Should the Government keep the ACNC? And if not, what should it put in its stead?

In the run-up to the election, Tony Abbott made it clear that a government led by him would abolish the Australian Charities and Not-for-Profits Commission (ACNC) and thus undo one of the Gillard Government’s signature projects. Apparently that is about to happen in at least a couple of ways. In a recent speech to directors of not-for-profits, Federal Social Services Minister Kevin Andrews announced that the dismantling of the ACNC was imminent and that in its stead a National Centre for Excellence would be installed designed to be “a fount of both innovation and advocacy”.

“We’ll abolish the Australian Charities and Not-for-Profits Commission which in the view of this Government imposes an unnecessary and ponderous compliance burden on the sector,” Andrews is reported to have said in his speech. In line with an earlier speech, he is reported to also have said, “We want to transfer the focus from coercive compliance and regulation to collaborative education, training and development.” How nice.

More recently, ACNC staff was apparently also offered voluntary redundancies, a not too subtle attempt to destabilize an entity which is still in the process of being built; an attempt though that might be necessary since abolishing the ACNC requires an Act of Parliament. In the most recent development, the Australian Tax Office is reported to plan taking over the regulatory and classificatory functions of the ACNC, another not too subtle signal that the Abbott Government is determined to unwind the ACNC.

Predictably, Federal Labor and Greens were not pleased. Shadow Assistant Treasurer Andrew Leigh, for example, argued that the Abbott Government should keep the ACNC be it only for the fact that according to one survey four out of every five “leaders” of the Third Sector were in favor of keeping it; see also here for another piece of his mind.

So what about compliance alternatives? What vision does the Abbott Government have for a regulatory framework that spans federal and state level and makes sure that the third sector is accountable and transparent and justifies the trust put into it through concessions and donations? In his speech to directors of not-for-profits Andrews was reported as having left open the possibility of some sort of national registrar; importantly, he mentioned a charity watchdog modelled after USA-based Charity Navigator , a US based entity that specializes in drawing up lists of top tens: 10 super-sized charities, 10 charities expanding in a hurry, 10 consistently low rated charities, 10 charities overpaying their for-profit fundraisers, 10 highly rated charities with low paid CEOs, and so on. Charities are also rated by their financial health and their accountability & transparency but it is not clear how that is done. Also not clear is how Charity Navigator intends to rate performance as it has announced it will.

Andrews provided few details about the exact configuration of compliance activities that he has in mind. Or for that matter about the National Centre for Excellence.

According to an “analysis” – more a rant really – on the Pro Bono Australia website, “policy analyst” John Butcher suggested that Andrews might find “the intellectual justification that has hitherto been conspicuously absent from the policy discussion” in an analysis that Helen Rittelmeyer wrote for “right-wing think-tank” Center for Independent Studies. Butcher attests Rittelmeyer “unimpeachable conservative credentials”.

I am on record as having been skeptical of both the ACNC and the way regulatory reform was engineered (see here and here and relatedly here and here; the first two CET contributions being on the insufficient way accountability and transparency of the third sector are being addressed in Australia and the last two being on the Mortensen / CAI case), so I read Rittelmeyer’s document (downloadable from the CIS website) wondering what this “credible poster child of libertarian conservatism” (Butcher) has to say and whether she really is as ideological as Butcher suggests. And what regulatory framework agenda we might have to expect from the Abbott Government.

While Rittelmeyer gets some facts and assessments right, she gets others remarkably wrong. Importantly, she simply does not know some of the relevant literature and does not understand subtle but consequential differences between charity watchdogs. In an environment where even a Federal minister can admit without consequence that he gets his facts from wikipedia that is not too surprising, I guess. After all, disdain for science seems par for the course for the Abbott Government (e.g., a debate about climate change anyone?) But I digress. Back to Rittelmeyer.

As also highlighted by the two-page “snapshot” that accompanies her document, Rittelmeyer concludes that “even with an annual budget close to $15 million, it is unlikely that the ACNC will make significant progress on any of the three objectives it was created to address: improving public trust in the NFP sector; reducing the burden of red tape that charities now face; and policing fraud and wrongdoing in the sector. The commission’s record during its first year has only confirmed this scepticism.”

To repeat, I am by no means a fan of the ACNC and the way it was implemented but, while there are legitimate questions to be asked about the presumption of honesty which the ACNC applies and the apparently related issue of compliance staff having left soon after they were hired, Rittelmeyer’s assessment strikes me as ignorant about what it takes to build organizations.

