Wednesday, June 2, 2010

Challenges to Transparency and Accountability (Part 2)


A friend told a story about coming home from a business trip and finding a horrible odor in the house. He searched the house, checked the plumbing and bathrooms, but could not find the cause. The closer he got to the master bedroom, the stronger the odor. He finally went to sleep in a chair in his library, but still was bothered by the odor. In the morning he called his son, and together they searched for the source of the smell. They found the cause, a dead opossum in the attic. The opossum had burst open as a result of the summer California heat in the attic.

This occurred during a time in the United States when there were a number of scandals rocking the nonprofit sector.

Too often, the stench of the scandal is present in the air, but we just aren’t able to pinpoint its cause, unless it is so obvious, and then the cause we discover, tends to be a symptom of the problem, not the real problem.

Almost invariably, the first thing that happens in these situations is that the State, through its legislature, or regulatory bodies, tries to regulate the sector made up of nonprofit organizations (NPO), nongovernment organizations (NGO), large international NGOs (INGOs), or civil society organizations (CSO). The news media and commentators begin to write and urge governmental action to curb these kinds of scandal, as if the problem is systemic rather than due to some moral or ethical failure on the part of some individual or organization. It is as if some vague sense of accountability would have prevented the problem in the first place.

The proposed statutory scheme or regulation may take the form of prescribing rules that include:

a. Periodic and regular reviews of the tax exempt status of the charity;
b. Revocation of tax exempt status for accommodation to tax shelters;
c. Increased sanctions for self-dealing and for jeopardizing investments;
d. Established standards for government review of conversions of tax-exempt organizations to for profit organizations;
e. Providing states or provincial authorities with the authority to pursue federal actions against exempt organizations for violating federal laws;
f. Improved quality and scope of financial statements and informational tax returns, and which require the signature of the Chief Executive Officer, or equivalent, and other officials of the nonprofit organization, on certifications in which the information in the informational tax return is certified to be accurate, complete, and current under penalty of perjury should that not be the case;
g. Penalties for failure to file informational tax return, or for failure to prepare the form in accordance with the regulations, or for filing the form, requirements for independent audit of the financial statement that include reconciliation with the informational tax return;
h. Required disclosures in the tax return of related party and insider transactions, and the accomplishment of performance goals and activities;
i. Required disclosure of financial statements, including requirements for posting on the organization’s website the application for tax exemption, the determination letter by the tax authorities, and the organization’s financial statements for the last specified number of years;

j. Detailed specification of governance policies, including board make-up, frequency of board meetings, and board member duties; and

k. Prescribed accreditation policies, procedures, and the like.

All because someone smelled a dead opossum in someone’s attic. Incidentally, I am not making this up. These listed regulatory proposals were actually considered by a committee of the United States Senate. While few of them were enacted into law, the danger of this kind of regulatory scheme is still present, perhaps more so today. Indeed, from time-to-time we see elements of these kinds of schemes in countries around the world, especially those in North America and Europe. In many countries, the role of nonprofit, civil society organizations is not well developed, with governments assuming the roles often played by the charity sector in other countries.

The International Journal of Not-for Profit Law, contained an article in its January 2006 issue, The Power Shift and the NGO Credibility Crisis, that described how world politics has undergone a radical and often-overlooked transformation resulting from the unprecedented growth of non-government organizations around the globe. The scope of the power and influence of NGOs or CSOs, which have moved from backstage to center stage in world politics, affect every aspect of international relations and policy making.

INGOs have been a positive force in domestic and international affairs, working to alleviate poverty, protect human rights, preserved the environment, and provide relief and development worldwide. Clearly, many of these NGOs and CSOs, especially the large international NGOs and CSOs, advocate policies and take actions that would be contrary to the stated policies and programs in many countries, thereby resulting in conflicts between the NGOs and the governments of the countries in which they may carry on their most critical programs, such as large scale protests which gain notoriety due to the violence and disruption they cause.

