PART 1—RECOMMENDATIONS FROM THE PANEL ON THE NON-PROFIT SECTOR

The Independent Sector organized the Panel on Nonprofit Sector in October 2004 to respond to the proposals issued last Spring by the Staff of the U.S. Senate Finance Committee. The panel is comprised of 24 nonprofit and philanthropic leaders. The Panel has created an eight-member Expert Advisory Group, a nine-member Citizens Advisory Group, and five working groups to assist provide the Panel with assistance and expertise. The Work Groups have now made a number of recommendations, and the Panel is encouraging public comment.

To improve transparency, the Transparency and Financial Accountability Work Group is recommending that...

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Sign Off by CEO and CFO. The principal executive officer and the principal financial officer would be required to sign the annual Form 990 declaring under penalties of perjury that the signing officer has examined the return, and to the best of the signing officer’s knowledge and belief, the information is true and correct, and complete. It is hard to argue with this recommendation.

Timely Reporting. The IRS should strengthen rules and procedures for granting extensions. We disagree to the extent that this would extend the time for reporting financial information to the public.  Take the various relief organizations that have collected hundreds of millions in relief for the victims of the South Asia earthquake and tsunamis. The public and charity watchdogs want to know how that money was used and how the massive inflow of funds affected administrative expenses and officer salaries and bonuses. As it stands now, significant portions of that information will not be available for at least a year and more likely a year and half. Public companies have accounting systems that permit them to report detailed financial information on a quarterly basis. There is no reason that public charities cannot report similar information on a timely basis annually. There will be those that argue that this will cost money. Those putting that argument forward apparently assume accounting systems in the non-profit context are waste of money. They are wrong.  Non-profits may not generate dividends for shareholders, but they do produce tangible benefits for their stakeholders. There is no reason why they should be less accountable in terms of the  return generated on the public’s investment. We should note that the recommendation (#2) is poorly written and very unclear in stating the recommendations. What  “current provisions” and what is the proposal for extending them further? 

Preparer Penalties. Preparer penalties should be extended to Form 990 returns. The IRS should have the authority to revoke exempt status because of failure to file required tax returns. Electronic filing of Form 990s should be mandatory. It is hard to argue with these recommendations.

Other Recommendations. The Transparency and Financial Accountability Work Group made a number of other minor recommendations, including a call to revise the Form 990, but without specific proposals for change.

Overall Assessment. The Working Groups appear to have deferred the most important improvement to what is referred to Phase II of the project—that is improvement to the accounting rules. Anyone comparing the financial information reported on Form 990 by two organizations often has little confidence as to whether the comparisons are meaningful because of various interpretations over account definitions and allocation rules. The working group seems to believe that fixing this is best left to either the Financial Accounting Standards Board, a newly created standards setting agency for non-profits or some other organization. Why? If Form 990 is going to be the public financial face of an organization, why can’t the IRS and the non-profit community fix it now. Here are several proposals:

More specific rules should be set for allocating executive officer salaries between program activities, fundraising, and general administration.  In our view, the simplest rule that would produce the most meaningful data would be to preclude allocation of certain officer salaries to program activities unless the officer in question had substantial subject-matter expertise and involvement. This would eliminate much of the game playing and inconsistency currently plaguing the system. For example, a museum’s CEO $200,000 salary would be allocated between fundraising and general administration. But the fact that he attended a two-hour meeting about a new exhibit would not result in a portion of his salary being allocated to mission. We would provide an exception in certain cases where there is not a lot of administration. Take for example, the  doctor who is the CEO of a small peered-review journal and spends considerable amounts of his time reviewing articles. Here an allocation might be appropriate.

The 990 could be simplified and better targeted by creating a series of 990s for specific types of organizations (museums, social service agencies, advocacy groups, hospitals, colleges and universities, etc). Each organization would be categorized and assigned a return category. A uniform set of definitions would be established for the accounts of each particular type of organization. While this would mean more forms, it would also mean shorter returns because whole sections that aren’t irrelevant to a particular category of organizations could be eliminated. Many people read the Form 990 online, and the length of the return can be cumbersome.

Relevant non-financial questions should be asked as part of each return. For example, a social services agency might be asked to show the number of clients served, the specific services provided, and any other information that the public should know about the agency.

These sorts of reforms should not be delayed and we certainly shouldn’t have to wait for a new organization to be created. The Independent Sector, working with the IRS and Congress, should just be able to do it now.

In the interest of full disclosure, the author's spouse is a member of the Expert Advisory Group..  The views expressed here are those of the author and should not be attributed to the author's spouse, who had no input into the preparation of this post.

 

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