Throughout 2013 the ACNC was in a building mode; during that one year it has registered almost 60,000 charities (including almost 2,000 new ones). If these data – as problematic by their very nature and as incomplete as they are; see also here – are made available in full to interested parties and researchers (as is planned and as the Charity Commission of NZ did), then there is considerable potential for ferreting out various kinds of misbehaviour ranging from outright fraud to various forms of misconduct.

The ACNC received last year in excess of 200 complaints that provided leads to various problems, I understand that several dozen are still under investigation. It is simply too early to say whether the ACNC is able to ferret out fraud and various forms of misconduct. And contrary to the claim made by Rittelmeyer that fraud and misbehaviour are nothing to worry about in Australia, there remains plenty of work to do and a well-run ACNC – simply by harmonizing reporting standards and collecting facts about the lay of the not-for-profit landscape — could go some way towards solving blatant problems such as this (the high cost of being charitable) and this (charities banking on a lack of transparency).

Rittelmeyer takes the 2012 BDO report as indication that fraud is “a minor and declining problem in Australia” (p. 6) because the percentage of charities that has experienced fraud is at 12 % – a number similar to the number reported by the National Fraud Authority in England – but less than in previous years. The NFA also reports that only about only a fifth of respondents apparently attempted to measure their fraud loss. Even if the total losses amounted to only a couple of percent of the revenues (donations) flowing into the sector they would amount to more than a billion dollars. And that’s before one takes into account that self-reported data in this context are highly likely to be under-reported due to the reputational consequences.

And it’s before we start talking about various forms of misconduct. A minor problem?

(There are other reasons such as the deterrent function of an effective ACNC as well as the fact that without some such agency tax status and breaks would by default have to be determined by the ATO which seems an obvious conflict of interest although as we learned yesterday a conflict of interest obviously lost on the Abbott Government.)

As regards the argument that the ACNC has failed to address red tape, it also seem way too early to tell. Certainly the intentions are good; and even those skeptical about what the ACNC can do given its current set-up and philosophy will have to acknowledge that it takes time to reduce red tape. That the ACNC so far has not reached agreement to eliminate duplicate reporting with NSW and Victoria is hardly surprising given the adversarial politics that have been on display in Australia for years. It would be interesting to learn from the South Australia and the ACT precedents how much the harmonization of reporting has saved there. Surely it was more than the 1 hour per economically significant nonprofit that Zettelberger allows the national director of UnitingCare Australia to whine about (p. 4).

Zettelberger also argues, comparing “trust” data from England and NZ and Australia, that the ACNC has not managed to instill trust in the sector. Again, it seems way too early to make that judgement. It also seems rather silly to compare trust scores across jurisdictions that are so different. Such numbers have little meaning.

(And since we are at it, the charity commission of NZ was not shut down because it did not deliver. There are conflicting reports about what happened in NZ and some of them suggest just the opposite; surely it failed not as miserably as the Charity Commission of England seems to have indeed done.)

Rittelmeyer’s conclusions become even more problematic and, I would argue, untenable, when she thinks out loud about compliance alternatives. Like Andrews she seems to favor organizational templates such as Charity Navigator and GuideStar.

As to GuideStar, I have yet to read a serious assessment that comes out in its favor and that factors in the huge amounts of funding that that project has received so far. Let’s also remember that its first, and so far most successful, incarnation (still operating at a loss as of last year) is built on data that are self-reported and, importantly, collected by the government. (Yes, those pesky IRS 990 forms.)

Both Andrews and Rittelmeyer favor a charity watchdog modelled after USA-based Charity Navigator. As mentions, Charity Navigator is a US based entity that specializes in drawing up lists of drawing up lists of various top tens and also — somehow — rates charities’ financial health and their accountability & transparency. How exactly these assessments are being made is unclear. Notably, Charity Navigator gave CAI / Mortensen a four star rating years after questions about it were raised.

Szper & Prakash (Voluntas 2011), when examining 90 nonprofits in the state of Washington for the period 2004 – 2007, find that ratings tend not to affect donor support for these nonprofits; based on interviews the authors suggest that charities believe that donors tend not to be affected by the Charity Navigator ratings, maybe because they realize that they are not reliable. The authors review several other studies that come to similar conclusions. Relatedly, Szper (Voluntas 2013) finds that, between 2004 and 2008, financial information reported by nonprofits reacted to ratings although she makes clear that she does not intend to imply that ratings changed these nonprofits’ internal operations or how they perceive themselves. This “playing to the test” is of course what economic theory would predict and numerous instances of US colleges and universities misreporting to U.S. News and World Reports suggest.

