Stephanie Cory, CAP, CFRE
Avoiding Nonprofit Scandal: Regulations & Ethical Standards to Know
If you’ve ever googled “nonprofit and scandal” or “charity and scandal,” you were probably shocked at the number of results. There are some bad apples out there. Unfortunately, scandals and wrongdoing receive the bulk of media attention, and this can tarnish the sector.
As the leader of a nonprofit organization, you can’t fix the sector, but you can make sure your organization is accountable and ethical. Become aware of regulations that impact your organization, how you raise funds, and how you report on your operations. This article will cover some key areas where organizations can go astray and will provide resources to help your organization be an accountable nonprofit.
Years ago, when I wrote the occasional grant for a client, I worked with the all-volunteer board of a startup nonprofit. I was engaged to write proposals for capital improvements and seed money. I proposed charging an hourly rate for my services, but the board president asked me if a commission basis wouldn’t be better. After all, if the grant isn’t awarded, the organization wouldn’t be out the money for my time. Better yet, if the grant was funded, I could potentially be paid more than my hourly rate. This sounds like a win-win, right?
Not only did this arrangement smell fishy, but it was also unethical, according to the Association of Fundraising Professionals (AFP) Code of Ethical Standards. As an AFP member, I was familiar with the code, and I knew this type of compensation wasn’t acceptable. I was able to let the client know I couldn’t sign on to a commission basis for my fee. We agreed on an hourly rate for my services. It’s cases like this where ethical guides can really come in handy. It’s not that you are a pain; you’re just following the “rules.”
Ethics in fundraising can be a gray area. Fortunately, AFP’s Donor Bill of Rights and Code of Ethical Standards are here to help. Much of what these documents cover is common sense, but some elements are worth highlighting because they aren’t necessarily obvious or because an example is helpful.
Under the Donor Bill of Rights, donors have the right “to be assured that information about their donations is handled with respect and with confidentiality to the extent provided by law.” If a donor asks to be anonymous, that doesn’t mean no one within the organization may know about the gift. It should still be entered into the donor database under the donor’s name, not under a dummy record called “Anonymous.” However, it’s important to remember not to publish that donor’s name in an annual report or an other public forum. The anonymous donor’s identity and gift amount should be shared only on a need-to-know basis.
Under the AFP Code of Ethical Standards:
“Members shall recognize their individual boundaries of professional competence.” This can come in to play with more complicated gift vehicles and the specific tax benefits they offer. It’s a reminder to us all to reach out to our networks for help in areas where we aren’t the strongest. It’s also a good reminder not to give donors legal or financial advice in our role as fundraisers or board members.
“Members shall ensure that all solicitation and communication materials are accurate and correctly reflect their organization’s mission and use of solicited funds.” Have you ever received a solicitation that told you what your donation of a specific (generally small) amount could accomplish, such as feeding a homeless child for a certain period of time? Be careful with examples like this. Make clear they’re only examples, not exactly what a donation will provide.
“Members shall obtain explicit consent by donors before altering the conditions of financial transactions.” What do you do when you’ve received a donation that can’t be used as initially intended? You reach out to the donor to ask permission to redirect the funds to another use. You can’t just assume the donor is okay with having the gift benefit another purpose.
“Members shall not accept compensation or enter into a contract that is based on a percentage of contributions; nor shall members accept finder’s fees or contingent fees.” While it is not surprising that accepting a finder’s fee for securing a gift is considered unethical, there is a bit of confusion about compensating fundraisers based on what they raise. Fundraising is often likened to sales: salespersons are often compensated based on commission, which is a win-win. The more they sell, the more the company makes, and also the salesperson. For nonprofit fundraising, however, this isn’t acceptable.
Fundraisers should always strive to put donors’ best interests above the organization’s or their own. If fundraisers were compensated based on a percentage of contributions, there would be incentive to act otherwise. Additionally, fundraisers could be incentivized to close smaller gifts more quickly than to be patient and continue stewarding donors for what could potentially be a much more meaningful gift to the organization.
