Increased Regulation of Nonprofit Groups Is Unnecessary, New Report Says

An “overwhelming majority” of nonprofit boards are highly involved in monitoring financial and ethical practices at their organizations, and their oversight means that Congress has little reason to increase the federal government’s regulation of charitable institutions, says a new report by scholars at the Johns Hopkins University.

More than 95 percent of nonprofit groups have undergone an independent financial audit within the past two years and have established internal procedures to ensure that their financial accounting is solid, according to the study conducted by the Johns Hopkins Center for Civil Society Studies.

More than 80 percent of the 247 organizations in the study said their board members approve all significant financial transactions and review them for potential violations of conflict-of-interest policies.

The center also found that nearly half of the organizations had adopted new procedures to prevent fraud and improve accountability — or had enhanced existing ones — in the past two years. Most of the groups that made such changes said they did so to improve their effectiveness rather than in response to outside pressure for change.

The center conducted the study in response to proposals by the staff of the Senate Finance Committee, which has spent more than two years investigating financial improprieties at nonprofit groups. In explaining the need for lawmakers to act, Sen. Charles E. Grassley, the Iowa Republican who chairs the committee, has blamed many of the problems uncovered by his staff on poor governance by nonprofit boards.

“In only one of the ethics and accountability areas cited by the staff of the Senate Finance Committee as needing legislatively mandated changes do nonprofit organizations appear to be lagging: the establishment of procedures to prevent retaliation against whistleblowers,” the study concluded.

Lester M. Salamon, director of the center, said the committee’s “image of nonprofit governance does not seem consistent with the data we generated.”

“The question is whether you impose new laws without first figuring out how significant a problem you have,” Mr. Salamon said. “I don’t think that’s how we should legislate. You legislate when there is evidence of significant problems that require legislative solutions. The practice in the field is not anywhere near as heinous as the anecdotes in newspapers seem to imply. And passing new laws to deal with individual improprieties is not good legislation.”

A spokesman for Senator Grassley declined to comment on the Hopkins report.

Ideological Approach

Jeff Krehley, deputy director of the National Committee for Responsive Philanthropy, in Washington, blasted the report as a “methodologically weak research project designed to thwart better public oversight of nonprofit organizations.”

“Let’s assume, for the sake of argument, that Salamon is right; that 85 to 90 percent of nonprofit boards are doing just fine with oversight and accountability,” Mr. Krehley said. “With close to 1 million charities and foundations on file with the IRS in 2004, that leaves up to 150,000 organizations having boards that are not involved in key strategic oversight functions and other significant accountability shortcomings.”

He added: “Asking, ‘Do you have this policy?’ doesn’t tell you anything about if they’re following the policy. You don’t know whether it has ever been enforced. How could you do a survey and find nothing of concern?”

Mr. Salamon, however, pointed to variations in the study’s findings among different sizes and types of nonprofit organization as evidence that his conclusions are valid.

For example, the boards of more than 80 percent of groups with annual budgets larger than $3-million reported that they approve all “significant” financial transactions, compared with 60 percent of boards at groups with budgets smaller than $500,000.

More than 90 percent of the boards of social-service groups review accounting practices, while 70 percent of boards of museums and theaters do so.

He acknowledged that the study was not designed to dig out examples of specific misdeeds at the organizations that participated.

“I can’t say that any survey is going to uncover most instances of wrongdoing, but it can answer the question, ‘Are there reasonable procedures in place to deal with these issues?’ From then on it’s a question of enforcement,” Mr. Salamon said.

“It’s not clear that you can legislate against every instance,” he added. “We have laws against murder, but murders occur. The solution to that is not to pass a new law against murder.”

Copies of the report, “Nonprofit Governance and Accountability” are available free on the Hopkins center’s Web site, at http://www.jhu.edu/listeningpost/news/pdf/comm04.pdf.