Accountability, Compliance and Transparency: Best Practices for Todays Nonprofits

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1 Accountability, Compliance and Transparency: Best Practices for Todays Nonprofits Seth Perlman Senior Partner, Perlman and Perlman LLP Art Taylor President & CEO, BBB Wise Giving Alliance Senny Boone DMANF General Counsel Moderator: Amy Sukol, CFRE Vice President, Lautman Maska Neill & Company

2 WHO S WATCHING YOU? Legislature Watchdog Organizations IRS States Other Federal Agencies News Media Donors

3 THRESHOLD QUESTIONS Why is fundraising regulated? What role do the states play? What role does the federal government play? What about watchdogs and the media? How extensive is fraudulent fundraising in the charitable sector? Does registration and reporting help prevent fraud? How has technology changed the landscape? How will it change in the future?

4 HISTORY OF FUNDRAISING REGULATION In 1955, New York established the Office of Charitable Registration to administer new fund raising regulations. Eventually over 40 other states established charity offices modeled after New York, in response to: Growth of mass marketing technology Proliferation of charities Increased competition Increased presence and use of commercial fundraisers

5 PROLIFERATION OF CHARITIES 501(c)(3) Entities Registered with IRS 1940: 12, : 320, : 654, : 1,135,626 As of 12/2012, 1,072,746 (973, 961 public charities and 98,785 private foundations)

6 WHAT ACTIVITY IS REGULATED? SOLICITATION In short, solicitation is the affirmative act of asking for a gift or selling goods or services that will benefit a charitable organization. GOVERNANCE Historically, governance was within the purview of the states; starting in 2008, the new Form 990 put the IRS in the position of regulating the governance of nonprofits.

7 STATE REGULATION 45 states have some sort of statutory scheme to regulate charitable solicitations and the use of nonprofit assets within their borders. Registration and reporting requirements are imposed on charities, professional fundraising counsel, professional solicitors, and commercial co-venturers. Each group is required to file annual registrations and/or contracts and/or financial reports and/or the IRS Form 990.

8 CHARITABLE ORGANIZATIONS Primarily Section 501(c)(3) and (c)(4) organizations Also may include other nonprofit organizations as defined by state law tax exemption and deductibility is a function of federal tax law while the nonprofit status is a creature of state law May even include for profit organizations key issue is asking for money using a charitable appeal 40 States plus DC require registration prior to commencement of solicitations

9 PROFESSIONAL SOLICITORS (a/k/a Professional Fundraisers or Commercial Fundraisers) Directly solicit the general public on behalf of a charitable organization for a fee May have custody/control of the contributions received Many states also require a pre-solicitation disclosure of professional status prior to making the request for a gift Required to register in 44 states, post a surety bond and file contracts with their nonprofit clients

10 PROFESSIONAL FUNDRAISING COUNSELS (a/k/a Fundraising Consultants) Help plan, manage, advise on, consult or produce and design solicitations to the general public for a fee Do not make the solicitations Generally, may not have custody or control of contributions Required to register in 32 states and post bonds in a few

11 COMMERCIAL CO-VENTURERS An entity that, as part of a sales promotion, uses the charity s name to sell its products or services (at its usual retail price) and makes a charitable donation based on the sales Registration and/or filing of contract required in: Alabama, Hawaii, Maine, Massachusetts, Mississippi and South Carolina (+ maybe California) 17 other states regulate the activity but do not require registration Require written contract and, in some cases, charity to file copy Require specific disclosure of the amount of the donation to potential buyers (either as a dollar amount of percentage of sales)

12 REGISTRATION EXEMPTIONS Vary from state to state, but most common include: Churches and in most states - Religious Organizations Organizations raising less than a specified dollar amount (most common is $25,000) Educational Institutions Organizations for which solicitations limited to membership Volunteers soliciting for the benefit of a named individual Political organizations Hospitals

13 CONSTITUTIONAL FRAMEWORK First Amendment - General Principles: The states have the power to compel charitable solicitors to identify themselves to the public before they solicit However, the First Amendment otherwise protects this activity and narrow tailoring of the laws is essential Solicitation of charitable contributions is fully protected, even by professional fundraisers with profit motives

14 CONSTITUTIONAL FRAMEWORK The Trilogy: Schaumburg, Munson and Riley Supreme Court struck down state and local regulations limiting the percentage of fees that charities could pay to raise funds Pre-solicitation disclosures of fundraising percentages held unconstitutional The Court questioned the states attempts to connect high fundraising costs to fraud

15 IRS REGULATION OF GOVERNANCE The IRS has a clear, unambiguous role to play in governance [w]here an organization has adopted good governance practices, we can reasonably expect that it poses less risk that it will misuse its tax-exempt status or its charitable assets. -Sarah Hall Ingram, Commissioner, Tax Exempt Division, 2009

16 OTHER GOVERNMENT REGULATORY Postal Service AGENGIES Federal Trade Commission United States Treasury (Anti-Terrorism) U.S. Senate Finance Committee U.S. House Ways and Means Committee U.S. House Committee on Oversight and Government Reform State Trade Commissions County and Municipal Registration Offices

