Giving Freely --And Wisely

They're out to get you--the nonprofits, I mean. In any year, charities may collect half the money they'll get from individuals in the weeks between Thanksgiving and New Year. But even as donors open their wallets, many give with divided minds. You admire the cause but secretly worry that the group might squander your money.

The better nonprofits worry about that, too. They seethe when less worthy competitors (and they know the names!) pull in big bucks. Several Web sites rate charities to weed out the detectable stinkers. They tell you what each nonprofit does and how it says it spends your money. But here's what you don't know: whether the group makes a real difference in the world and if its financial disclosures are fair.

Questions like these are driving a budding "transparency movement" for public charities. State laws can do nothing. A series of Supreme Court decisions leaves charities free to hide or say whatever they want when they're raising funds (short of fraud, of course). Instead, the chief actors are donors, public-policy think tanks and concerned nonprofits themselves.

The first order of business is to follow the money. Today, that's the heart of what the rating services do. Most nonprofits (including religious charities but not churches) have to file Form 990, a financial disclosure, with the IRS. These are being mined for data and put on the Web.

Unfortunately, you can't always believe what the 990 says. It's supposed to show how much the nonprofit spends on actual services, as opposed to fund-raising and administration. But the law isn't much enforced. In a report covering part of the 1990s, the General Accounting Office found that 64 percent of public charities claimed to have zero-- zero! --fund-raising expenses. Do you believe that? Neither do I.

The charities' own, independent audits generally do better--and good groups disclose them. But accountants have a lot of discretion in deciding which expenses to call "fund-raising." Nonprofits that disguise their costs or exaggerate the value of donations can win higher ratings than those that present their finances more fairly. The temptation is always there.