September 25, 2020
By Katelyn Miller, CPA, MST, Manager, Nonprofit Tax
In one of the largest updates in recent memory, Charity Navigator has rolled out the first of four significant changes to their rating system. The Encompass Rating System expands the number of charities the organization rates from 9,000 to 160,000 – the most in its history. What does that mean for nonprofit organizations? If your organization has not been rated by Charity Navigator previously, it will likely be rated going forward (with new metrics). An organization should familiarize itself with the recent and future changes, assess the impact on its rating and consider making changes accordingly. It could mean the difference between meeting your fundraising goals and scrambling for additional grant funding to fill the gap.
The Changes to Charity Navigator’s Rating System
Charity Navigator promotes the changes to its rating system as a better way to serve both donors and nonprofits, providing a platform to share their impact and results with potential donors. The new system includes a number of metrics to analyze small and newly established nonprofits using artificial intelligence that extracts information from IRS Forms 990 filed electronically for three consecutive years.
The Encompass Rating System will work in tandem with the current Star Rating System and score nonprofits on a scale of 0 – 100 based on a Finance & Accountability “beacon.” This beacon includes five metrics to gauge the nonprofit’s financial health:
- Program Expense
- Independent Audit or Financial Review
- Board Composition
- Liabilities to Assets
- Website Listed
Over the next 18 – 24 months, Charity Navigator will be adding three additional beacons – Impact & Results, Leadership & Adaptability and Culture & Community. Read more about the launch of the Encompass Rating System here.
Whether your organization is currently rated under the Star Rating System or expects to be rated shortly under the new criteria of the Encompass Rating System, now is the time to consider the new metrics under the Finance & Accountability beacon. For example, organizations with total revenue above $1 million are expected to have an audit, and those with revenue between $250,000 and $1 million are expected to have a formal audit, review or compilation – even if their state law does not impose such requirements. Failure to meet this requirement could cost the organization 25 rating points. Secondly, does your board meet the 25-point requirement to have at least three board members, the majority of which are independent? Read the FAQs about the new Encompass Rating System and consult a CPA with nonprofit expertise to help your organization tackle these important considerations under the new rating system.
In addition, in anticipation of the Impact & Results beacon organizations should review Part III of their IRS Form 990. The Form 990 is a public document and communicates a deeper story beyond the balance sheet. Nonprofit leaders owe it to their organization’s bottom line to focus on what the critical Part III conveys about their work and determine whether it truly reflects their impact on the community that they serve. While it might appear in an IRS filing, Part III functions as a public relations piece — so carefully consider how you can use it to shine a light on your accomplishments. For tips and best practices, read our blog post on Your Secret Nonprofit Fundraising Weapon: IRS Form 990.
GRF will monitor developments in the roll out of Charity Navigator’s Encompass Rating System, including the launch of the three additional beacons. For questions about how to improve your organization’s current rating, contact GRF’s team of Nonprofit Tax experts.
Katelyn Miller, CPA, MST
Manager, Nonprofit Tax
Richard J. Locastro, CPA, JD
Partner and Director, Nonprofit Tax