Thursday, November 7, 2013

Some Reactions to the Reactions to my Op-ed in the Chronicle of Philanthropy

I recently wrote an Opinion piece in the Chronicle of Philanthropy warning the nonprofit sector of the potential for a growing rift between nonprofit insiders and donors when it comes to financial accountability.  The gist of the piece was that while donors are very concerned about where their money goes, nonprofits seem to be spending more effort convincing donors not to pay attention to summary financial measures than they are in providing and highlighting more detailed financial information.  Here are my thoughts on some of the reactions.
  1. Most importantly, I am once again amazed at the civility and good nature of those in nonprofit work.  It is fair to say that most of those who have commented on or otherwise written about my piece disagree with me.  I am not surprised by this, of course, given the message and the audience.  What I find notable is that the nonprofit sector may be the one last place of American discourse where civility reigns and people are able to disagree without being disagreeable.
  2. A common criticism of my view is that in order for nonprofits to promote greater financial transparency, solidify internal controls, and make use of external review, they need to expend resources and these resources would require "overhead" expenditures.  Thus, my arguments really favor those promoting the "Overhead Myth" campaign.  (An example is this Op-ed in the Chronicle of Philanthropy.)  Here is the problem with that argument.  The costs of setting up basic internal controls are minuscule.  The costs of making financial information in the Statement of Function Expenses (already compiled for each organization's Form 990) are close to zero.  The costs of external review, while not trivial, are hardly the problem when it comes to the overhead debate.  External accountants routinely offer discounted, even pro bono, services to nonprofits.  The organizations facing criticism for spending large amounts (sometimes 40% or more) of their budget on fundraising and administration are not spending that on accounting services – the common culprits for high overhead are administrative pay, advertising, consulting, fundraising, and travel.  (Daniel Borochoff makes a similar point in the comments to the previously mentioned Op-ed.)
  3. Many have argued that the nonprofit sector is already very transparent because they file and make public their 990s which include substantial financial information.  (An example is this Op-ed in the Chronicle of Philanthropy.)  Perhaps I have high standards, but I don't think the fact that nonprofits follow the law, which requires filing and making 990s available, is sufficient effort to be considered highly transparent.  As I have argued before, an organization that wants to offer superior transparency should not just make tax filings available but also put the information together in a meaningful way.  This does not mean only giving a simple pie chart of the three categories of expenses (program, fundraising, administrative), but moving beyond that by offering a detailed breakdown of which types of expenses these are (advertising, consulting fees, salaries, postage, etc.).  This information is already on financial filings; all organizations need to do is make it salient to donors by featuring it prominently on their webpages or annual reports.  I have yet to see an organization that features this information prominently, and I am not sure why.

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