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The American Institute of Philanthropy (AIP) is a 501 nonprofit organization, created in the United Statesmarker by Daniel Borochoff in 1992 to provide information about charities' financial efficiency, accountability, governance, and fundraising. Charity financial reporting can be inconsistent, unclear, and occasionally unethical or fraudulent.

About

AIP analyzes charity financial documents to identify charities that are financially efficient, and ones that are not, and publishes its findings. AIP encourages donors to give to charities that will allocate most of their contributions to program services that benefit the people and to causes that donors wish to support. AIP also promotes charity accountability and transparency through its research on the rapidly changing nonprofit field.

AIP publishes the Charity Rating Guide & Watchdog Report, containing ratings of the financial efficiency of over 500 United States charities. The ratings are grades ranging from A+ (best) to F (worst) and are based on analysis of charities' financial documents. The ratings include the percentage of a charity's budget that is spent on program services, how much it costs a charity to raise $100, an accountability measure, and the salaries of the charity's three highest-paid employees. The Guide also features articles about problems in the nonprofit field and tips to help donors make wise giving decisions and avoid charity scams. AIP posts its top-rated charities on its website.

AIP also investigates ethical issues surrounding charity spending, including salaries and payouts, financial reporting, telemarketing and direct-mail solicitation campaigns, and governance. AIP shares the results of its research with the media and government agencies and works closely with these parties to educate the public about informed giving. AIP President Daniel Borochoff has testified before Congress about veterans charities, the aftermath of Hurricanes Katrina and Rita, and the philanthropic response to the 9/11 attacks.

Exposure

AIP’s ratings have received wide exposure from Congress and the media; particularly AIP’s appearance on the front page of The Washington Post, on editorial pages of The New York Times, and on ABC and CBS News programs. This has resulted in loud complaints about AIP’s rating system from a number of organizations.

The average American believes 22.4% is a reasonable amount for a charity to spend on overhead and that a typical charity spends 36.3% of donations on overhead, according to a February 2008 study by Ellison Research, a marketing company.

The major criticism from low rated charities is the claim that AIP’s rating system does not follow Generally Accepted Accounting Principles (GAAP) or rules for reporting financial information on the IRS tax Form 990. These groups posit that if AIP took the figures as reported in these financial documents, their ratings would be outstanding. While GAAP reporting rules provide guidelines for a charity to report its financial activities, these reporting rules do not measure or claim to measure how efficiently an organization is raising and spending donated dollars.

Charities have wide latitude in how they choose to report activities even within IRS and GAAP standards. In addition, a charity can spend as little as 1% of its budget on its programs and still be in compliance with GAAP and IRS reporting requirements. Direct mail and telemarketing solicitations that contain educational messages and other income-generating activities that accounting rules allow charities to report as program costs, are not considered to be program services by many donors. For these reasons AIP analyzes and makes adjustments to the audits and tax forms of some charities for consistency and to better reflect the goals of many donors who want their donations to be spent on bona fide programs.

Charities poorly rated by AIP for financial efficiency often cite favorable reviews or ratios from other sources of charity information. These other sources typically do not perform AIP’s in depth level of financial analysis and may accept a charity’s own reporting without question. A study by the National Council of Nonprofit Associations, titled Rating the Raters: An Assessment of Organizations and Publications That Rate/Rank Charitable Nonprofit Organizations, states of AIP's ratings, "Rigorous and fair analysis of objective criteria. Does not simply repeat self-reported analysis from [nonprofit organization]."

Another criticism is that AIP does not rate the quality of their programs. AIP encourages donors to consider a charity’s program accomplishments in relationship to the resources it receives.

Criticism

Studies of charity watchdogs' methods have raised concerns about the validity of their ratings, and suggest they may not be reliable source for charity ratings. AIP reviews only 500 charities, where Charity Navigator reviews over 5,400, and it is undetermined how AIP selects the charities it reviews. One group that AIP is critical of claims that AIP rates a large number of liberal groups, as compared to conservative groups, and only a small number of pro-military groups. However, on its website, AIP posts the names of all the charities it rates; the list indicates that of the charities that have a political bias, the charities cover a wide spectrum of political beliefs.

Charity rating organizations have been criticized by philanthropy experts for the validity of their evaluation methods and their conclusions. A study reported in the Stanford Social Innovation Review—an award-winning magazine covering successful strategies of nonprofits, foundations and socially responsible businesses—found that watchdog groups:
  • Rely too heavily on simple analyses and ratios derived from poor-quality financial data;
  • Overemphasize financial efficiency while ignoring program effectiveness; and
  • Do a poor job of conducting analyses in important qualitative areas, such as management strength, governance quality and organizational transparency.
Specifically, this study found that a "gotcha" mentality and lack of transparency were AIP's biggest shortcomings, saying it was "difficult to understand what specific adjustments AIP made to a given nonprofit's ratings and why." This study's authors concluded that, as donors make important decisions using potentially misleading data and analyses, the potential of watchdog agencies to do harm may outweigh their ability to inform. They suggested:
A more effective nonprofit rating system should have at least four main components: improved financial data that is reviewed over three to five years and put in the context of narrowly defined peer cohorts; qualitative evaluation of the organization's intangibles in areas like brand, management quality, governance, and transparency; some review of the organization's program effectiveness, including both qualitative critique by objective experts in the field, and, where appropriate, "customer" feedback from either the donor or the aid recipient's perspective; and an opportunity for comment or response by the organization being rated.