This article continued, pointing out that:

After 9/11, however, the specter of terrorist using NGOs as a front for their operations and some highly publicized cases of abuse have made this a critical issue that needs to be addressed by the NGO community. In addition, the increasing power of NGOs has prompted scholars, governments, and the media to raise questions about the roles and responsibilities of these new global, non-state actors. Fundamental questions include: how many NGOs actually exist, and what are their agendas? Who runs these groups? Who funds them? And, perhaps most significantly, to whom are NGOs accountable, and how and what influence do they actually have on world politics?

As reported in this issue of The International Journal of Not-for-Profit Law, and elsewhere, we are unable to accurately gauge the size and range of this sector. There are a number of reasons for this, including the scope of the types of organizations and activities undertaken, the problem of definition, the lack of attention to this sector, the dramatic growth of the sector in the last 20 years, and the fact that many operate in some level of obscurity, just to name a few.

Data for the number of national NGOs and locally based and operated NGOs around the world is much more difficult to develop, in part because of the definitional problems and the aims and legal structures recognized for CSOs, such as charities, public benefit associations, voluntary associations, etc.

The changes in technology, and especially the technology of communication and new media, have helped transform the world of NGOs. Improvement in information and telecommunications systems, plus the “near-ubiquity” of electronic facsimile machines in the early 1990s, as well as improved use of the Internet through electronic mail, websites, blogs, and social networks have made it possible to transmit documents almost instantaneously to virtually anywhere in the world, to raise money through Internet portals and mobile phone text messaging, and to effect “instant, inexpensive, and almost entirely unregulated flow of information.”

Moreover, as argued in the article in The International Journal of Not-for-Profit Law, “the real story is not the proliferation of NGOs, but how these organizations have effectively networked and mobilized members to reshape world politics.” This may be true, at least with respect to shaping world politics for larger international groups. The networking of charitable organizations can be quite effective in mobilizing NGOs to perform needed services and meet natural disasters and other crises.

But, the real story, it seems to me, is what has been called in the literature, “a crisis of transparency and accountability.” What the authors of the article in The International Journal of Not-for-Profit Law argue is that “NGOs as an international community lack transparency and accountability in terms of finances, agenda, and governance necessary to effectively perform their crucial role in democratic civil society.” And here, it is not just a crisis of transparency and accountability that is limited to the third sector, or even is primarily directed to the third sector. I address this in the next section, “SO, HOW THEN SHALL WE LIVE WITH THESE CHALLENGES?” Nevertheless, for purposes of this post, my primary interest is limited to transparency and accountability in the third sector, which is the one of the most significant and important agenda matters of the International Committee on Fundraising Organizations (ICFO) and its member organizations.

But, even when the sector has an important place in society, many regulatory schemes imposed by governments tend to work against the very purpose for the the existence and work of participants in the sector, or against the effectiveness of particular charities. Administrative expenses increase as these organizations retain the services of accountants, lawyers, and direct mail fundraising or public relations consultants.

While the use of experts external to the organization may be useful and appropriate, as legal requirements and accounting practices and disclosure requirements become more complex, nonprofit organizations find that it is necessary to increase the level of outside legal and accounting services in order to assure compliance with these statutory and regulatory requirements and to insure protection from prosecution or the imposition of sanctions. This simply increases the administrative cost pool for nonprofit organizations, thereby adversely affecting the ratios with the potential of limiting the funds available for mission objectives. Yet, few of these statutory and regulatory schemes address the issue of transparency and accountability.

In the inaugural issue of The International Center for Not-for-Profit Law’s review of Global Trends in NGO Law, the Center provided an overview of five major themes that have emerged with respect to laws affecting NGOs during the period of 2007 – 2009. These include: (1) Restrictions on the formation, operation, and activities of NGOs; (2) Increased restrictions on foreign funding to NGOs (although the Persche v. Finanzamt Lüdenscheid decision of the European Court of Justice has some impact on this point within the European Union); (3) International cooperation laws that place prohibition on NGOs exchanges of knowledge, capacity, and expertise across borders; (4) Implications of government funds to support civil society; and (5) Use of tax incentives to support government policy toward civil society.

