Article Archives >> Lead Stories >> February 16-28, 2005

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Independent Sector Seeks Comments on Ideas
To Strengthen Governance and Accountability
Work Groups and Expert Advisory Group offer comments
on draft proposals of Senate Finance Committee

The Independent Sector’s Panel on the Nonprofit Sector has received a series of comments from five Work Groups and its Expert Advisory Panel “to inform its recommendations to the Senate Finance Committee for strengthening the governance, ethical conduct, and accountability of the charitable sector.”

The recommendations cover 21 specific areas and fall into four broad categories: improving transparency and financial management; improving government oversight and enforcement; improving governance and self-regulation; and compliance requirements for small organizations.

The recommendations have been published on the Independent Sector’s website and the organization is seeking public comments through Friday, February 18. The Work Groups and the Experts do not always agree. The Panel itself, composed of 24 national leaders of the philanthropic community, will hold a series of “town meetings” across the country during March and April and hopes to have a final report by late spring. The Senate Finance Committee issued its white paper report last June. (See Ready Reference Page “Senate Committee White Paper Proposes Vast Expansion of Federal Power Over Charities.”)

On issues relating to the Form 990 tax information return, the Work Group recommended requiring certification by both the chief executive and chief financial officers of a charity, requiring electronic filing by all charities as soon as possible, enforcement of existing penalties for inaccurate or incomplete returns, and a one-page filing requirement for those too small to file a Form 990 or Form 9990-EZ.

The Work Group recommended that all public charities with gross revenues of more than $2 million and every private foundation with assets of more than $10 million obtain an audit by an independent certified public accountant, and require the audited financial statement to be filed with the Form 990 and made available for public inspection. In addition, “Congress should provide financial support for a publicly accessible database of current Form 990 series documents and accompanying financial statements.”

The Work Group recommended greater penalties for self-dealing by private foundation insiders but only if there is also increased authority for abatement.

Donor Advised Funds

The recommendations on donor advised funds were among the most extensive. The Work Group first recommended a statutory definition of a donor advised fund, which could exclude funds for which a majority of advisors were appointed by a public charity or by a governmental entity. It recommended disclosure of the aggregate value of donor advised funds on the Form 990 returns of charities holding such funds. It recommended anti-abuse rules to target the potential for “asset parking” where no funds are distributed for long periods of time, and for “round-tripping” where funds are granted to private foundations and back again. It did not agree with the Senate Finance Committee that there should be a minimum distribution requirement from each fund every year.

The Work Group agreed with requiring donors to certify that they receive no private benefit from any grant and prohibiting payment of expenses for donor/advisors and grants to them or related parties. It also had “no objection” to the Senate Committee recommendation that donor-advised funds could be used to satisfy donors’ binding pledges so long as the donor receives no substantial benefit other than the satisfaction of the pledge in return. It is generally understood now that a donor may not use a donor-advised fund to satisfy a personal pledge.

Work Group members did not agree whether states should be given more power to enforce federal rules relating to charities, while the experts recommended that states incorporate federal tax standards such as the excess benefits tax rules into state law.

The Work Group recommended against changing the standard for imposing excise taxes on foundation managers from knowing or willful violation of the rules to a “should have known” standard. There is no indication that changing the standard “will have any positive effect on preventing wrongful actions from occurring,” the Group said.

The Work Group recommended providing states with notice of proposed actions against charities, not just final actions, so that states could initiate their own actions where appropriate. It recommended disclosure of closing agreements with taxpayers, whether or not the names of the parties were revealed. The Expert Advisory Group said revealing names could deter resolution of some disputes.

Voluntary Self-Regulation

The Group “strongly encourages nonprofit umbrella organizations to create meaningful, long-term, voluntary self-regulation of their own members.” “The public expects a higher ethical standard from the charitable sector than from other sectors — and rightly so,” it said. The recommendations did not mention government financial support for such efforts, although the Senate Committee had suggested the possibility of an appropriation.

It recommended that all organizations establish whistleblower policies to encourage individuals to come forward with creditable information on illegal or unethical practices and protect the whistleblowers from retaliation.

It recommended establishment of a conflicts of interest policy by each charity and a requirement for charities to report on their Form 990 tax returns whether or not they have such a policy. It also recommended creation of an audit committee along the lines of Sarbanes-Oxley requirements. (See Ready Reference Page “Charities Consider Role of Audit Committee”.)

For small organizations, it recommended that they be “held to the same standards of accountability and ethical conduct, but methods for demonstrating compliance should be commensurate with the size and scale of the organization.” It did not define the line between large and small.

YOU NEED TO KNOW

There will be a lot more debate before final rules may be adopted as statutory requirements. Hopefully, careful study of real problems will limit the likelihood that Congress will go crazy with harsh remedies for problems that do not exist.

One of the most striking sentences in the entire report was the comment that “the public expects a higher ethical standard from the charitable sector than from other sectors — and rightly so.” That seems to be a tremendous burden to accept for the sector so blithely. Of course the public has a right to expect high ethical standards, but why shouldn’t we expect equally high ethical standards from other sectors as well? No sector has a monopoly on either virtue or vice.

Article Archives >> Lead Stories >> February 16-28, 2005