Whether purchasing stock in a publicly traded company or investing cash into a private company or small business, an investor will perform due diligence…an investigation of the business to make an informed decision of whether or not to invest in the company.
The same should be done when donating to a charity. Yet research shows that most donors are not vetting charitable organizations before making a donation. The nonprofit sector has grappled with economic fallout, government funding cuts and high-profile scandals. Due diligence can assure a donor that the organizations they donate to are effectively governed, transparent, accountable, fiscally responsible and aligned with their core values.
Steps in Donor Due Diligence
1. Evaluate the organization’s mission, programs and services. Are the programs and services aligned with the mission? Does the nonprofit have the capacity (staff and resources) to successfully deliver their programs and services?
2. Does the nonprofit post their IRS 501(c)(3) determination letter on their website? If not, check on their 501(c)(3) status through the IRS exempt organizations search tool.
3. Review their financial statements. Does the organization post their most recent IRS 990 reporting form, audited financial statements and annual report on their website? Organizational transparency and easy access to these documents is important! If not, you can get a nonprofit’s IRS 990 reporting form online at the Foundation Center’s 990 Finder. Or to get even more information on a charity, you can go to GuideStar.
4. Has the organization evaluated outcomes of their programs and services through a formal, independent evaluation? Was the evaluation conducted within the last 3 - 5 years?
5. Does the organization have a strategic plan and development (fundraising) plan? This will show you, the potential donor, where the organization is heading and if they have the resources to get there.
6. Inquire about the nonprofit organization’s investment policy.
7. Does the organization have a conflict of interest policy for members of the Board and staff?
8. Talk to the Board of Directors, staff and their current donors to determine the nonprofit's commitment to donor stewardship.
9. Visit the nonprofit’s headquarters. Attend an event or program the organization is hosting.
It may seem like an extra amount of effort to perform due diligence of a charity. Doing so will give you a full picture of the mission, strategies and sustainability of the organization and will likely assure that your donation is going to a good cause and will make a difference.