Therefore, the thesis with which I have been working is this: The present model for NPO accountability is not a sustainable model if real transparency and accountability to the public and to potential and actual donors is going to occur or obtain.

The model is this: In the first instance, there may be only minimal accountability through the registration process for nonprofit organizations in connection with obtaining either authority to operate and/or tax exempt status, if granted. Even in countries where registration if voluntary, the process of registration may be difficult and time-consuming, and may impose bureaucratic hurdles that can discourage groups from even applying to the register in the first place.

In many countries, some framework laws include provisions requiring NGOs to re-register every year or every other year, giving government officials repeated opportunities to deny disfavored groups the right to operate. Nevertheless, for the most part, this accountability is only to the government which granted the authority to exist, raise funds, and receive a tax exemption status. This is the only requirement for the vast majority of nonprofit or civil society organizations, with no other requirements for any form of accreditation or oversight. The rules in this case are minimal. The only apparent accountability is the accountability to donors or the general public that the tax exempt status has been granted by the government, and some possible disclosure of financial information, which may not be required other than for pragmatic public relations reasons. Most of us would not be consider these minimal disclosures as advancing any idea of transparency or accountability.

However, a model in some countries also provides that some authoritative body, such as the State or an independent monitoring organization, although rarely in existence, establishes rules regarding what type of information must be disclosed. The information required to be disclosed is based on the State’s value set and not on any universally binding moral principles. Secondly, accountability requires disclosure of this specified information to designated individuals or entities, such as the State, the public, or some independent monitoring agency or entity. Third, for the most part, accountability is confined to providing information regarding the process of accounting for funds and whether the NPO complied with certain processes or procedures in accumulating and reporting the funds received and expended.

Except with respect to certain tax related information, there is limited accountability, if any, required of any organization. There may be an exception to this conclusion in the case of NPOs, NGOs, or CSOs which agree to submit themselves to accountability and monitoring pursuant to either a state imposed regime which may not mandatory, or an independent monitoring organization and some form of self regulation, such as that represented by ICFO members.

However, very few charities seek any level of independent accreditation or monitoring, leaving the vast majority of charities without any meaningful monitoring. Moreover, there are few independent or self-regulatory monitoring organizations around the world. As we have discovered in ICFO, the concept of independent monitoring by foundations or similar organizations established for the purpose of promulgating and enforcing Standards of Accountability is for the most part nonexistent in most parts of the world, although there is an emerging interest in this in many countries. Indeed, One World Trust ( has mapped self-regulatory initiatives around the world.

In the United States, the filing requirements for informational tax returns leave many charities exempt from such filing requirements. And in the case of those which are required to file informational tax returns, failure to file these returns in any timely manner, or not at all, may not affect the tax exempt status of the noncompliant organization, and may not subject that charity to any meaningful sanction. This is in the process of some change in light of some regulatory reforms. Nevertheless, I suspect that lack of meaningful sanctions as a result of failure to file informational tax returns in a timely manner may be the case in many countries.

For reasons which I will explain, I do not think that this model is sustainable if the goal is to have transparency and accountability across the sector. The question is whether there is another model which would more adequately address the weaknesses in the current model, or if in the end, we decide that this is as good as it is going to get and we better just learn to live with its limitations.

It may well be that because of the large number of nonprofit organizations and increasing size of the sector worldwide, there will never be an adequate way to monitor transparency and accountability across the sector assuming that these are good goals to obtain. The difficulty of achieving these goals rises to the level of impossibility or near impossibility as the INGOs become larger and more complex in their organizational structures which extend across many countries with subsidiaries and affiliates operating in those countries, either raising funds or actually performing the public benefit purpose for which they are organized.

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