Transparency in Fund Rasing - Essay Example

Transparency in Fund Raising Introduction Fund raising is one of the noblest initiatives that a person of a group of people can develop in order to help other people in need. The number of charitable institutions has been growing steadily and new groups are being established every day. However, with the growing number of charitable groups are issues surrounding their efficiency and honesty in bringing the solicited funds to the targeted recipients. It has been investigated that there are a number of fundraising groups that have taken advantage of the altruism of many, and that have turned their fundraising activities into a profiteering endeavor. The tendency of some charitable groups to cheat their way into the system is fuelling doubts in the public's minds and prompting some legislators and groups to come up with standards for charity groups in order to promote transparency. The move towards establishing transparency is necessary so as to protect the charitable institutions that are honestly helping people, and to prevent profiteers from taking advantage of the public's generosity. It has been established that almost half of all adults volunteer every year, and 90% of all households donate to charitable institutions. Over $207 billion are solicited each year from individual donors, and $41 billion comes from corporations and foundations (Panel on the Nonprofit Sector, p. 9). Charitable groups also enjoy tax privileges from the government, recognizing that they play a special purpose in the community. Likewise, individuals and corporations also enjoy tax privileges by allowing them to deduct charitable contributions when calculating income taxes. This is a measure implemented by the government to encourage the public to donate to charities (Panel on the Nonprofit Sector, p. 12). Issues Surrounding Fundraising Groups Fundraising groups are important in aiding people or animals in need, and in funding research for diseases. It is also a good venue for the public to show concern for their fellowmen and to support causes that are close to their hearts. Some people think that channeling funds through charitable groups and institutions may be a more effective way of reaching the people in need than if the responsibility to help is left to the government alone. This became apparent in the Katrina disaster, where nonprofit groups and individuals came to offer help way before the government arrived with its disaster response. Despite the good that some charities have done to the world, the reputation of nonprofit groups engaged in fundraising activities is being questioned and the public is looking for more transparency in the accounting and management of these charities. Issues arise from apparent mismanagement of funds, high salaries of officials, and the lack of effectiveness of some of the charities in addressing the needs of the community. Billions of dollars are solicited each year for various charitable institutions, and some of those funds do not reach the recipients they are supposed to aid. There is also the issue of some individuals and groups using names of legitimate charities in order to rake in some of the money intended for good use. Certainly, the nonprofit system is becoming a means of gaining profit for the opportunists. According to a survey by the Brookings Institute, "only 11% of the public thinks that charities do a very good job of spending money wisely and only 19% feels that charities do a very good job of running their programs and services" (American Institute of Philanthropy [AIP]). This reflects the general public's bad perception of most charitable groups. The same study by the AIP reports that compared to the summer prior to the September 11 disaster, the confidence of the public in charities dropped by 10-15% in 2004. There are numerous individuals and groups that see charitable pursuits as a profit-making opportunity. An undercover investigation conducted by the AIP and ABC News describes how easy it is to establish phony charities. The investigation reveals that some people organize fundraising groups to take in huge amounts of money, believing that it would be easy to escape scrutiny if the group will initially use a small percentage of the money for the intended purpose. With the current system, it is relatively easy for hoax organizations to establish a group, create a phone pitch to would-be donors, and escape the scrutiny of public by spending a little of the solicited funds to a stated purpose. A good illustration of how some people take advantage of the altruism of the public is Kids Wish USA founder Michael Manzer, who has been imprisoned for mail fraud and money laundering. His organization promised to grant wished of terminally ill children, but failed to grant even one wish (AIP). The effectiveness of the organization in delivering the services to targeted recipients is another issue surrounding fundraising groups. The American Red Cross, which for years has been trusted by the government and the public to provide effective response to disasters, has suffered from instability in governance (Strom). How the organization performs is an important issue, considering that millions of dollars are solicited each year by these nonprofit groups. In an investigation by the U.S. Senate Finance Committee on anomalies surrounding some charities, the Internal Revenue Service (IRS) revealed several issues they found occurring in the nonprofit sector. These issues include the misuse of charitable entities to benefit the donor, instead of the charity or the public; abusive credit counseling organizations; overstated charitable deductions by donors; inconsistent manner of determining compensation of executives; and limited disclosure on governance (Panel on the Nonprofit Sector, p. 13). Taxation issues abound because of the tax benefits that nonprofits and donors are receiving from the government. The Need for Transparency Millions to billions of dollars are received every year by charitable organizations. In the past, these groups are not required to report their activities and spending to their donors, but the emergence of numerous groups engaging in profit-making schemes have clouded the reputation of all charitable groups and affected the confidence of the public on charities. For the true and honest charities to continue doing their work, they have to be distinguished from the deceitful opportunists. Senator