6 Considerations for Establishing Effective, Responsible Transparency for Non-Profits

Transparency and accountability are expected in the non-profit world and they are often legally required. However, as the transparency revolution grows in our society, it is not enough for compliance-driven transparency to become an acceptable substitute for culturally ingrained, values-driven efforts.

Most financial information is public record and while recent studies show that most people have more confidence in a non-profit than they do in their government, the non-profit community is being looked upon to demonstrate that they are adhering to high ethical standards and putting funds to use efficiently and effectively.

As non-profits, we must establish practices that ensure the highest levels of ethics and integrity at the beginning. Steps must be taken to ensure not only the quantitative value of the non-profit but the qualitative value as well. Accountability and transparency must be as visible and understandable as possible and the norm for non-profits.

There are more complaints to state attorney generals on the lack of transparency or the failure to disclose information than on almost any other issue. When there is a lack of information, there are often accusations of waste, theft, and conspiracy. Most of the time, these accusations are untrue, but it is not something you want to see on your non-profit’s Twitter feed or blog. The chairman of the board of the Carnegie Corporation of New York in 1952 said, “Foundations should operate with glass pockets.” The same is true for every non-profit.

In order to keep your non-profit’s finances in check, follow these steps to instill a culture of transparency and responsibility in the earliest stages.

Step 1: Look at how GuideStar, BBB Wise Giving Alliance, and Charity Navigator define, identify, and promote accountability and transparency.

Learning more about how those websites collect and make available non-profit data can assist you when starting your non-profit. Here is some information about each of these websites:
GuideStar: This database provides contact information, revenue, and expense data for the current year, three years’ worth of IRS form 990, annual reports and board members, board chair and chief executive officer listings. While new non-profits won’t have all of this immediately accessible, it is good to see what information will be immediately available to the public on this site.
BBB Wise Giving Alliance: This website provides reports on charities and non-profits based upon the information that is available. They assign a finding of “Standard Is Met,” “Standard Is Not Met,” or “Unable to Verify” on 20 different standards. The standards deal with Government and Oversight, Measuring Effectiveness, Finances, and Fundraising.
Charity Navigator: This is listed as the world’s largest charity evaluator. It specifically rates two areas, Financial Health, and Accountability & Transparency. They provide these ratings so that social investors and charitable givers can make intelligent giving decisions and so the non-profit sector can improve its performance.

Step 2: Create your non-profit website with accountability and transparency in mind.

One of the most important things you can put on your website is how someone’s donation is actually spent. Prospective donors want to know that their money will be helping the non-profit’s cause – not just pay salaries or expenses. Your website should be informative and thorough when detailing why fundraising is needed and what will be done with it. Include your non-profit’s annual reports and more so that donors can understand where the money is going.

Step 3: Post IRS Form 990 on the non-profit’s website.

IRS Form 990, Return of Organization Exempt From Income Tax, is a public document that must be filed by tax-exempt organizations. If the form is not filed for three years in a row, then the non-profit’s status as tax-exempt will be automatically revoked. Because Form 990 asks if all members of the nonprofit’s governing body have been provided a copy of the form before it was filed and also asks about the process used to review the form, many non-profits choose to implement a policy that requires full board review of the form before it is filed with IRS.

Step 4: Understand the Sarbanes-Oxley Act.

The Sarbanes-Oxley Act does not currently apply to non-profits, with a couple of notable exceptions. It prohibits non-profits and publicly traded companies from retaliating against whistleblowers. In addition, it is a federal crime for non-profits and publicly traded companies to intentionally destroy internal documents. The Sarbanes-Oxley Act presents guidelines that non-profits may want to follow because they represent good management practices. Some of these guidelines include establishing a competent, independent audit committee, rotating auditors every five years, requiring the chief executive officer and the chief financial officer to sign and certify the financial statements and prohibits loans to directors, officers and staff. By creating management practices that are similar to those listed in the Sarbanes-Oxley Act, prospective donors, board members, and volunteers can see how transparency is managed in the non-profit.

Step 5: Clearly define who is accountable for the non-profit’s expenditures by adopting financial management and expense policies.

Boards of directors have a fiduciary duty to ensure that a charitable nonprofit’s assets are used in accordance with the donors’ intent and in support of the non-profit’s mission. Financial policies clarify the roles, authority, and responsibilities for essential financial management decisions and activities.

A conflict of interest policy is one of the most important policies that a non-profit board can adopt. The policy should be in writing and reviewed regularly. It should require those who have or think they have a conflict to disclose it and it should prohibit board members from voting on any matter if there is a conflict. IRS Form 990 asks not only if the non-profit has such a policy, but it also asks about how conflicts are identified and managed.

The Executive Director or the Board of Directors should be responsible for the pre-approval and final approval of travel expenses, including hotels, food, and transportation. By holding everyone to the highest level of accountability when it comes to travel expenses, there will be less of a chance that a staff member feels the expense policy only applied to him or her and not to the board members.

Step 6: Adopt an internal complaint procedure for staff and volunteers, such as a whistleblower policy.

This not only will create a safe way for board members, other staff and volunteers to raise concerns internally, it will also show the non-profit’s commitment to accountability and financial transparency. The non-profit can be aware of and address the concerns as appropriate.

Final Thoughts

Prospective donors are not interested in more numbers, more reports, more information or more press conferences. What Americans want is trustworthy, understandable, relevant information about how a non-profit operates and what is needed to provide the services or products for the greater good. With greater transparency and accountability from the beginning, non-profits can provide just that.