While it is sometimes possible to obtain the data we need in order to subject these smaller organizations to the rigorous analysis necessary to be able to provide meaningful information to donors, often it is not.
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Accrual basis accounting reports revenue as it is earned and expenses as they are incurred, providing a more complete picture of an organization’s assets and liabilities (resources owed to outside parties), and a better measure of how efficiently it is operating.
Economies of Scale
Economies of scale occur when the size of an organization’s operations allow it to operate more efficiently. As an organization grows it costs it less (per unit) to produce its goods or services due to its overhead and other fixed costs being spread over a larger volume of output.
Charity rating methods suitable for larger organizations often cannot be fairly applied to much smaller charities given that the latter lack the economies of scale necessary to operate at the same level of efficiency.
Small charities that assist underserved populations, that are fulfilling an unmet need, or that are new or in the process of scaling up to a larger size may still be worthy of donors’ support despite CharityWatch’s inability to rate them due to this comparability issue.
Lack of Independent Audited Financial Statements
Most charities forego hiring external auditors to produce annual audited financial statements until they reach a size that subjects them to regulations requiring them to do so, such as to satisfy state fundraising regulations, to obtain credit, or for insurance purposes.
The lack of an audit, however, means that a qualified outside party has not subjected the charity’s financial reporting to auditing standards that would test the effectiveness of its internal controls and assess whether or not the charity’s financial information is fairly presented and free of material misstatements.