In-house fundraisers should be paid on a salaried or hourly basis. Grant writers and other consultants should be paid on a project or hourly basis. For staff, does this mean bonuses aren’t okay? No. However, the code states that “Members shall be permitted to accept performance-based compensation, such as bonuses, only if such bonuses are in accord with prevailing practices within the member’s own organizations and are not based on a percentage of contributions.” If staff in other roles and departments are also eligible for bonuses and the bonus a fundraiser receives isn’t based on a percentage of what is raised, a bonus is just fine.
Most states require nonprofit organizations to register before they solicit donors, and each has a different set of requirements, exemptions, and fees. National organizations are required to pay thousands of dollars in annual registration fees, and the paperwork can be so burdensome that outsourcing is a common option. Registration can get trickier for local organizations who may believe, incorrectly, that a few out-of-state donors would not trigger the requirement for registration. By the letter of most states’ charitable solicitation laws, an organization must register before making the first solicitation.
In some cases, it’s more cost effective not to solicit donors in a given state if it’s just a handful of donors with small gifts that barely cover the registration fees. In many states, it’s breaking the law to look the other way and mail without registering.
What about Soliciting Donations via Your Website?
What about online donors who seek out your website from across state lines? The National Association of State Charity Officials drafted the Charleston Principles to address this issue. Unless you’re specifically soliciting donors in a given state or receiving online gifts from that state’s residents on a repeated and ongoing basis, you’re typically in the clear. There’s no need to lose sleep over that $25 tribute gift from across the country.
Fundraising Consultants or Solicitors May Need to Register, Too
If your organization works with fundraising consultants or solicitors, your state may also require that they are registered. In some states, such as Pennsylvania, every contract must be approved before a consulting engagement beginning. Check your state’s requirements, and make sure anyone you hire is appropriately registered. Ethical and competent consultants will know the law and follow it. Be wary of any “consultant” who is not aware of applicable registration requirements or does not follow them.
Standards for Excellence
If you want to ensure that your organization is an accountable nonprofit, there are great resources available to guide you. The Standards for Excellence Institute was created to promote the highest standards of ethics, effectiveness, and accountability in nonprofit governance, management, and operations. Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector provides a framework and step-by-step guidelines for organizations to follow, whether or not they seek accreditation or recognition.
The code contains six guiding principles within twenty-seven topic areas with specific performance benchmarks that address how boards function, how programs are evaluated, how risk is assessed, and more. One guiding principle is that nonprofits must comply with legal and regulatory requirements. The specific benchmarks are that management be aware of and comply with all applicable laws and conduct periodic internal compliance reviews.
Proper donor stewardship dictates that donors receive prompt, heartfelt thanks for their gifts. In addition to these expressions of gratitude and appreciation, donors also need to receive a properly worded acknowledgment. For gifts of $250 or more, or $75 or more if the donor received a benefit, a written contemporaneous acknowledgment is required. Any quid pro quo a donor received for the gift must be identified. This is typically an issue for events. For gifts where the donor did not receive anything, the acknowledgment needs to state that nothing was received in exchange for the gift.
When something is received, the value of the benefit must be disclosed. For example, take the purchase of a $150 gala ticket where the fair market value of the dinner and musical entertainment was $60. A properly worded acknowledgment would state the gift amount and “amounts in excess of $60 may be tax-deductible to the full extent of the law.” May be tax-deductible is key. This is because only donors who itemize on their tax returns can currently claim any deductions for charitable gifts.
Another tricky area of gift acknowledgment is what to do about in-kind gifts—that “stuff” you may or may not want. Valuing the gift, in this case, is the donor’s responsibility. All your nonprofit’s acknowledgments should be doing is describing what was received. In-kind gifts get trickier when they’re high in value. Did you know the IRS requires a form for all in-kind gifts where the value is $500 or more per item? This includes publicly traded securities. If the item is valued at $5,000 or more, a qualified appraisal is required. The donor is responsible for obtaining the appraisal, and one is not required for gifts of publicly traded securities. Make sure someone at your organization is responsible for these forms, whether it’s your development department or your finance department.
