Addressing Not-For-Profit Sector accountability and transparency

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The Australian Third, or Civil Sector, is one of the largest industries in the country. According to a 2010 Productivity Commission (PC) report (see here) it consists currently of 600 000 not-for-profit organizations, of which the Australian Bureau of Statistics considers about 60 000 economically significant (e.g., employing paid staff, or otherwise a candidate for taxation). Over the past decade the sector’s contribution to GDP has doubled and it is currently estimated to be at least 4 percent per annum, i.e., well in excess of $40 billion. Nearly 5 million volunteers add an estimated $15 billion in unpaid work. The Third Sector is a key ingredient of civil society.

The Australian Third Sector is also covered by a pathetic hodgepodge of regulation. In the words of the PC, “the current regulatory framework for the sector is complex, lacks coherence, sufficient transparency, and is costly to NFPs [Not-for-Profits]” (PC 2010, XXIII) yet, the Australia does not have standards of recommended practices for charity accounting such as England or Wales, or New Zealand, or the USA and Western European countries for that matter. Fundraising is de facto unregulated. Essentially, donors and state have little idea what happens to the considerable amount of private or government donations (concessions). That’s not a way to instill public trust and confidence in a sector whose livelihood depends on it.

The problem has long been known and a sizable cottage industry has documented the lack of accountability and transparency of the Third Sector in Australia. Over the last 15 years (starting with the 1995 Industry Commission report) five significant federal inquiries have addressed the regulatory mess that the Third Sector represents, and dozens of talking heads — mostly lawyers, advocates, and bureaucrats — have given their opinion on literally thousands of pages of final and draft reports, thousands of submissions on the draft reports, transcripts of hearings, scoping reports (the latest one, drawing on the PC 2010 report, issued in January 2011, see here.

Apparently, to judge from a clip in the SMH this past weekend, the federal government is now determined to install a national not-for-profit regulator to cut the red tape in the sector: Labor, we learn, “will reportedly put aside $53.8 million over four years in Tuesday’s budget to establish the independent Australian Charities and Not-for-profits Commission from July 1 next year.” (see here)

Welcome news that is on the one hand.  One the other hand, I fear the problem of accountability and transparency of the Not-For-Profit Sector will not be solved this way. If other countries’ history is any guide, it will take some big scandals to focus the government and the sector on what it means to be accountable and transparent.

I see two key problems:

First, few seem to have a good understanding what exactly the purpose of regulatory reform in this area ought to be, and can be. A couple of weeks ago I attended yet another workshop organized by the Australian Centre for Philanthropy and Nonprofit Studies at QUT. It was telling that in the last of two days of sessions, the participants were scrambling to answer what seemed a naive, and maybe was meant to be a devilishly simple, question: why do we need regulation in the first place? It took a while for the – in other countries widely accepted
— answers to come forth: to promote public trust and confidence in the charitable sector, which requires that fundraising is done properly, that money is going to cause, that accountability and transparency are such that donors (private and public) can verify that money will be spend the way NFPs say it would be spent. The problem is, none of these things can be easily regulated. Partially because regulation that tries to ensure these kind of things needs enforcement which is expensive. Very expensive indeed.

Second, few — specifically the dozens of talking heads that dominate the debate currently — seem to have a good understanding of available working models. Much of the focus seems to be on the Anglo-American model but this model — based as it is on obligatory annual (self-) reporting — is known to have its share of problems and will, in any case, take years to be implemented here. What, unfortunately, continues to be ignored in the Australian discussion are the very effective certification agencies that exist in a number of West-European countries such as Germany, the Netherlands, Switzerland, or Austria. In all these countries,
(self-) reporting requirements are way behind those in, say, the England, or the USA. Yet, these certification agencies have been rather successful in generating public trust and confidence in the sector, or at least its nationally working flagships (which albeit representing typically 5 percent of the sectoral firms account for more than 8o percent of assets and revenues. Importantly, most of these certification agencies make due with surprisingly small budgets. Shoe-string budgets indeed of a couple of millions at most of which typically at most a third comes from Public subsidies. Yet another interesting example is the New Zealand Charities Commission which — having been established only in mid-2005 — has within a couple of years managed to establish a Charities Register which has 24/7 up-to-date information on more than 25,500 registered charities (see www.charities.govt.nz) and which is moving towards a model that through its actions (e.g., complaints forms on its website) quickly towards a model that seems to draw on some of the lessons that can be learned from the certification agencies in Europe.

So, while it is commendable that the federal government does something, the way it apparently wants to go about reforming the Not-For-Profit Sector seems ill-advised, wasteful, and predictably ineffective. It is a policy that seems not based on the considerable evidence that is out there on available alternatives, and ultimately insights from economics about the incentive incompatibility of self-report mechanisms.

