COMMENTARY
Nonprofits must boost accountability
By Hugh R. Jones
Public demands for institutional accountability have swept through all major segments of our society: government, the for-profit sector, our religious sector and the media.
The nonprofit sector is no exception. Confidence in nonprofit organizations is at the lowest level in two decades and one-third of Americans 57 or older have less confidence in nonprofits over the last two years, according to a September 2002 survey by Epsilon, a major fund-raising company.
The level of financial support for our nation's public charities has slipped. Well-publicized scandals involving many of America's most trusted charitable organizations may be a substantial contributor to this lack of confidence.
Now, there is growing pressure by federal and state regulators, donors, funders, the media and other stakeholders for nonprofits to voluntarily adopt, or adopt by legislative fiat, many of the reforms that Congress implemented in the Sarbanes-Oxley Act of 2002 for for-profit, publicly traded corporations.
That law requires greater accountability for financial statements by chief executives and chief financial officers, and it prohibits auditors from simultaneously providing consulting services to the companies they are auditing. It has required independent audit committees of the boards of directors, and establishes an independent, nongovernmental board to oversee audits of publicly traded companies.
The primary source of accountability for nonprofit institutions, by contrast, is the board members themselves. They have statutorily imposed duties under Hawai'i's Revised Model Nonprofit Corporation Act. Under this law, a director has the duty to act in good faith.
Although the Internal Revenue Service has regulatory authority over tax-exempt nonprofits, in practice the IRS examines only a small fraction of the nation's 1.5 million exempt organizations. The bulk of oversight over the nonprofit sector is left to the states.
In Hawai'i, most oversight of nonprofit organizations is provided by the attorney general's office. The number of complaints to the office regarding public charities has mushroomed, largely resulting from greater public awareness of the attorney general's oversight authority that came from the Kamehameha School's controversy and resulting reforms. Unfortunately, the attorney general has no funding that is dedicated specifically to nonprofit oversight.
The New York attorney general has sought to impose Sarbanes-Oxley-type reforms upon the nonprofit sector. But a recent national study by Kintera, which provides technology support to nonprofits, found that 81 percent of nonprofit organizations have seen no change in their level of financial accountability following the accounting scandals that have swept the for-profit sector.
It is more than likely that efforts to legislate these reforms will be eclipsed by their voluntary adoption. Why? Major funders and donors will make choices based on the adoption of best-practices policies.
What are the minimum best practices that nonprofits should adopt?
Board responsibilities
• Each nonprofit's board should engage in planning activities necessary to determine the organization's mission, define specific goals and objectives and evaluate the success of the organization's programs.
• It should establish policies for the effective management of the organization.
• The board should annually approve the organization's budget and periodically assess the organization's financial performance.
• The full board or a designated committee should hire the executive director, set the executive's compensation, and evaluate the executive's performance at least once a year.
• The organization should have written policies that address attendance and participation of board members at meetings and include a process for noncompliance.
Conflict-of-interest policy
• A nonprofit should have a written conflict-of-interest policy applicable to individuals with significant independent decision making authority regarding the resources of the organization.
Financial accountability
• A nonprofit should operate in accordance with its board-approved annual budget.
• It should create and maintain financial reports on a timely basis that accurately reflect the financial activity of the organization.
• If its annual revenue exceeds $300,000, a nonprofit should subject its financial reports to independent audit.
• Employees should be provided with a confidential means to report suspected financial impropriety and misuse of resources.
• Written policies adequate for the size and complexity of its organization should govern the investment of assets, internal-control procedures, purchasing policies and unrestricted net assets.
Legal compliance
• A nonprofit should be aware of and comply with all federal, state and local laws.
Openness
• A nonprofit should make available annually to the public accurate information about its mission, program activities, board of directors, management staff and basic audited (if applicable) financial data.
• At least one staff member should be responsible to ensure that the organization is in compliance with federal and state laws that require the disclosure of information to the public.
Fund raising
• A nonprofit's fund-raising costs should be reasonable.
• Solicitations and promotional materials should be truthful, clearly identifying the organization, mission and intended use of the solicited money.
Donor relations
• A nonprofit should respect the privacy of its donors and safeguard the confidentiality of information.
The adoption of these minimum best practices, and other reforms, may help to restore public confidence in our nonprofit institutions.
Hugh R. Jones is a supervising deputy state attorney general. He wrote this article in his personal capacity.
