More on non-profits
A panel commissioned by the US Senate Finance Committee has issued a report recommending more governmental oversight and financial disclosure for non-profit charities and foundations. The request for the recommendations followed the uproar when it was disclosed that several charities collected money for victims of the 9/11/01 tragedy, but then spent the money on other endeavors. Criticism regarding this issue lead to the resignation of the president of the Red Cross.
Link to a story on the recommendations in the Indy Star.
This subject gives me the opportunity to address the issues raised by a comment by RiShawn Biddle to this post on charitable trusts: I recognize that charities are meant to benefit the public broadly, and the government (federal, state, and local) has permitted public charities to avoid most taxes that they would otherwise face. I recognize that this gives the public and the government a stake in how these organizations are operated. But I object to the notion that we as citizens should not be able to create and operate institutions that benefit us without extensive governmental involvement and oversight.
Yes there is a lot of fraud, abuse and basic incompetence in the non-profit sector. As someone who has been involved in many non-profit endeavors, I have seen my share. But the government is not the best solution for every problem that confronts us. I believe that there is just as much fraud, abuse and basic incompetence in the government as there is in the non-profit sector. Private parties who fund and create such public charities with their hard earned cash are best positioned to know of the risks and to implement protections. People who devote themselves to the non-profit sector are capable of ferreting out abuses, and implementing solutions, and they are doing that right now.
Another problem I have with the proposal for more federal oversight of non-profits comes from personal experience. Many non-profits are fairly small organizations with very small budgets, sustained only by the willingness of a few individuals to devote their lives to the cause. Increasing governmental oversight typically means more forms, more complicated forms, and an increase in the amount of institutional resources that must be expended on administrative tasks. While a big foundation like Lilly can fairly easily deal with increased administrative overhead, smaller organizations will struggle. A small organization that relies on volunteers to complete tax forms and even to perform audits will be hard pressed to fill those tasks if they become too burdensome.
March 5th, 2005 15:58
“Yes there is a lot of fraud, abuse and basic incompetence in the non-profit sector. As someone who has been involved in many non-profit endeavors, I have seen my share. But the government is not the best solution for every problem that confronts us. I believe that there is just as much fraud, abuse and basic incompetence in the government as there is in the non-profit sector. Private parties who fund and create such public charities with their hard earned cash are best positioned to know of the risks and to implement protections. People who devote themselves to the non-profit sector are capable of ferreting out abuses, and implementing solutions, and they are doing that right now.”
Sounds nice. But in reality, most charitable donors aren’t exactly in the best position to monitor these things. For one, they’re not owners in the way shareholders or sole proprietors are; that essentially means that the donors don’t necessarily have the same rights to access financial data that a shareholder, LLC member, limited partner or other owner would. And having read plenty of 990s in my day, I can tell you that even those reports don’t give as much a clue as to what’s going on.
If you don’t have ownership as the main source of regulation, you then need some other source. Publicity doesn’t necessarily help; private organizations, unlike government, can ignore media scrutiny and still survive unscarred. And don’t give me any of that stuff about “trustees”: like corporate directors, those guys often serve at the pleasure of top management or in order to maximize their prominence in society. In fact, it’s actually worse with trustees than with corporate directors: The latter have to serve owners or the market; a board member who allows fraud to run rampant in a firm will suffer reputation and financial damage. Little of that helps keep trustees vigilant.
I’m no fan of regulation: It’s a mixed sword which can hurt charities in numerous ways. In fact, if I had it my way, I’d completely restructure the way charitable organizations are set up in a manner that would lessen regulation as a whole: There would be a clear title or ownership of sorts, with heirs of the founders or donors getting both voting rights, access to financial statements and the ability to dismiss management at their pleasure. Ownership = accountability and it works better than regulation ever could.
But at the moment, we’re stuck with the current charitable structures in existence. Which means there must be a better way to keep them from defrauding donors and ultimately ruining the desire of people to give to charities — which will lead to even more government intervention i.e. welfare offices and the like. So unless we restructure the whole system to create a more ownership-like system, more government regulation is what we will need.