A sister form to the IRS Form 8283 is Form 8282, which must be completed if your organization disposes of the donated property within three years. Do you have an auction? You could easily be submitting both forms the same year for high-value auction items. The forms apply to both individuals and businesses who want to claim a charitable tax deduction for their gifts.
The IRS Form 990
While on the subject of IRS Forms, it’s important to mention the IRS Form 990. It’s the informational tax return all nonprofits are required to complete each year. There are penalties for not filing or for filing late. Penalties for filing late can add up to $50,000. If you fail to file for three consecutive years, say goodbye to your tax-exempt status.
Before you file your Form 990, take the time to review it for accuracy. Are you reporting the correct number of volunteers? Don’t just carry forward what you submitted last year. Also, take a look at how you explain your programs. Are you taking advantage of the opportunity to share your program outcomes and why your programs should matter to a donor?
Some questions buried deep within the 990 address important policies your organization should have. These include a whistleblower policy and a conflict-of-interest policy. Both are designed to protect your organization as well as your board, staff, and volunteers.
A whistleblower policy provides your employees, board members, and volunteers with a way to confidentially report suspected impropriety or misuse of your organization’s resources. An important element of the policy is that it prohibits retaliation against anyone who reports suspicions. This protection removes the disincentive for employees to uncover wrongdoing for fear of retaliation. After all, who is going to speak up if it means their job could be on the line?
Where reports go is a key element of a whistleblower policy and one to think about for your organization. For a fee, third-party services are available to receive reports. This has the advantage of anonymity for the reporter. If cost is a concern, a board member can be the designated reporting contact for your organization. It’s best not to have your CEO or your CFO be the contact should any wrongful acts involve them.
A conflict-of-interest policy ensures that your organization is doing what it can to avoid conflicts of interest. A conflict exists when an “insider” has a personal interest that conflicts with the organization’s interests. It ties back to the board’s duty of loyalty where the organization should come before personal interests. Insiders are your board members, staff, and volunteers with significant, independent decision-making authority.
Conflicts should be declared when an insider first affiliates with your organization, be that joining the board or beginning work. Each subsequent year, any conflicts should be declared. As soon as a new conflict is known, it should be declared in writing. Someone at your organization should be charged with noting conflicts and filing these important documents—don’t have them completed just to check off a box for good governance.
What are some examples of a conflict of interest? The most obvious is ownership in a company that seeks to do business with your organization. Another is a relationship by blood or marriage to someone else within the organization. A conflict that arises frequently, but is not always recorded because it’s less obvious, is service on other boards. Think about it. You’re a board member for two nonprofit organizations in the same community. You learn of funding and partnership opportunities for both organizations in your role as board member. Which organization’s interests are you putting before the other’s when it comes to a case of scarcity?
Just because a conflict exists doesn’t mean that an organization has to avoid transactions with an insider. This does, however, mean careful documentation and being aware that there could be an appearance of nepotism from the outside. Say, for example, one of your board members owns a roofing company and your building needs a new roof. There is no law against hiring that company, but you want to follow a few steps. Have the insider—in this case the board member who owns the roofing company—declare his conflict in writing and recuse himself from any discussions of the new roof. Document in writing that he was not present at any discussions of, or the vote concerning, the roof. It would also be helpful to solicit other bids that would show the board member’s pricing is competitive.
Being an accountable nonprofit takes time and effort, but it’s worth it. Many donors are savvy researchers who will look for evidence that your organization is a good steward of their gifts. You can’t be a good steward if your organization is squandering funds on fines and legal fees for wrongdoing. As the adage goes, “An ounce of prevention is worth a pound of cure.”
Editor's Note: We hope that this article sparks an honest self-examination at your organization. Of course, this article is of a general nature only. Neither the contributor nor the publisher are engaged in the rendering of legal or other professional advice, nor is an attorney-client relationship formed. Always consult with a competent attorney on important questions of law.
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