A key problem is that the data Charity Navigator uses are typically provided by the charities themselves. Says Rittelmeyer (p. 9),

“Each charity evaluator has a different approach, but the general model is the same. The evaluator obtains information about charities from publicly available government documents (such as IRS forms in the United States), from the charity’s own website, or by asking the charity to voluntarily submit information. The evaluator then posts some or all of the information on its own website, usually with its own evaluation of the charity attached in the form of a letter grade or a star rating.”

Note the implications: In a market segment widely known for its diverse set of organizations – organizations that in addition produce mostly experience and credence goods – accountability and transparency is essentially left as a choice to those who might well have a vested interest not to be accountable and transparent.

The presumption of honesty may be a noble on but it is one that is too often taken advantage of (politicians charging private traveling to the public purse anyone?) The literature on tax or environmental compliance or the recent rash of (laboratory) studies on dishonesty (see also here or here) makes clear that this is a silly assumption at best. The truth is, we lie a lot and we lie frequently. Honestly. And we do so the more is at stake. There is a lot at stake in the third sector and taking advantage is made easier because people working in that sector often have a very high opinion of their work (and themselves) and hence find it easy to rationalize transgressions as being in the interest of the some higher cause.

Rittelmeyer seems to argue that the proliferation of national and international evaluators will somehow – Competition! Competition ! — take care of whatever imperfections the current watchdogs are afflicted with. For all I can see that is not likely given their structural problems. And I am in any case not aware of any empirical evidence that would support that conjecture.

I have elsewhere (see here and here and here) made the case for a two-pronged approach based on a truly independent charity commission/registrar that provides elementary data to help us understand the lay of the third sector and to harmonize reporting standards and on the kind of certification model championed by the International Committee on Fundraising Organizations for the few hundred nationally operating charities. Some of the more successful templates are those provided by some of West-European certification agencies. I have pointed to them previously (e.g., here in my comment on the Productivity Commission report).

As it is, the ICFO — a growing confederation of certification agencies in a wide number of countries — just published a new and comprehensive description of the various models used by its members. It is an intriguing read – all 158 pages of it — that would become well those that are seriously concerned about accountability and transparency of the third sector (see here for the press release and here for the opus magnum itself).

The various certification models represented in the ICFO are not, wisely in my opinion, based on the presumption of honesty and attempts of damage control when the damage has been done; most models require the few hundred nationally operating charities – if they apply — to subject to extensive self-reporting and follow-up onsite visits. Those that pass the test are given a seal of approval that has no gradations. A charity is considered either to walk its talk or not. Note that nationally operating charities have an incentive to apply for certification since not applying could be interpreted as having failed the test. Indeed the successful West-European certification agencies typically give the seal of approval to hundreds of not-for-profits, which account for the major share of revenues of the third sector. These agencies make due with low operating costs (less than two million dollars for countries the size of Canada, Germany, Netherlands, and Switzerland) and have been shown theoretically and empirically to be working reasonably well.

If the present government is truly interested in the third sector becoming accountable and transparent, then looking into these models rather than untested Charity Navigator or GuideStar models seems a much better way to go.

What to do with the ACNC? Even Kenneth Andrews seems to admit that some sort of national registrar is needed. That is what the ACNC is already doing and it seems to do it reasonably well. (It’s certainly better than the ATO doing it since, as mentioned, it would face an inherent conflict of interest.) Can, and should, the ACNC engage in collaborative education, training and development as it already does? I am less sure of that although especially smaller charities that notoriously have difficulties to deal with the regulatory burden might benefit from it.

In short, dismantling the ANC strikes me as a silly undertaking at this point; redefining its purpose and challenging its performance in the basic provision of data that make us understand the third sector seems, in contrast, a reasonable way to proceed. Together with an effective and independent certification system for nationally operating charities and not-for-profits, fraud and various forms of misbehavior could be better controlled and trust in the third sector could be effectively increased. There is considerable scientific evidence out there in favor of some such solution and it ought to be tapped.

There is a real danger that in stead of the not particularly persuasive current regulatory framework one is put in place that will be even worse.

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