to what was alleged last year to be a pyramid scheme orchestrated by New Era Philanthropy, the AIP named names.

In perhaps AIP’s most notable case, Father Flanagan’s Boys’ Home in Omaha, Neb., known as Boys Town, sued the organization after getting an F grade.

Although Boys Town got high marks otherwise, the grade was based on the organization’s stockpile of more than $500 million. The AIP gave an automatic F to any group with reserves amounting to five times its annual budget or more.

“Not to say that they’re bad, but most charities are poor,” Borochoff said. “Would you want to see a soup kitchen close down because you’d rather give to a charity that has five years of available assets?”

Boys Town officials declined comment. The American Cancer Society’s Seffrin, although a supporter of the AIP, isn’t sure the F was merited.

“There are some awfully sound organizations that get an F grade,” he said. “When I see an F, I think, ‘failure.’ ”

The Boys Town lawsuit was settled in May when the AIP agreed to differentiate which organizations got Fs based strictly on their reserves, and to show what their grades would otherwise have been. Boys Town got a B-plus discounting its high level of assets.