17 WATCHDOG ORGANIZATIONS BBB Wise Giving Alliance Charity Navigator AND THE MEDIA CharityWatch (f/k/a The American Institute of Philanthropy) Guidestar - Philanthropedia News Media Print, Television, Internet

18 List of Watchdog Groups And some with a religious focus: (part of Wall Watchers) And of course:

19 EVOLUTION OF FUNDRAISING THE INTERNET Jurisdictional questions affecting nonprofit online activities: Whether a state court has the power to adjudicate claims against an organization for its conduct on the internet The extent of statutory authority of state or federal regulatory agencies Charleston Principles Federal Tax Issues

20 BBB Wise Giving Alliance: Overview Why? Because donors and businesses asked for it Standards-based reports Goals - Encourage informed giving - Strengthen charities 20

21 It s been going on for quite a while 1920s BBB s began national & local charity reporting 2001 BBB national program merged with another charity watchdog (NCIB) and was renamed as BBB Wise Giving Alliance 21

22 What is involved? BBB Standards: 20 Standards for Charity Accountability BBB Reports: on publicly soliciting charities - about 11,000 across BBB system (1,300 national charity reports) 22

23 What is the benefit? Donors: BBB Reports - free, quick way to check if charities meet high standards BBB Seal - widely recognized, valued charity trust mark 23

24 What is the benefit? Charities: Standards key practices BBB Accreditation no cost. Charity that meets all 20 Standards is Accredited. BBB Seal Optional licensing program, only for BBB Accredited Charities 24

25 BBB Standards for Charity Accountability Governance & Oversight Reporting on Effectiveness Finances Solicitations & Informational Materials 25

26 Guiding Concepts for BBB Charity Standards Standards for key practices, not ratings Audited financial statement is preferred reference. IRS Form 990 is not sufficient alone. Generally Accepted Accounting Principles (GAAP) Accuracy of expense reporting Accountability is more than financials 26

27 What are the top 5 BBB Wise Giving Alliance Report Findings? 27

28 Top BBB Charity Findings Annual Reports: not fancy Mission Program Summary Board & Officers List Financial Summary - Total income, prior FY - Expenses: program, FR, admin - Ending net assets 28

29 Top BBB Charity Findings Governance Meetings 3 or more evenly spaced full board meetings/year Majority in attendance Face-to-face - One conference call may serve as one of the 3 meetings 29

30 Top BBB Charity Findings Effectiveness Policy Enacted by board Policy commits to conduct performance assessments at least every 2 years How well org is addressing its mission (e.g., strategic plan) 30

31 Top BBB Charity Findings Effectiveness Report Written report on org s performance provided to board for approval Progress, future goals ChartingImpact.org (project of GuideStar USA, Independent Sector & BBB WGA) 31

32 Top BBB Charity Findings Website Disclosures, If Soliciting Annual report basics Mailing address of charity Access to in PDF or - link to GuideStar 990, description Privacy policy - notice, access, choice, security 32

33 What issue gets the most public attention but is not among the top 5 BBB charity report findings? 33

34 Expense Ratios! Spend at Least 65% of Total Expenses on Programs Spend No More Than 35% of Contributions on Fundraising Expenses Fewer than 7% of national charities do not meet either of these standards 34

35 BBB conducts in-depth financial review: Expense ratio calculation using GAAP financial information. Will question expense allocation, if potential concerns identified. 35

36 Joint Cost Allocation Activity that combines fundraising with education/advocacy Cover story of Wise Giving Guide Example: Appeal asks for donations but also asks recipient to: - sign a petition - see doctor if have following symptoms - take these actions to clean environment 36

37 Joint Cost Allocation Key GAAP issues: Intent charity planned dual purpose appeal Audience selected for need for information Content must include a call-to-action other than sending a donation Should not exaggerate program allocation More info: AICPA Statement of Position 98-2 (ASC ) 37

38 Appeal Accuracy Have solicitations and informational materials, distributed by any means, that are accurate, truthful and not misleading, both in whole and in part. Examples of appeal accuracy issues: 100% of your donation Zero Fundraising Expenses Incomplete or inaccurate representations about the financial state of organization 38

39 Cause-Related Marketing Disclose at point of solicitation: Amount or % per unit sold to go to specified charity If applicable, duration (i.e., during October 2013) If applicable, the maximum or minimum total donation 39

40 Want More Information? Nationally Soliciting Charities: Give.org Metro New York charities: NY.give.org 40

41 DMA Nonprofit Federation DMA s Nonprofit Federation includes an Ethics Committee -Seasoned fundraising practitioners. -Works to enhance trust in the fundraising process and assists members with ethical concerns and best practices. Responsible self-regulation is vitally important to stave off heavy-handed legislation.

42 Public (mis)perception of Fundraising Setting the stage why now? -Public concerns about the cost of fundraising is not new. -Several media stories and pressure on the charitable sector has led to an increased focus -Example: 50 Worst charities

43 Defending Fundraising Costs For years, the bad apples do reputational harm and hurt donor confidence in fundraising and escape, while the fundraising community has been trying to explain legitimate fundraising. It costs money to raise money.

