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The Road to Regaining Trust in the Nonprofit Sector: 10 Essential Reforms

- published in December 2004 issue of the Charity Rating Guide & Watchdog Report

“Public Distrust heightened by too many bad actors in the nonprofit field cries out for regulatory reforms and increased donor diligence.”

– Daniel Borochoff, AIP President

Only 11% of the public thinks that charities do a very good job of spending money wisely and only 19% feels that charities do a very good job of running their programs and services, according to a recent Brookings Institution study. The study found that confidence in charity is 10-15% lower today than it was in the summer before 9/11.

The Senate Finance Committee is currently working on new legislation to improve the accountability, governance and regulation of the nonprofit field. The American Institute of Philanthropy recommends that Congress enact the following vital new measures to help nonprofits regain public trust:

1. Require that most charities raising money for a highly popular cause, e.g. firefighters, police, veterans, disaster relief, hungry or ill children, cancer, etc… maintain reasonable annual fundraising costs of 35% or less. Exceptions would be made for groups that have been in existence for less than 3 years or with gross revenues of $500,000 or less. Controversial or unpopular causes, e.g. legalization of marijuana, abortion, gay rights should be allowed to have fundraising costs exceeding 35% per year due to the smaller number of people willing to support these causes. Past attempts to regulate fundraising costs have failed in the courts due to free speech concerns. The First Amendment should continue to guarantee that we have the right to raise money for unpopular causes even if it is very expensive to do so. Opportunistic fundraisers, who purposely pick causes that the public is most likely to support, should not be allowed to hide behind the First Amendment.

2. Require that religious organizations soliciting the public uphold the same level of regulation and accountability as secular groups. Dishonest or inefficient fundraisers can choose to form a “religious” charity to avoid being transparent and facing scrutiny from the IRS and many state regulators. AIP believes that this will strengthen the integrity of religious organizations.

3. Require all charities that raise $250,000 or more from the public to have an audited financial statement. The chief executive officer should sign a written statement under penalties of perjury that the charity’s audit, as well as its tax form, is complete and reasonably portrays the charity’s finances. Nonprofits need to have an outside accountant audit their books and see to it that adequate internal controls are being followed. The three most recent audits should be made available to the public.

4. Require charities to disclose complete audits and tax filings of its taxable business activities and for-profit subsidiaries. There is too much temptation for charities to bury questionable practices in its minimally accountable for-profit subsidiaries.

5. Require charities to make available to the public its audits and tax forms within one year of their fiscal year ends. The failure to do so would incur the risk of losing their ability to offer tax deductions on contributions during the time that the reports are over one year late. Donors need more timely financials in order to evaluate a charity’s current level of efficiency.

6. Require a charity’s basic governing documents, including the current articles of incorporation and bylaws, be made available to the public.

7. Require all charities to provide upon request a copy of their conflict of interest policy and board approved written documentation that it has been followed. The policy should call for public disclosure of why it is in the charity’s best interests that business be conducted with board members, officers or others with substantial influence over the organization, or with their respective family members. This should include records of multiple competitive bids by vendors or lenders who are not related to insiders at the charity. The IRS should levy heavy fines on charities and their executives that condone abusive self-dealing.

8. Require charities to provide upon request a description of their recent activities and accomplishments in relation to the expense categories used in its financial statements. So that donors understand what a charity is raising money for, a board-approved budget should also be made available upon request.

9. Require charities to provide whistleblower protections, including procedures for complaints to be made to a rotating committee of independent board members. Mandated employee confidentiality agreements that silence whistleblowers should be outlawed.

10. Create a federal regulatory agency for charities: a Securities and Exchange Commission of the nonprofit world. Most regulation of charities takes place at the state level yet charities operate and solicit money in multiple states. Charities are burdened with different filing requirements in about 40 states. Charities and the public would benefit from having one super reporting form that would be provided to a federal agency and any interested donor. If state regulators could free up time and resources spent collecting and filing duplicative forms, then they could do more to crack down on charity abuses.

Ultimately, any new rules will only be effective if the directors of nonprofits take them seriously and charity regulators have the resources to enforce them. Being that too many charity directors are asleep at the wheel and government resources are inadequate to regulate over 1.6 million nonprofits, much of the responsibility to improve the sector lies with the donor. AIP will continue striving to serve as your charity watchdog and resource for informed giving. Hopefully, Congress will soon provide us with some important new tools to help us elevate the effectiveness of charitable giving.

 
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