A second study, Rating the Raters: An Assessment of Organizations and Publications that Rank/Rate Charitable Nonprofit Organizations, provides a separate assessment of AIP, Charity Navigator, Better Business Bureau Wise Giving Alliance, and other charity information services. The major findings are:
  • Approaches and criteria are not the same. The methodologies and criteria used vary significantly among the various rating and ranking organizations.
  • Evaluation criteria may not be readily apparent. Not all nonprofit rating and ranking groups make it easy for the donor to determine the evaluation method and criteria used.
  • Evaluators may use criteria that are overly simplistic. Simple financial ratios and/or measurements that apply in some circumstances may not apply in others.
  • Evaluators focus on financial measurements and overlook program effectiveness. Financial "efficiency" is assessed by most third-party ratings groups as a percentage of contributions received. This tends to be their primary focus.
  • Competence of the evaluator is critical and difficult to determine. It is virtually impossible for donors to determine the relevant credentials, expertise and experience of the rating organization's staff.
  • Evaluators often derive revenue as a result of their rating reports, creating a potential conflict of interest and questioning whether these groups are motivated by the desire to inform potential donors or by the media attention that improves their revenue stream. AIP, for instance, charges a fee for a sample copy and requires membership as a condition for receiving its annual rating reports.


Some groups criticized by AIP, such as Paralyzed Veterans of America, have pointed out that they meet "all 20 criteria that the Better Business Bureau Wise Giving Alliance establishes for charities, including that a charity's fundraising costs not exceed 35 percent of contributions, a common standard." The Better Business Bureau Wise Giving Alliance charges charities to use its seal of approval. Vietnam Veterans Memorial Fund asserts that the criticisms leveled here against charity watchdogs all apply to AIP.

References

  1. Mission Statement, Goals and More
  2. The Frederick News-Post Online - Frederick County Maryland Daily Newspaper
  3. How to tell a good charity from a bad one - MSN Money
  4. Rating the Performance of Charities : NPR
  5. Charity Rating Guide and Watchdog Report
  6. American Institute of Philanthropy, Top-Rated Charities
  7. Charity Alert :: Committee on Oversight and Government Reform :: United States House of Representatives
  8. ABC News, "Failing to Serve America's Heroes on the Home Front"
  9. http://oversight.house.gov/documents/20071213131834.pdf
  10. Hearing Archives :Committee on Ways & Means :: U.S. House of Representatives :
  11. Committee on Ways and Means, Oversight Subcommittee, 107-47, Response to the Recent Terrorist Attacks
  12. The Washington Post, "Study Faults Charities for Veterans"
  13. The New York Times, "An Intolerable Fraud"
  14. CBS News, "Vet's Charities Pocket Money"
  15. American Institute of Philanthropy, "Veterans Charities Protest Their F's"
  16. Ellison Research, "Most Americans believe non-profits spend too much on overhead"
  17. American Institute of Certified Public Accountants
  18. Financial Accounting Standards Board
  19. IRS Form 990 Instructions
  20. Supreme Court of the United States, Madigan v. Telemarketing Associates, Inc.
  21. Journal of Accountancy, "How to Report a Joint Activity"
  22. House Committee on Oversight & Government Reform, "Waste, Fraud, and Abuse" hearing, Daniel Borochoff Testimony, December 13, 2007, p. 4.
  23. American Institute of Philanthropy, Rating Criteria
  24. American Institute of Philanthropy, Praise
  25. National Council of Nonprofit Associations, Rating the Raters: An Assessment of Organizations and Publications That Rate/Rank Charitable Nonprofit Organizations
  26. Vietnam Veterans Memorial Fund. A Response to the American Institute of Philanthropy's Evaluation Of the Vietnam Veterans Memorial Fund. Washington, DC: Vietnam Veterans Memorial Fund. p. 1. [1] Accessed 4-12-09.
  27. American Institute of Philanthropy, A-Z Charity Listing
  28. "Lowell, Stephanie, Brian Trelstad, and Bill Meehan. “The Ratings Game: Evaluating the Three Groups that Rate the Charities.” Stanford Social Innovation Review. Summer 2005, p. 42. Accessed May 16, 2009. [2]
  29. Lowell, Stephanie, Brian Trelstad, and Bill Meehan. “The Ratings Game: Evaluating the Three Groups that Rate the Charities.” Stanford Social Innovation Review. Summer 2005, pp. 39-45. Accessed May 16, 2009. [3]
  30. Lowell, Stephanie, Brian Trelstad, and Bill Meehan. “The Ratings Game: Evaluating the Three Groups that Rate the Charities.” Stanford Social Innovation Review. Summer 2005, p. 43. Accessed May 16, 2009. [4]
  31. Howell, Deborah. “A Veteran’s Charity Cries Foul.” Washington Post, February 24, 2008, p. B06.
  32. Better Business Bureau Wise Giving Alliance, Charity Seal Program Fee Schedule


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