The whole affair shocked Stephen Howell, CFO of The Nature Conservancy, the largest philanthropic environmental group in the world. In May 2003, a three-part series in the Washington Post put the Conservancy’s operations under a spotlight. While the newspaper didn’t much dispute the charity’s GAAP financial statements or IRS Form 990, it did question other numbers and business practices.
The Post noted, for example, that the disclosure of president and CEO Steven J. McCormick’s 2001 compensation had not broken out lucrative components: a signing bonus of $75,000, a living allowance of $75,000, and a home loan for $1.55 million. Other revelations outraged members, such as the Conservancy’s cozy relations with business interests and willingness to accept limited building on conservation land. True, the newspaper didn’t flatly accuse anyone of breaking laws, and Howell’s integrity was never put on the line. But those who knew him began to wonder if he had something in common with two other CFOs in the news at the time — Andrew Fastow at Enron and Scott Sullivan at WorldCom. Friends started asking him, “Are you going to jail?”
For Howell and The Nature Conservancy, and for scores of other charities, the Post series was a wake-up call. Like its for-profit kin, Nonprofit America is being pressured to be more accountable to its constituents. Donors, taxpayers, regulators, and legislators are demanding greater transparency from nonprofits, in both finances and operations. Moreover, donors increasingly want to know how much value their contributions are creating (see “How Effective Is That Charity?”).
Adding to the pressure is the Sarbanes-Oxley Act of 2002. Although most Sarbox rules apply only to publicly held for-profit firms, the spirit of the law clearly applies to all enterprises. Nonprofit directors drawn from the corporate world are now asking why the law’s reforms shouldn’t apply to nonprofits as well.
An Erosion of Trust
While the calls for nonprofit accountability have grown in volume, they aren’t new. Episodes of fraud, incompetence, and abuse have gripped the charitable sector over the years, and nonprofit executives have taken their lashes in the court of media opinion. “You have a general erosion of trust in institutions that 40 years ago people trusted without question,” says John H. Graham IV, president and CEO of the American Society of Association Executives, in Washington, D.C.
That erosion has been accelerated by high-profile falls from grace. One occurred in 1995, when William Aramony, the former president and CEO of United Way of America, was convicted on numerous charges, including fraud, and subsequently served more than six years in federal prison. More recently, the American Red Cross came under fire when, awash in donations after the 9/11 terrorist attacks, the charity allocated a big chunk ($264 million of $564 million) to reserves for future attacks. Although the practice of adding to future reserves was long-standing, donors unaware of the practice were outraged, and the Red Cross was forced to reverse course.
Another major scandal surfaced in 2002, when the United Way of the National Capital Area (UWNCA) came under investigation. Its former CEO, Oral Suer, stole $497,000 from the charity, whose headquarters are a stone’s throw from Capitol Hill. Washingtonians were appalled.