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Charities Need Greater Government Scrutiny

Asbury Park Press

December 28, 2002


by Trent Stamp

You can bet that, someday soon, one of America's largest charities will be exposed for Enron-like accounting irregularities.  We don't know which name-brand charity it will be, but it will happen.  It is naïve to think only the highly regulated world of for-profits -- where thousands of interested individuals are looking at the books and the Securities Exchange Commission is charged with this specific task--is dangerously cutting corners.  

It is far more likely to happen in  the non-profit sector where almost no one is scrutinizing the books.  There are only 16,000 public companies in America .  There are nearly 900,000 charities.  The numbers alone guarantee a failure.

Further exacerbating this very real scenario, the victims will now be the most vulnerable members of our society. And when it does happen, it will be because people who could have done something about it, the United States government, decided to look the other way.   America 's charities are operating with very little regulation or oversight.

In light of corporate scandals, government can no longer make a plausible argument that charities don't deserve the type of scrutiny that the for-profit sector warrants.  Quite simply, the charitable sector is much too large to warrant the continued disinterest our government has shown it. Nearly 15% of our nation's GDP flows through these 865,000 organizations.  

With the charity sector being so massive, it would seem to be in the public interest to ensure that this sector is operating in a transparent, forthright, and accountable manner.  And yet, our government seems not to care.  

When the Enron debacle was first uncovered, President Bush immediately sought to reassure investors by proposing tough new government requirements on CEOs.  But today, as the United Way in Washington , DC is in danger of shutting down completely, embroiled in conflict, controversy, and crisis, where is our government?  The silence is deafening.  

The evidence is more than anecdotal.  In the last 10 years, the number of U.S.-based charities has doubled, while the number of IRS agents assigned to monitor them has stayed the same.  

Furthermore, for-profit companies must file their financial statements quarterly, and submit their audited annual report with the SEC within 90 days of the end of their fiscal year, as well as submit audited returns to the IRS annually..  Contrast that with the lax laws governing charities, that must file an informational return, the 990, 135 days after their fiscal year ends, and can have an automatic four-month extension (with, unlike the for-profit sector, no interest incurred) merely by asking. 

And while these 990s are supposed to be provided to any inquiring citizen, we have found a huge number of national charities that flat-out ignore this law.  And what does the IRS do to charities that ignore the Internal Revenue Code, as well as the rights of American donors (and taxpayers)?  Sadly, the answer is nothing.

You need more warning signals?  Why does Hale House, which acknowledged stealing from donors, still have tax-exempt status?  Why is the United Children's Fund, which used its innocuous name to raise nearly $2 million and then allocated only $5,000 of it to children, still allowed to offer its donors a standard IRS tax deduction?  Our government simply doesn't care.  They've focused their attention on the for-profit sector, arguing that charities operate in a fundamentally different fashion.  

But most charities operate like for-profit companies.  Did you know the YMCA of the USA had revenues last year of $4 billion?  Or that the California Community Foundation lost $23 million in the stock market last year?  The idea that charities consist of a few bleeding hearts serving up soup to the homeless is an antiquated recollection of a day that might never have existed, and certainly doesn't now.  

This laissez-faire approach to charity regulation is even more insidious with most big charities being inextricably intertwined with the government.  State, local, and federal governments contributed over $250 billion of tax-payer money to America 's charities last year, basically to carry out government work.  At Charity Navigator, we found that of the largest 2,000 charities in America , an overwhelming majority of them received most of their funding from government sources.  

Our government has acted like irresponsible parents who don't realize how big, strong, and powerful their child has become.  We've given charities the privilege of tax-exempt status.  We've given them millions of dollars in tax-payer funding.  We've given them a far less-sophisticated set of accounting and reporting rules by which to play, and then we've walked away, and hoped that they would behave.

We're fortunate that so many have.  Charities do amazing work in this country and remarkably, with little oversight, usually have admirable codes of ethics.  Here are some achievable ways to rectify the problem:

  1. Develop an SEC-type overseer for charities.  The IRS clearly isn't up to the job.  
  2. We need a more thorough review of tax-exempt status -- far too many organizations are being granted this privilege, and they're crowding the field for the organizations with the ability to bring about long-term change.  
  3. Regular and more frequent reporting of annual returns.  Filing one tax return, as late as nine months after the fiscal year ends, is preposterous.  
  4. We need uniform  rules for reporting that data.  And we need penalties that are actually enforced, for organizations that don't provide their data to taxpayers on request. 

        In short, we need a government that takes the charitable sector seriously, before the next public scandal further erodes the faith of American donors.

Trent Stamp is the executive director of Charity Navigator, a Mahwah-based organization evaluating the effectiveness and financial health of more than 1,700 charities.  Charity Navigator accepts no advertising or donations from the organizations it evaluates.


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