Inside Philanthropy

A blog on philanthropy and nonprofit news and issues. A publication of Philanthropy Journal.

March 1, 2007

Can nonprofits police themselves?

The charitable marketplace in the U.S. is the focus of a critical debate about the extent to which voluntary actions and organizations should be regulated.

The debate is critical because it involves two values that are fundamental to our democracy but can create tension in how they are put into practice -- the rule of law and the freedom of individuals to voluntarily give their own time and resources to address social problems, often through nonprofit organizations and foundations.

Whether intentional or not, nonprofits and individual givers may run afoul of laws and regulations designed to make sure the charitable marketplace operates with an even hand.

Scandal and excess on the part of some nonprofits, foundations and donors have triggered widespread review by regulators and lawmakers of the charitable marketplace and the laws and rules governing how it works.

Powerful trade groups like Independent Sector argue that nonprofits can police themselves by voluntarily embracing and complying with a detailed set of standards on ethics, governance, legal compliance, public disclosure, financial oversight and fundraising.

Just this week, the Panel on the Nonprofit Sector posted on its website a second draft of “Principles for Effective Practice” and invited nonprofits to comment on those principles through March 30.

Also this week, The New York Times reported that a new study by the IRS, the largest ever by its exempt-organizations division, had found flaws in the way 600 charities and foundations reported payments to executives and other employees.

As a result of the study, 600 charities and foundations have had to file amended tax forms, and the IRS also asked 40 individuals to pay a total of $20 million in excise taxes as a penalty because the agency had determined nonprofit executives were paid excessively.

The IRS told the Times it also is looking into loans made to insiders at charities and foundations.

The voluntary sector plays a critical role in a democratic society, and nonprofits need to do a better job keeping their own house in order.

Clearer standards, greater peer pressure and better professional training and education can go a long way to helping the charitable marketplace police itself and maintain the independence that is critical to the role it plays in society.

But that marketplace also needs stronger laws, regulations and policing to help ensure that individuals and organizations transacting charitable business operate in the open and with fairness.

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