6 Responses to "Addressing Not-For-Profit Sector accountability and transparency"
  1. The problem with government regulation of not-for-profit organisations in Australia by legislation is well documented, but to state that these organisations are unaccountable is simply not true.
     
    They are accountable by a range of mechanisms – some simple, others complex and expensive.
     
    First, the great majority of not-for-profit organisations in Australia are incorporated as Associations and have members. The voluntary Boards of these organisations are accountable every year via the AGM. Members take strong action against waste and mismanagement.
     
    Second, most of the really large not-for-profit organisations in Australia are substantially government funded. The “contracts” or “service agreements” require detailed acquittals of “inputs, outputs and outcomes” in the kind of detail that no for profit manager would ever agree to. Increasing numbers of the not-for-profit providers of child care services, aged care services, etc, are already subject to strict accreditation regimes.
     
    Third, the engagement of large numbers of volunteers in a great majority of the smaller not-for-profit organisations ensures that there is a strong “social audit” function at work to discipline self-interested insiders. These are the best policemen and women you can have. Wicked things get done in private. Members and volunteers make sure that there is plenty of “sunshine” on the affairs of most not-for-profits.
     
    We need a national registrar who will provide donors and supporters with the basic identification information that stakeholders need. We do not need a new bureaucracy to collect more forms – as if the crooks will self-identify themselves in the information they send in.
     

  2. Andreas, I agree, the opportunity to develop regulation which reflects the realities of the 21st Century demands that the fundamental questions are asked without being constrained by existing models.
    Promoting public trust and confidence is a common task for regulation that is applied to fundraising as well as sending your child to a licensed day care provider or borrowing money from an accredited financial advisor. However, the responsibility for promoting trust and confidence is a shared responsibility which can be greatly facilitated by independent and specialist intermediaries.  Hence the general public’s reliance on respected kitemarks as a proxy for trusted goods and services.
    The potential for using certification for fundraising is considerable – because the highest risks are concentrated in the largest fundraising organisations which should be self-motivated to be transparent and accountable – but would benefit from a specialised certification agency that understands the risks and realities of fundraising. 
    This approach should also be attractive to government because the costs of certification can largely be covered by the large fundraising organisations. This approach can also be applied to other risks for not-for-profit organisations – particularly those providing services to vulnerable groups – such as the child day care example I used above.
    The only note of warning is that the actual standards used by a certification agency have to be co-produced and then supported by fundraising organisations, Government (representing the overall interest of the public), and consumer interest groups. The good news is that there is a lot of useful learning to be captured from fundraising certification systems operating in Europe.

  3. Ted,

    I appreciate what you say; I guess as the Vinnies Qld State Director of Communications and Fundraising you are professionally obliged to some such statement.  And, admittedly, things are not all bleak. And, yes, a national registrar would be a good thing for the reasons that you give: to help us better understand the lay of not-for-profit land. So far so good.

    That said, there is plenty that can be improved in terms of accountability and transparency. One of the major drivers of the current initiatives (PC report, Scoping report, now apparently the fed govt initiative for a national nfp regulator) was, as surely you will recall the Choice Magazine March 2008 issue on charities:

    “3.2 The Choice article, as discussed in  Chapter 1, raised several issues surrounding the operation of charities in Australia, including: a lack of transparency in the way in which public or donated funds are spent; and lack of accountability, despite the fact that Not-For-Profit Organisations  are major providers of services to the public.

    3.3 The survey conducted by Choice found that 81 per cent of respondents did not know what proportion of their charitable donation reached their favoured charity’s beneficiaries, yet 94 per cent considered it important to have access to that information. The survey found wide variability and inconsistency in the way that charities communicate key information to donors. In some cases, such information was not publicly available at all, as some charities did not publish their annual reports or financial accounts.

    3.4 The Choice report also found that  there was no uniform accounting or reporting standards for charities, so even when charities did make available information about how donations were distributed, this information did not necessarily allow a comparison to be made across different entities, because different approaches and definitions may be used. As one respondent put it:

    Charities pluck numbers out of the air for their fundraising costs. There’s no agreement about what constitutes administration costs. Some will say it’s only the people in your fundraising department. Others might include IT, HR, marketing departments … there’s no consistency.” http://www.aph.gov.au/senate/committee/economics_ctte/charities_08/report/c03.pdf

    Certification agencies following one of the ICFO models would dramatically improve consistency of assessment, accountability, and transparency. Certainly for those entities working on a national or multi-state level. As they have done in many a country.

    Would that mean more bureaucracy? On balance definitely not since a seal of approval, apart from giving consumers some efficient guidance, would be a good reason for cutting lots of red tape that currently exists for the simple purpose of fighting fraud, abuse, malfeasance, and questionable mission drift. And all of that for a meager couple of million dollars. Which is what the budget of the relevant ICFO entities is.  

    Me thinkst that is something worth implementing. Or at least considering.

