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NONPROFIT COMPLIANCE: FRIEND OR FOE?
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NONPROFIT COMPLIANCE: FRIEND OR FOE?

© David Gray, CFP®, CDFA

The December 2004 issue of Money Magazine has an article on the recent Brookings Institution report that found "nearly one out of three respondents expressed little or no confidence in charitable groups and only 11% said they believe charities do a very good job of spending their money wisely." The article went on to say, "Fact is, people have good reason to be wary." Is it any surprise that many wealthy donors are hiring "Giving Advisors" to help them figure out which organizations to trust?

For an entire sector that enjoys great public benefits, including the lack of corporate taxation and the deductibility of donations to support our efforts, we should be shocked that public mistrust of nonprofits is so high. Yet the reactions of many in the nonprofit community to the calls for increased oversight are puzzling. Instead of embracing an opportunity to gain the moral high-ground, and the public trust, many voices are calling for the status quo. While it is true that the vast majority of honest, hardworking and ethical nonprofits are being tainted by the scandals of the few, we all share in the responsibility of earning the public trust.

This is why it seems incredibly shortsighted that we, as an industry, are showing such a tepid and defensive response to looming regulation and oversight. Some are fighting increased regulation because of a belief that overburdened nonprofit administrators cannot handle increased responsibility. This argument is downright horrifying in that it fosters the exact problem that has caused the increased mistrust in the first place: if we cannot accept the burden of proper oversight of our organizations, do we really deserve the special benefits that we have been granted? Are we prepared to tell the public and their chosen legislators that we want all the benefits nonprofit status allows but we really don’t have the time to be any more accountable?

Others argue that there is enough legislation and regulation already, it’s simply a matter of enforcing what is already on the books. Yet the recent legislation in California has been created to address the fact that the rules did not go far enough. Now audits are required for smaller organizations. While this creates a cost to organizations, it also represents a great opportunity.

Instead of fighting the calls for greater transparency and oversight, we should embrace them. We should look to other industries and see how they have taken the lead on compliance issues. As a former compliance officer in the brokerage industry I see many parallels and potential answers to our dilemma. While the Securities and Exchange Commission has oversight and sets regulations in the investment arena, the brokerage business and the brokers themselves work under the umbrella of a Self-Regulated Organization, the National Association of Securities Dealers (NASD).

The essence of organizational compliance in the brokerage industry is achieved through a compliance process that takes three key steps, all of which could be adopted by the nonprofit community. In the process, we could own the issue of compliance and take it out of the hands of legislators. We could hold up our work to show that we deserve the trust of the public, and the tax breaks, and we could convince potential donors that we "get it" when it comes to responsible management.

Step One: Create a Compliance Manual

Step One is to create an Organizational Compliance Manual. This book details each area that regulation covers and requires oversight. The Compliance Manual provides a checklist of those things that must be accomplished each year to ensure that the organization is being managed with appropriate governance and supervision. Sections would cover audit preparation, oversight and dissemination, employment regulations, conflict of interest policy, etc. Different organizations would require different elements. For example, a hospital or health care organization might include a very detailed ethics statement that a small arts organization would omit; a large organization with an endowment would require investment policy and procedures where a small start-up might not.

Step Two: Who is Responsible

Step Two requires naming specific people (positions in the organization) that are responsible for completing each of the tasks in the Compliance Manual. This includes specific staff work, such as filing a state charity registration form by a certain deadline, and board work, such as the approval of the audit by the full board, or the research on comparable positions that justifies an executive salary. Each task is assigned and a methodology created to record that the task has been completed and by whom.

Step Three: Verification

Creating the record of tasks accomplished and by whom is the essence of the compliance process. Because each task or issue is recorded with verifiable information no one has to wonder if things are getting done or who should do them. For example, in the brokerage industry, a field office inspection includes a review of a number of client files and the compliance officer notes what is and what isn’t in the files. The compliance officer’s notes and the signature of that officer, along with the broker, make up part of the compliance record. This way, when a problem arises that involves a regulatory agency, the company can be reasonably certain that they had fairly and adequately obeyed the rules. More importantly, a compliance officer can provide training and suggestions for improvement to ensure that no serious problems arise later. Finally, there is no confusion as to who is responsible for the completion of specific tasks.

Implementation in the Nonprofit Arena

In the nonprofit arena the Compliance process offers numerous training opportunities as well as clear and coherent roles and responsibilities relating to high profile issues such as executive compensation and Board conflicts of interest.

While all this may sound daunting and burdensome to the managers of nonprofits, the reality is that we do much of this work already. We just don’t do it in a way that is consistent and verifiable. A manager helping staff understand the importance of audit procedures or defining the organization’s privacy policy as it relates to donors or constituents is simply a training opportunity. Having the staff acknowledge that they have received the training is simply a way to prove that proper oversight is in place.

At the Board level, an organization would not simply have board members sign a document that says they have disclosed all conflicts of interest, they would go further and show that where such conflicts exist, specific independent research has shown that the conflict is not harming the organization.

How do you do this? I know of a nonprofit that pays over $200,000 in insurance premiums annually to an insurance salesman who sits on their board. Assuming there is a compelling reason not to ask that board member to step down, the Board should seek other bids for insurance coverage. When it is clear that the trustee is providing the best coverage (which could be the cheapest but might be the insurance company with the greatest ability to pay claims) then the conflict might be considered acceptable. The working papers that show the competing bids and the criteria by which the appropriate insurer was chosen become part of the compliance record. While this process may seem burdensome and awkward ("We don’t want to offend Joe after all he’s done for us…") the reality is that until we are prepared to take these steps we can’t expect public trust or support.

Who Governs?

One key piece of the puzzle that is currently missing is the question of who should develop the Compliance Manuals and procedures and who has the credibility to be considered a legitimate Governing body? The priority for many legislators and regulators is to show a dynamic response to a particular scandal instead of focusing on ways to improve the sector as a whole. Rather than leave the solution to this riddle to the regulators, we need to take ownership of the problem and provide the solution ourselves.

As the debate about increased oversight and regulation continues, it would be appropriate for our larger service organizations, such as Independent Sector, to create templates of Compliance Manuals for their constituents. This would not only provide a valued service for members, it could also help ensure that we regulate ourselves much as the brokerage industry does. Perhaps a more broadly based Nonprofit Governance Coalition could be established to oversee and implement flexible templates that could be readily applied to nonprofits of different sizes and types.

Finally, few things would reverse the distrust and skepticism among the public more than being able to show a potential donor a Compliance Manual and the record of work that proves your organization cares about earning the public trust.

Of course, creation of these Compliance Manuals and procedures can be contracted out to consultants with experience in this area (such as yours truly) but the sector would be greatly served by having templates available and a recognized industry oversight body to bring credibility to our efforts. Being able to say that "Our organization complies with all Nonprofit Governance Coalition Level III Compliance Standards" would go a long way to bringing control of the nonprofit sector back to the nonprofit sector.

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David Gray is a Certified Financial Planner®, Certified Divorce Financial Analyst™ and President of Finance Arts, LLC, a consulting firm serving the nonprofit community. He has served as a Compliance Officer in the brokerage industry as well as Executive Director of a mid-sized nonprofit Arts organization. He can be reached at www.FinanceArts.com.



Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER and federally registered CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements.