April 23, 1998 | Read Time: 5 minutes
Ever since Supreme Court Justice Louis Brandeis declared “sunlight” to be the “best disinfectant,” greater openness has been a favorite device for people who want organizations that serve the public to behave better.
Government agencies and large corporations have long had to operate within a web of rules and procedures aimed at making closed-door meetings and hidden agreements impossible. Now, demands for more disclosure are increasingly, and controversially, being directed at charitable groups, especially those that receive government grants or contracts.
Ironically, if those efforts succeed, they may create the appearance of more accountability, while doing relatively little to produce it.
The most contentious example of the growing interest in disclosure by non-profit groups can be found in San Francisco. Earlier this year, a member of the city’s Board of Supervisors proposed an ordinance that would require non-profit groups that received municipal funds to open up their records and meetings to the public (The Chronicle, January 29). In addition, charities with more than $100,000 in grants and contracts would have to include a city-designated trustee on their boards.
San Francisco non-profit groups mounted a vigorous protest, which has delayed action on the measure until at least next month.
Elsewhere, efforts to throw more sunlight on charitable groups are also under way. In Indiana, for example, the State Board of Accounts, which monitors the use of state money, is suing Clarian Health Partners, a non-profit organization that was formed two years ago as a result of the merger of a non-profit hospital with two hospitals affiliated with Indiana University, a public institution.
The transaction gave Clarian more than $300-million in assets that had belonged to the university hospitals. The State Board of Accounts contends that as a result of the transfer in assets, Clarian must hold public meetings and make its records available to state auditors, the press, and others who might want to examine them, as required under Indiana’s Open Door Law and Access to Public Records Act.
Clarian argues that since it is a private group that gets no money from the state, it is not required to comply with the disclosure laws. (The deal calls for it to compensate the university for the lost assets over a 10-year period.) Unless a settlement is reached, the Indiana Supreme Court probably will decide whether the law applies.
Thanks to the wonders of digital technology and the Internet, increased disclosure is about to touch even those non-profit groups that do not get government support. Later this year, if all goes as planned, the Internal Revenue Service will make digital versions of its Form 990 — the tax return that most medium to large non-profit groups are required to file — available to the public. Although anyone can already obtain printed versions of the forms, the availability of those documents in a computer-friendly format is expected to increase substantially the number of journalists, regulators, and other interested people who will examine the financial reports of the nation’s charities.
More than a few leaders in the non-profit world, however, are anxious about the conclusions that will be drawn when that happens.
As is well known to anyone who has ever wrestled with the mountains of data that businesses are required to disclose, numbers rarely speak for themselves. Since non-profit groups typically invest too few resources in preparing their financial reports, unintended inaccuracies and omissions are often a problem. Fuzziness in defini tions and variations in accounting methods also lead different groups to count similar items differently.
Thus, the ability to put salary figures, fund-raising expenses, and other perennially touchy issues in context will be hard, especially for people who are unfamiliar with how charities operate. While a number of efforts to create consumer-friendly methods of reporting charities’ data are under way, the sheer volume and variety of material that is likely to be available when the Forms 990 go “on line” will make careful scrutiny perhaps an impossible challenge.
What’s more, even charities can be dishonest. Non-profit bookkeeping tricks, such as spreading salaries among multiple programs (or organizations), concealing overhead expenses as direct costs, or shifting revenue between fiscal years, are hardly secrets — except with respect to how widely they are practiced.
Advocates of greater disclosure believe that such misconduct will occur less frequently if the chances are greater that it will be detected. But that may not be so. The more emphasis that is placed on financial figures, the stronger the incentive will be for those engaged in suspect practices to hide them. Although “sunlight” may indeed disinfect, it may also drive people into the shadows.
Those people who call upon non-profit groups to be more forthcoming in what they report to the public are, in effect, saying that the trustees of those organizations are not properly monitoring their activities. Likewise, those people who want to impose stricter standards of disclosure on charities that accept government funds are implicitly saying that the public agencies that administer the grants or contracts are failing to supervise them.
Sometimes those judgments are warranted, and public watchfulness is essential to insure that those who should be responsible really are. But if the nation’s charities have reached a state in which much greater vigilance from an information-laden populace is necessary, then it is their governing mechanisms that we should be attending to. Otherwise, we may wind up adopting the forms of accountability without achieving the reality.
Leslie Lenkowsky is professor of philanthropic studies and public policy at the Indiana University Center on Philanthropy and a regular contributor to these pages. His e-mail address is llenkows@ iupui.edu.