44 DMANF Fundraising Principles A nonprofit is accountable to both donors & its constituencies for the mission it serves. (& to retain its 501c status.) A nonprofit has an obligation to make solid business decisions to meet both short & long term objectives to make the world a better place.

45 DMANF Fundraising Principles Donor expectation is high. They expect you to operate at angelic level of standards & transparency. In fact the degree to which a situation is ethical or not ethical is not determined by financial results.

46 DMANF Fundraising Principles GENERAL PRINCIPLES: a. Nonprofits must clearly articulate mission. b. Nonprofits must act to further mission. c. Messaging to donors must be accurate and transparent. d. Nonprofits must apply good faith efforts to be compliant.

47 DMANF Fundraising Principles Use of Funds/Cost of Fundraising Investing v. spending (fundamental distinction) Long View: Without donors and strategies to acquire and retain donors, nonprofits could not remain active and mission delivery would not survive.

48 DMANF Fundraising Principles Fundraising is both a short term and a long term investment in the mission of an organization. a. Costs are normal part of doing business b. Investment takes years to pay off. Efficiency should be measured on overall program, not by a single campaign. c. Restricted or unrestricted? Follow donor intent. d. Diversify sources of funding & spend a majority of annual revenue on program.

49 DMANF Fundraising Principles A nonprofit should spend a majority of its annual revenue on programming. But if fundraising expenses exceed program expenses in a financial reporting period explain why: -start-up period -new donor acquisition for longer term need -rebuild after period of cost-cutting Each organization is different!

50 DMANF Fundraising Principles Effectiveness is measured over time based on a combination of: Mission, impact, financial stability & growth Not using a % based ratio applied as a cookie cutter!

51 DMANF Fundraising Principles e. For accuracy on how contributions are used, nonprofits may allocate joint costs that include fundraising and/or to perform valuations of gifts in kind. -reported on IRS Form 990 -legitimate and commonplace aspects of financial reporting.

52 DMANF Fundraising Principles Joint cost allocating: Splitting up the cost of an activity when more than one purpose is served and the activity includes a fundraising appeal. -example: a fundraising appeal that has a brochure detailing how to reduce cancer risks also includes a fundraising appeal. Gifts in Kind: valuation that accounts for goods donated to an organization.

53 DMANF Fundraising Principles Honesty & accuracy in reporting joint cost valuations and gifts in kind valuations consistent with financial auditing standards & requirements. -FASB, Financial Accounting Standards Board -Not-for-profit Advisory Committee (NAC) provides the nonprofit community perspective to FASB (est d 2009)

54 DMANF Fundraising Principles Working with Commercial Partners: Contracting with external agencies, consultants and suppliers provides the most cost-effective means of accessing fundraising expertise. You would not provide ongoing support to an organization lacking expertise run from a kitchen table! Public perception, though, seems to indicate a belief that organizations should run on a shoe-string budget using only volunteers.

55 DMANF Fundraising Principles When you work with an agency or consultant: -Get it in writing. If it seems to good to be true it is. -Document payments due, what the nonprofit is getting, the ownership rights in donor information and the materials to be produced for the campaign. Remember that you need to control the contract you should review it with your own counsel (& not counsel for the agency!)

56 DMANF Fundraising Principles In a contract: a. The nonprofit organization must always be in control of the program, message delivery, and the collection of funds. You will be blamed! b. You should always be in control of and have immediate access to all donor names and contact information generated from the campaigns. c. No conflicts of interest. Do not get entangled and know who really benefits. This can include Board, staff, vendors serving on boards a no no.

57 DMANF Fundraising Principles d. Payment schedule should be clear and real. A conflict occurs when proceeds of the campaign are tied to payment terms and the vendor is the beneficiary. For example including a never-ending future interest in proceeds that cannot be paid back. (The more you mail, the more you owe out of future proceeds v. actual payment for provided services.) e. Understand contract terms before signing the agreement. Feel free to seek out other nonprofit fundraisers with seasoned experience to give you advice in addition to the legal advice by your counsel.

58 DMANF Fundraising Principles f. A commercial entity partnering with a nonprofit organization should not knowingly or carelessly hurt or endanger the financial health or reputation of the organization. Being savvy or tricky is not ethical. Aiming a campaign at unsophisticated nonprofit supporters to help children, veterans, dogs, firefighters, the blind and not actually providing promised aid could be fraud and is purely selfinterested. An agency working on behalf of nonprofits has an extra duty to be ethical!

59 DMANF Fundraising Principles g. Be compliant with all federal, state filings required as a commercial partner. Nonprofits should seek copies if they are not familiar with the agency or they have concerns and should also seek references from nonprofit clientele.

60 DMANF Fundraising Principles Teeth These are not simply words the DMANF will investigate complaints by donors, consumers, members & others based on these principles and the DMA s lengthier Guidelines for Ethical Business Practices. -Compliance is required of membership -If no cooperation, referral to authorities & publication in annual report. (See -Submit a complaint at ethics@the-dma.org

61 Seth Perlman Art Taylor Senny Boone