Report Calls for Federal Charity Database, Other Changes to Improve Oversight

A new report by a national panel of nonprofit experts urges charities and foundations to make dozens of changes in their operations to strengthen their governance and accountability and to help prevent legal abuses in the nonprofit world. The report comes in response to a request from key members of Congress, who last fall asked for feedback from nonprofit leaders about new rules they are considering to deal with problems they say are widespread in nonprofit organizations.

The 59-page report, which was released last week by a group of more than 100 nonprofit officials put together by Independent Sector, a coalition of about 600 charities and foundations, drew praise from many people in the nonprofit world for its wide-ranging ideas.

It offers suggestions that nonprofit boards and top officials do more to ensure that organizations operate properly, and recommendations for ways to prevent people from gaining improper benefits through their charitable work. In addition, the report recommends that the federal government create a database of financial information about charities and foundations and use revenue from the excise tax private foundations pay on their investment earnings to help step up its oversight of nonprofit groups.

But some critics worry that because the report did not focus on two key areas where lawmakers believe abuse exists — excessive compensation for nonprofit leaders and improper fund-raising practices — members of Congress will be emboldened to propose legislative changes before nonprofit leaders suggest ways to prevent potential problems in those areas.

“This document fails to tackle many issues that are first and foremost in everyone’s mind about accountability in the nonprofit world,” says Jeff Krehely, deputy director of the National Committee on Responsive Philanthropy, a nonprofit watchdog group in Washington. “I’m concerned that foundations and charities are trying to get away too easily.”

More Reports Planned

Officials at Independent Sector — who were asked by the Senate Finance Committee in October to organize a committee to recommend ways to strengthen governance, ethical conduct, and effective practices at nonprofit organizations, and to submit an initial report by February about what they found — say they plan to examine compensation issues and solicitation guidelines in a future report. Those areas, Independent Sector officials say, were too complex and contentious to resolve in the few months they had to complete their initial work.

“The items we have covered in the initial report are not necessarily the most important or urgent ones — but ones on which we thought we may be able to develop consensus,” says Diana Aviv, the group’s president. “The challenge in front of us on a much broader range of issues will be a higher mountain to climb.”

In the report released last week, Independent Sector officials say they tried to cover as many issues as possible raised by the Finance Committee in a discussion document and a Congressional hearing on nonprofit abuses in June. The fundamental concern lawmakers seem to have about nonprofit organizations, Ms. Aviv says, is that donations are not being used for the charitable purposes for which they were intended.

“From that flows everything,” Ms. Aviv says. “Compensation issues, fund-raising practices, financial management, and many of the other issues we’re going to address.”

In a statement, Sen. Charles R. Grassley, Republican of Iowa and chairman of the Senate Finance Committee, said that he appreciates the efforts of Independent Sector and the many nonprofit participants. Until the committee completes its work, he did not want to make any comments about it. But, he said, “it’s clear we need to look at reforms in the nonprofit governance area.”

Clarifying Finances

One of the main themes of the Independent Sector group’s report is financial management — in particular, how transparent charities are about handling their money. Seven of the 21 sections in the report deal directly with financial issues, while many other sections also discuss financial matters.

Aides to the Senate Finance Committee have repeatedly said that one of their first priorities in this legislative session will be to consider ways to crack down on problems at donor-advised funds.

Donor-advised funds — which allow people to donate money to special accounts, claim a charitable deduction on their federal income taxes, and then recommend how the money in the account should be distributed — are subject to a range of abuses, the report says. One such abusive practice is known as “round tripping,” in which a private foundation meets its legal requirement to distribute at least 5 percent of its assets each year by making a grant to a donor-advised fund and then requesting that the donor-advised fund pay that money back to the foundation.

The report suggests several ways to help prevent financial improprieties with donor-advised funds, including a suggestion that donor-advised funds be prohibited from making grants to some types of private foundations.

Whether charities and foundations should be required to get annual financial audits was a lively topic of conversation among people who produced the report, Ms. Aviv says. But the committees that dealt with the subject of financial audits failed to achieve consensus on the issue.

The committee agreed, however, that nonprofit groups must do a better job than in the past of producing accurate, timely tax filings — and they voiced strong support for electronic tax filing and for maintaining existing financial penalties for groups that file their tax returns improperly.

The report also suggests that Congress should provide money to create a federal database of financial information on nonprofit organizations. And the federal government should work more closely with states to pursue improper conduct in the nonprofit world, the report said.

Yearlong Review

The Independent Sector report is the first action in what is expected to be a yearlong review of nonprofit activities.

Late last week, another 25-member Independent Sector panel was scheduled to review the initial Independent Sector findings and to begin considering public comments before submitting their suggestions to the Finance Committee in early March.

The committee is taking comments from the public until February 18. To view the report, or to make comments on it, go to http://www.nonprofitpanel.org.