Road to Regaining Trust in the Nonprofit Sector: 10 Essential
- 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
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
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:
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.
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.
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 charitys audit, as well as its tax form, is complete and
reasonably portrays the charitys 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.
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.
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 charitys current level of efficiency.
Require a charitys basic governing documents, including the
current articles of incorporation and bylaws, be made available
to the public.
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 charitys 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.
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.
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.
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.