  4. You appear to rely heavily on the Choice Magazine article for your premise – that there is a lack of transparency being demonstrated by not-for-profit organisations. It’s a shakey basis for any kind of serious discussion.

    In the 2008 “Choice Magazine” conducted a survey of large charities and published a list of large charities which showed what was said to be their “annual income from donations, grants and other activities”. Choice reported that Lifeline Community Care and National Heart Foundation did not provide the requested data.

    The problem with the Choice findings is that Choice appeared to have no appreciation of the different corporate structures of several of the organisations reported on. What were reported as the nation’s largest organisations were sometimes state-based organisations with a federated structure and sometimes part of a larger religious body. As a result Choice’s rankings and conclusions were flawed.
    Much of the information sought by Choice was and is available from the web sites of the named organisations, who, in the main, publish their annual reports on-line (see a full list at Appendix C at: http://www.pc.gov.au/__data/assets/pdf_file/0003/89400/sub029.pdf)

     

     

     

     

     

     

     

    Most larger charities already publish full financial accounts and much more on their web sites. Try St Vincent de Paul Society Queensland for an example.

    For the very few people, other than academic researchers who check the financial statements of charities before they support them, and, if transparency is the issue, then the annual reports published by most charities are a much richer source of data than any government regulator.

  5. Ted,

    I re-read your submission to the PC and am not impressed; you simply do not know some of the relevant literature and arguments; they are summarized in my submission on the same occasion:  http://www.pc.gov.au/__data/assets/pdf_file/0004/92857/subdr266.pdf

    (I question, incidentally, the ethics of submitting such a document as a private citizen when you clearly have very vested interest in a particular outcome. Nothing wrong with having vested interests but they should be disclosed.)

    I do understand that you think there is too much red tape out there and your complaints about the uncoordinated, fragmentary, and unnecessarily duplicated data collection efforts of multiple, and often poorly informed, agencies is well taken. I even am in favor of the kind of data collection effort that the current federal government wants to put in place, somehow.

    It is this “somehow” that bothers me because the implementation of this Australian Charities and NFP Commission currently looks like a rather intransparent process.  But more fundamentally, even if some such national regulator is up and running (and the relevant NZ experience indicates that it will take at least 5 years to become half-way operable), it will not be enough. As similar data collection efforts in the USA were not enough.

    The NZ Charity Commission is — for all I can see — moving in interesting ways towards a model that marries a regulator of the kind you guys envision with aspects of what the ICFO certification agencies actually do. The folks in NZ do it through reactions to complaint forms and the court system. In the end, they will end up doing what ICFO certification agencies already do. And do well. See Bekkers (NVSQ 2006 and follow-up work), or — if that’s not good enough — take the fact that many governments in the countries where ICFO entities operate (such as in Germany and the Netherlands and Switzerland) take the seal of approval to substitute for their own quality assurance processes. 

    You argue that a growing number of nonprofit organizations maintain a presence on the web and make regular disclosures about their activities. That’s good (and true to some extent) but also not enough. For one these reports are often simply not very informative. (No surprise there given the incentive incompatibility of self-reporting well-established in the economics literature.)  There is also — as you yourself point out — no harmonized reporting (e.g., regarding what counts as fundraising), making comparisons even within sector segments highly questionable.  Most of all, only donors with deep pockets have the time to understand whether there money goes to cause or not.

    Certification agencies molded after the ICFO templates are a very viable alternative that comes at a ridiculously low price. Certainly compared to the $50 million that are budgeted to understand the lay of nfp land in the years ahead.  I have little doubt that consumers would welcome a seal of approval that ensures them that their money is, with high likelihood, going to cause. 

    Do I rely too heavily on the Choice Magazine article? No. Note that up to here I have not once mentioned it. I am happy to question their methodology, and even results (although I believe that they get the basic sentiments of consumers right). All my arguments above and in my various writings have nothing to do with the Choice Magazine issue; I just reminded you about one of the triggers of the current policy debate. 

    What the Third Sector here ought to avoid is the equivalent of a Grassley Commission inquiry that our colleagues in the USA had to fight off at high cost; I like to believe that it is no coincidence that the very same Senator and his Senate Finance Committee in January 2011 closed the investigation of six ministeries — four of which did not fully comply with the investigation — and asked the ECFA (one of the ICFO members) to lead an independent, national effort to review and provide input on major accountability and policy issues affecting such organizations. As Grassley said, “ECFA has a proven track record of accountability with its member organizations and is uniquely situated to work with representatives form the religious and broader nonprofit community.”  

    Amen.

  6. Les,

    thanks for your comment with which I agree. Specifically with your statement that the actual standards used by a certification agency have to be co-produced and then supported by fundraising organisations, Government (representing the overall interest of the public), and consumer interest groups. The death of the English patient seems to suggest that much (although the English situation was really idiosyncratic.)  

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