Chuck Grassley of Iowa sees that there have been abuses among some of the charitable institutions and he is working to generally focus on transparency and the management of the board, bringing special attention to self-dealing and high salaries. The senator states that the purpose of a comprehensive compliance system for soliciting organizations is to create a balance between reform in the system and promoting charitable giving among the general public. At the same time, the senator believes that legislation should not become a burden to legitimate nonprofit organizations wanting to do good to the community. The Panel on the Nonprofit Sector believes that the regulation should be responsive to the diversity of the system, or this may present operational difficulties to the charities, causing them to possibly curtail or cease charitable activities entirely (p.21-22). The American Institute of Philanthropy has been active in providing the public with ratings of fundraising groups so as to help the public scrutinize and determine which groups are doing well in providing promised services. This is helpful to people who intend to donate money for a good cause, but are unsure of which charitable group to choose. However, it is unlikely that everyone knows that such a resource exists, and these unawares become the probable victims of profiteering organizations. A move towards transparency is seen as the only way for the public to truly assess the different nonprofit organizations and to determine which organizations are honestly pursuing their stated missions. Craig Causer reports that more and more nonprofit organizations are adopting transparency in order to earn the confidence of the public. He listed several groups that are now more willing to disclose financial statements documenting how much money has been received and to what purpose that money was used. The Panel on the Nonprofit Sector also states that several nonprofit organizations and watchdogs are working diligently with the U.S. Finance Committee to improve systems of governance and accountability (p. 14). The Council of Better Business Bureau asserts that the transparency in soliciting organizations will not only ensure that the funds received will be used for the intended purpose, but will also inspire public confidence and increase public interest in philanthropic endeavors. The decision by legislators and nonprofits to come up with standards should be a major step in improving the nonprofit sector. Standards for Charities A number of charity watchdog groups and other individual and professional organizations, including the American Institute of Philanthropy, BBB Wise Giving Alliance, Charity Navigator, and MinistryWatch, have developed standards that they think should be followed (Independent Sector). These guidelines are seen as necessary to ensure that charitable groups are not using their name and stated purpose as a way to solicit money for personal financial gain. The Independent Sector believes that these guidelines would "help board members, staff and volunteers demonstrate their commitment to practice that is responsible, accountable, and ethical, and provide benchmarks to determine how well an organization is fulfilling its responsibility to its contributors and the general public." It should be noted that the recommended guidelines developed by the aforementioned organizations are intended to cover fundraising organizations that solicit from the public and receive tax exemptions under section 501(c)(3) of the Internal Revenue Code, and do not cover private foundations that do not solicit funds from the public (BBB Wise Giving Alliance). The foremost issue in fund raising transparency is the manner in which the organizations spend the money they solicit. The transparency in the spending activities of charities is necessary to ensure that every nonprofit group channels the funds in an honest and prudent manner, in accordance to the mission of the group. The BBB Wise Giving Alliance estimates that at least 65% of the total expenses of charitable organizations should be allocated to program activities, and that fundraising expenses should not exceed 35% of solicited funds. This is close to the figures recommendation made by the Maryland Association of Nonprofits, which is pushing for a 3-to-1 fundraising efficiency ratio as a standard for charitable organizations. This means that for every $1 spent on fundraising activities, at least $3 should be raised (Causer). Similar recommendation has also been made by the AIP with regards to the amount of money spent for fundraising activities. In relation to the spending activities of the nonprofit organization, it is also recommended that annual reports be made available by the nonprofits, according to acceptable accounting practices. Such financial statements has to include such items as salaries, travel, and other expenses of the group, as well as a statement of the percentage allocated to the programs, the fund raising activities, and the administrative functions (BBB Wise Giving Alliance). The AIP suggests that such financial statements be required for charities that receive $250,000 or more from solicitation. The group also recommends that nonprofits be required to acquire the services of outside accountant to audit their books and to ensure that appropriate internal controls are well in place. Taxation is another issue that attracts the attention of the government. Because of the tax privileges that accompany charitable activities and charitable donations, some people use charities to gain undue tax advantage. The Panel on the Nonprofit Sector recommends to Congress that it should give the IRS additional resources to focus on the nonprofit sector. The Panel also suggests some changes in the filing of Form 990, the annual information return submitted to the IRS, to ensure an accurate, detailed, timely, consistent and more efficient reporting system (p. 24-27). Standards for governance and oversight is another issue that need to be established to ensure that the governing body of the charitable institution is "active, independent and free of self-dealing" (BBB Wise Giving Alliance). There have been issues arising from sound governance of charitable groups, in particular, the board that oversees programs and operations. The BBB recommends there should be regular appraisals of performance of the CEOs and of the operations of the charity, including, fundraising activities, approval of the budget, set up of conflict of interest policies, and establishment of accounting practices. The BBB also asserts that nonprofit organizations be evaluated with regards to their effectiveness in implementing their stated purpose and achieving their missions. This would entail the establishment of a board policy to assess the performance of the charity and to determine programs for the group. It is also recommended that charitable organizations be ready to provide statement of their activities and accomplishments as measured against their expenses declared in their financial statements (AIP). In order to maintain transparency of the charities, they should also commit to providing documents and statements for the public. The BBB suggests that regulators need to require solicitations and informational materials to be accurate, truthful and not in any way, misleading. The charitable groups also have to clearly disclose how they benefit from the sale of products or services, if ever the solicitations are a result of promotional activities. In the same manner, the AIP recommends that charities disclose complete audits and tax filings, including those documents and statements that belong to their subsidiaries. It has been observed that some charities use their subsidiaries to hide some anomalies. This recommendation is important because currently, there are no federal laws requiring charitable groups to submit audits, except for those generating $500,000 or more in federal grants (Panel on the Nonprofit Sector, p. 35). The Panel on the Nonprofit Sector recommends that charities keep the public well informed about their programs and financial spending through annual reports, their websites and other means of information dissemination (p. 37). Such documents should not only inform about the programs and financial activities of the group, but should address the privacy concerns of donors as well (BBB Wise Giving Alliance). The AIP also believes that the nonprofit system will function well if a governing body similar to the Securities and Exchange Commission for businesses and companies would regulate nonprofit groups. This would be essential in achieving improvements in the system, as the regulating body will focus on activities of nonprofits only. This would also create a more efficient agency that will formulate a single set of regulations for all nonprofits, which at present time, are complying with different filing requirements from around 40 states. This concentrated effort should also result in more time and resources to crack down on charity abusers (AIP). In cases where there are anomalies discovered within a charitable organization, it is necessary that witnesses to the crimes be protected so that a thorough and fair investigation can ensue. That is why the AIP recommends to legislators that protection for whistleblowers be established, and that mandated employee confidentiality to deter whistleblowers from reporting anomalies be prohibited. The AIP is also concerned about the fact that religious organizations do not fall under the same category as the secular groups. It believes that this could prompt dishonest individuals to form religious organizations in order to escape the transparency issue. It is deemed necessary that religious groups adhere to the same accountability as other charities in order to preserve the integrity of religious institutions. In addition, there may be unscrupulous religious leaders who are currently using their groups for profit-making schemes. In such a case, regulatory standards need to be established. Conclusion The declining confidence of the public on charitable institutions is prompting government and nonprofits as well to act together and establish standards that will promote transparency of nonprofits. These standards cover issues including the spending of solicited funds, tax exemptions for the charities and tax deductions for donors, availability of informational materials, and effectiveness of the programs and the charitable organizations as a whole. With the current system, there are dishonest individuals and groups that enrich themselves by setting up charitable groups, and keeping the solicited funds for their own benefit. Aside from dishonest opportunists, the governance and effectiveness of legitimate organizations are becoming questionable as well. Because of the lack of transparency and set of rules from the government, the honest and hard-working nonprofit organizations are affected by the negative reputation of some dishonest groups. There are watchdogs that aid the public in determining the most effective and efficient charitable organizations, but their efforts are not enough to prevent the formation of charitable hoaxes and to punish offenders. It is only with a clearly stated set of rules that nonprofits and the public can realize changes in the system and revive enthusiasm and interest in philanthropic endeavors. It is to this end that the Senate Finance Committee is working with nonprofit organizations and watchdogs to establish standards that will ensure reform in the nonprofit sector, and at the same time, encourage the public to participate in charitable activities. Works Cited American Institute of Philanthropy. "The Road to Regaining Trust in the Nonprofit Sector: 10 Essential Reforms." Charity Rating Guide & Watchdog Report. Dec. 2004. 15 Dec. 2005 . ---. "Undercover Investigation Reveals How Easy It Is to Set Up Phony Charity." Watchdog Report. Apr. 2004. 15 Dec. 2005 . BBB Wise Giving Alliance. "BBB Wise Giving Alliance Standards for Charity Accountability." Give.org. 2003. 14 Dec. 2005 . Causer, Craig. "Special Report: Nonprofits Building Trust Through Transparency." The NonProfit Times. 1 Nov. 2004. 15 Dec. 2005 . Council of Better Business Bureaus, Inc. "Previous Standards: CBBB Standards for Charitable Solicitations." Give.org. 1982. 14 Dec. 2005 . Grassley, Chuck. Proc. 2005 Independent Sector Annual Conf., 24 Oct. 2005. 14 Dec. 2005 . Independent Sector. "Compendium of Standards, Codes, and Principles of Nonprofit and Philanthropic Organizations." 2004. 15 Dec. 2005 . Panel on the Nonprofit Sector. "Strengthening Transparency, Governance, Accountability of Charitable Organizations." A Final Report to Congress and the Nonprofit Sector. June 2005. 15 Dec. 2005 . Strom, Stephanie. "President of Red Cross Resigns; Board Woes, Not Katrina, Cited." The New York Times. 14 Dec. 2005. 15 Dec. 2005 . Read More