By PUTNAM BARBER
The revolution in non-profit accountability is afoot, and the public's
trust is in the balance.
Beginning next week, charities will be
required to make their informational tax returns for the last three years
more accessible to the public. In short, they must provide copies of their
tax returns to anyone who requests them in person, and send copies within
30 days to people who request the documents in writing. Posting a copy of
the form on line will satisfy those requirements, so a number of charities
have done so already. More can be expected to offer the information via
the Internet as momentum grows for this new approach to accountability.
Such increased access to information is a positive development.
But as researchers, regulators, journalists, donors, and others start
crunching all the numbers contained in those returns -- and using their
findings to paint a more detailed picture of the way America's charities
do their work -- the non-profit world will face a new and daunting
challenge.
Unfortunately, much of the audience is unprepared to
digest the information it receives. How successfully the non-profit world
rises to this challenge may determine whether it is able to hold on to the
public's trust into the next century.
Part of the problem is the
chasm between how charities actually work and how many citizens perceive
them to operate -- or strongly believe they should operate. Two widespread
misconceptions:
* That good works are mostly done by people who
themselves cheerfully live in self-imposed poverty, drawing little or no
salary.
* That spending money to seek donations implies a moral
defect in either the seeker or the cause.
Charity leaders have
only themselves to blame for those and other misconceptions.
In
the past, many charity leaders failed to educate the public about the
complexities involved in financing voluntary organizations that seek to
improve the public good. Some actively resisted the candor on which
confidence could be built. A few took advantage of the legal loopholes
that made it easy to bar public access to detailed information for
short-term, sometimes personal, gain. Now that significant amounts of
information are about to be widely circulated and used by people with
varied interests and concerns, those errors by charity leaders will come
back to haunt the non-profit world.
Many state attorneys general
and other regulatory agencies have already begun to grapple with some of
the issues raised by the increased information flow. But they and the
leaders of charitable organizations must work harder to provide context,
explanation, and a foundation for realistic interpretation. That is the
only way to avoid the risk that the flood of new and ever more-detailed
data will erode public confidence in the way non-profit organizations go
about their work.
In an unfortunate coincidence, the sudden flow
of new data comes at a time of complicated change in the rules that govern
the way charitable organizations report their finances.
The
American Institute of Certified Public Accountants, which develops the
accounting rules that most charities choose to follow, amended its
standards for non-profit groups last year. The new rules will lead many
organizations to increase sharply the amounts that they report as
fund-raising or administrative expenditures -- even though the way they
conduct their affairs may not have changed at all.
The rule
changes, although intended to limit the gray areas that might have allowed
some organizations to conceal questionable expenses by classifying them as
program services, will invariably create problems in understanding
year-to-year and organization-to-organization comparisons.
What's
more, as the accounting changes take effect, the traditional rules of
thumb used by donors and administrators may become less and less useful.
In addition to the efforts of non-profit leaders, individual
charities must rise to the challenge of helping the general public
understand these complexities. Some groups may want to take the trouble to
restate earlier years' financial reports using the new guidelines.
Spending time to do that may be the only way to document that their
operations have not jumped into unacceptable territory.
More
organizations will probably want to supplement their financial reports and
tax returns with careful explanations of how they have used their funds to
advance their missions and goals. Skill will be needed to create candid
and persuasive explanations of how the accounting rules -- never anyone's
favorite "read" -- require more of their work to be classified as
"administrative" or "fund raising" than in previous years.
Others
must change the ways they operate as well. Managers of United Ways and
other federated campaigns must rethink the rules they employ to determine
eligibility, which sometimes include specific ratios, such as a
requirement that less than 25 per cent or so of overall revenue can be
spent on overhead and fund raising. In the same way, some watchdog groups
will need to consider new ways to express their judgments, and perhaps
even develop wholly new standards. Regulators may need to add explanatory
text to on-line summaries of financial information about registered
charities.
Certainly it will take some time for non-profit leaders
and regulators to arrive at a broad understanding of how the systems for
collecting and publishing data about America's charities will work for the
best in the new wired age. But the process needs to begin now, since much
depends on getting it right. The future of many important non-profit
organizations -- and indeed of public confidence in the non-profit world
as a whole -- may well depend on finding some answers quickly.
Putnam Barber, a regular contributor to these pages, is
president of the Evergreen State Society, in Seattle, which works to
strengthen non-profit groups and civic organizations. His e-mail address
is putnam.barber@tess.org