Changing your null on charities

By Razib Khan | April 26, 2011 10:38 pm

My friend Holden Karnofsky has a review of the Greg Mortenson affair over at the The GiveWell Blog:

There has been a lot of coverage of the scandals around the Central Asia Institute. The founder has been accused of fabricating inspiring stories, as well as of spending less than half of the millions of dollars he’s raised on building schools.

The Central Asia Institute receives four stars from Charity Navigator (archived) and had perfect ratings from Great Nonprofits prior to the scandal (archived), but GiveWell has declined to give this organization a recommendation or distinction (note that that page was published in mid-2009).

In a sense this doesn’t indicate impressive foresight on our part: nearly all charities we examine do not receive recommendations or distinctions, so it’s not as though we spotted the fabrications and financial mismanagement ourselves. Yet in the bigger picture, I see this incident as a vindication of our approach to giving: it’s a reminder that you shouldn’t give charities the benefit of the doubt.

CATEGORIZED UNDER: Culture
MORE ABOUT: Greg Mortenson
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    There are some reasons to give charities a benefit of the doubt that you wouldn’t afford to for profit entites, at least in the United States.

    One is that U.S. charities are subject to regulatory oversight from both the IRS and (typically) a state attorney general’s office. The IRS, which is the most systematic and effective regulator of the two, pays particular attention to the risk that a charity engaged in self-dealing that provides excessive financial benefit to insiders. The main hole in this oversight is the extent to which donations simply fund further fundraising, something that varies dramatically from one charity to another even in otherwise similar kinds of charities, a point that is worth researching prior to making a major gift.

    An absence of private benefit for insiders doesn’t necessarily mean that a charity is doing good work, but it does remove what would otherwise be a powerful incentive to divert resources from its stated purpose to private gain, a factor that is particularly relevant when you have no direct way to personally determine if the charity’s resources have been put to use for a charitable purpose.

    Charities also have powerful interests in protecting their reputations, because their good name is intimately tied to their ability to raise the funds necessary for them to carry out their missions. The incentive of charities to protect their reputations is stronger on average than that of for profit businesses who rely mostly on the benefit conferred in a particular pay for service transaction to receive continuing business with reputational concerns being merely secondary marketing issues, rather than being the dominant marketing issue.

    Charities which receive funding from foundations or public sector grants of any significant size also are almost always required as a condition of receiving the grants to have both audited financial statements prepared by an outside CPA, and some modicum of internal controls.

    Charitable organizations which are not religious organizations are subject to more oversight (and hence somewhat less likely to have undiscovered irregularities) than those that are religious organizations as a result of exemptions from the regulation of charitable organizations afforded to religious organizations in a variety of settings in an effort to avoid impinging on freedom of religion rights.

    None of this means that charities aren’t, at times, fraudulent or corrupt or malfeasant. But, charities are more likely to deserve the benefit of the doubt, particularly in the case of domestic non-religious charities, than other organizations.

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About Razib Khan

I have degrees in biology and biochemistry, a passion for genetics, history, and philosophy, and shrimp is my favorite food. In relation to nationality I'm a American Northwesterner, in politics I'm a reactionary, and as for religion I have none (I'm an atheist). If you want to know more, see the links at http://www.razib.com

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