Then came The Nature Conservancy revelations, which angered politicians like Sen. Chuck Grassley (R-Iowa). “People should have confidence that when they write a check for charity, the money will help the needy, not the greedy,” stated Grassley last year. Grassley, who is chairman of the Senate Finance Committee, is leading a crusade to rein in excessive tax write-offs and improve nonprofit oversight.
Scandals aside, three other factors are drawing attention to the nonprofit sector:
Mushrooming growth. In the last five years, according to the Urban Institute, the ranks of registered nonprofits have swelled from 1.2 million to 1.4 million, up 17 percent. Meanwhile, revenues have soared from $1.4 trillion to $2.1 trillion, up 50 percent, and assets have rocketed from $2.1 trillion to $4.1 trillion, up 95 percent. An increase in service revenue and the ramping up of family foundations account for much of the growth. The money alone, inevitably, creates suspicion.
Tax-avoidance issues. The Internal Revenue Service loses millions to write-offs stemming from the sector’s tax-exempt status. IRS commissioner Mark Everson pointed out in an April Senate hearing that one of the IRS’s four five-year objectives is to deter abuse within the tax-exempt sector and to close at least a portion of what he calls the “tax gap.” The “gap,” at more than $300 billion for all taxpayers, is the difference between taxes owed and taxes actually paid.
The rise of watchdog groups. The public’s appetite for open-book management has greatly increased, in part because of the Internet. Watchdog groups like BBB Wise Giving Alliance and GuideStar load their Websites with financial documents and research reports. GuideStar offers downloads of IRS Form 990s (the annual information returns) for some 350,000 nonprofits; more than 20,000 people visit its site each day. The alliance issues reports on 500 nonprofits, and visitors to its Website downloaded a half-million of them in the six weeks following the devastating tsunami in December 2004.
Obviously, the time has passed when outsiders took for granted the good intentions of nonprofit CFOs and audit committees. Grassley, Everson, and others who speak from bully pulpits in Washington want finance officers to install better controls, produce more-extensive audited documents, and give much more performance information to the board and the public.
The people who police charities from state capitals want much the same thing. “This is turning into a cottage industry for attorneys general,” says Thomas McLaughlin, senior manager for Grant Thornton’s not-for-profit practice. During last year’s state legislative sessions, legislation was proposed in 19 states to tighten up regulation of nonprofits, according to Independent Sector, a nonprofit think-tank-cum-trade-group based in Washington, D.C. So far this year, 24 such bills have been introduced in 15 states, according to the National Council of Nonprofit Associations.
Wrong Way at United Way
Few cases provide better evidence that nonprofits need closer oversight than the UWNCA fraud. A forensic audit in 2003 confirmed that longtime CEO Suer, who retired at the end of 2001, had loaded up on unreimbursed advances, questionable vacation and sick-leave cash payments, and excess deferred pay. His wrongdoing dated as far back as 1976.