Accountable Strategies blog

A blog about accountability issues in the public, private, and nonprofit sectors

Nonprofit accountability

Posted by David Kassel on June 6, 2007

What’s the least accountable sector of our society?

It may just be the nonprofit sector; and there appears to be at least two people in Congress who are cooperating in an attempt to reform that situation.

As OMB Watch has reported, Senator Max Baucus and Charles Grassley, the Democratic and Republican leaders respectively of the Senate Finance Committee, have asked the Treasury Secretary to make nonprofit tax filings more informative and transparent.

In a May 29 letter to Treasury Secretary Henry Paulson, Baucus and Grassley single out nonprofit executive compensation, in particular.  “It can be easier to understand how much a Fortune 500 executive is paid than how much a charity is compensating executives due to the shell games that go on in some cases,” they write. They specifically call for updates to Form 990, which nonprofits file annually with the IRS. 

Baucus and Grassley are on to something, and have been for some time.  While nonprofits do much important and beneficial work for society, they are subject to relatively little scrutiny and have relatively light requirements to publicly disclose financial and other types of information.

The problem appears to stem in part from the race over the past two decades or so in this country to privatize governmental functions, from human services to highway construction.  As Robert S. Gilmour and Laura S. Jensen have noted in 1998 in their article, “Reinventing Government Accountability,” in Public Administration Review:

…delegation of public functions outside the bounds of government profoundly challenges traditional notions of accountability, making it all the more difficult, as James Madison put it, to “oblidge” government to “control itself.”

At Harvard’s Hauser Center for Nonprofit Organizations, Elizabeth K. Keating describes the “selective disclosure environment” in which nonprofit organizations operate.  One result has been a series of financial scandals in those sectors.

Among the recent cases are the questionable use by the Red Cross of donor funds and program management by nonprofits after 9/11 and again after Hurricane Katrina, Keating writes.  She also cites the case of New Era Philanthropy, in which hundreds of individuals and organizations were duped into donating money to a Ponzi or pyramid scheme.

The lack of public disclosure requirements also appears to encourage conflicts of interest in nonprofits, such as the case of Oriana House, Inc., a nonprofit that runs the Summit County correctional facility, halfway houses, and other facilities.  In The Nonprofit Quarterly, Rick Cohen writes in “Conflict of Interest, Mischief, Thou Art Afoot,” that the Ohio State Auditor had found that the firm had engaged in hundrds of questionable related-party transactions.  Yet the Oriana executive director fought the Ohio auditor’s access to Oriana’s financial records, claiming nonprofits were exempt from certain kinds of financial disclosure.

Cohen reports that despite its near-total dependence on government funds, the courts found that Oriana was not the equivalent of a public agency and did not have to accede to the auditor’s request for unrestricted access to the records.

Keating points out that the federal Freedom of Information Act is a key element of  a democratic government and of accountability.  But it doesn’t pertain, of course, either to nonprofits or the private sector. 

Yet, even the private sector has more reporting requirements than does the nonprofit sector.  As Keating notes, the Securities and Exchange Commission requires regular disclosures of financial and other significant information by private-sector companies wishing to sell securities to the public. These documents are submitted electronically to the SEC’s EDGAR system and become available to the public. Most firms must then make annual and quarterly filings to be allowed to have their securities traded on the secondary market. 

Currently, nonprofits’ IRS Form 990 filings can be found on the GuideStar website.  Keating suggests the adoption for nonprofits of a substantially enhanced electronic filing system similar to the EDGAR system.  It would seem that government, in particular, needs to beef up, rather  than reduce, its oversight capacity when it comes to nonprofits. 

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One Response to “Nonprofit accountability”

  1. Board of director access to employee thoughts needs to be worked in at some point.

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