Debate Begins Over Proposal to Overhaul Fund-Raising Disclosure Rules

April 24, 2008

Debate Begins Over Proposal to Overhaul Fund-Raising Disclosure Rules

Mark Fitzgibbons, an executive at American Target Advertising, a prominent direct-mail company, has drafted a legislative proposal to overhaul the way nonprofit groups disclose information about their fund-raising activities. And he is eager to get the nonprofit world talking about it.

The proposed legislation, which he has submitted to several members of the House Oversight and Government Reform Committee, would allow organizations that raise money in multiple states to bypass the current state-registration system and file a standardized online form giving details on issues such as whether they hire outside fund raisers and how they compensate them.

The form would also provide other information that is typically demanded by state regulators — such as assets, executive compensation, expenses, and revenues.

Mr. Fitzgibbons, president of corporate and legal affairs for American Target Advertising, in Manassas, Va., has been fine-tuning his proposal since Congress held hearings last winter into the high fund-raising costs of some veterans charities.

Some lawmakers then suggested that federal action might be needed to get charities to tell donors what percentage of their contributions is spent on programs that directly help people.

Mr. Fitzgibbons says his “direct-to-donor” system would be less cumbersome and costly for charities than registering in multiple states — and make it easier for donors and regulators to find information because it would be posted online. Organizations that did not “opt in” to the new system would be subject to traditional state-registration laws.

The proposal would also force members of Congress to shine a light on their own fund-raising activities. Committees that raise money for federal political candidates, for example, would be required to indicate on the disclosure form whether they have transferred money to other candidates or committees — a practice Mr. Fitzgibbons says is not always disclosed in fund-raising solicitations.

Take a look at Mr. Fitzgibbons’s proposed legislation and disclosure form. Do you think his method would be better than the current state-registration system? Would it help expose charities with questionable fund-raising practices? Can you suggest ways to improve the proposal? Click on the Comment link below to share your thoughts.

— Suzanne Perry

Comments

Here are the National Association of Charity Officials’ (NASCO) comments on Mr. Fitzgibbons’ proposal.

NASCO supports uniformity in state registration forms and participated in the development of the Unified Registration Statement that is used in about 36 states. We generally recommend that states accept a uniform registration form under mandatory charity registration laws. We are working on a possible uniform annual financial report for that could be used by states that have some kind of annual financial reporting.

In a perfect world, charities would voluntarily disclose all of their operational and financial data, there would be no issues with a misleading/fraudulent solicitations, no consumer complaints, no theft or embezzlement by insiders, and all information would be readily available on-line or by request for someone who does not have access to the internet and regulations would not be needed. Unfortunately, charities are human institutions and suffer from human imperfection. There is actually more information available to the public about publicly traded corporations through the SEC than the nonprofit sector.
As a voluntary system, no enforcement sanction could exist for organizations who elect not to volunteer their information or volunteer accurate and complete information. We already know that not every charity complies with existing mandatory requirements, especially when they have a less than stellar story to report. On that basis, Fitzgibbon’s contention that today’s non-compliant entities would participate in his voluntary system to save the costs they are already avoiding is logically flawed, and it holds no real promise of inducing any voluntary disclosures of unflattering or questionable financial information, such as high fundraising costs and/or executive compensation, another logical inconsistency.

Many charities fail file the federally required Form 990, or to file accurate and complete ones. Why would a voluntary system work better when even the mandatory system with penalties for non-filing fails to achieve 100 percent reporting?

Fitzgibbons' disclosure form does not contain all of the information currently collected in the the Unified Registration Statement used in 36 states and is not nearly as comprehensive as the old or new Form 990.

Even if the voluntary disclosures were complete and timely, would charities that opt in be required to notify State regulators and give them a link to their voluntary disclosure?

Fitzgibbons’ voluntary disclosure program does not substitute for state law requirements that charities that have in excess of a certain income threshold file audited financial statements. Financial audits reveal weaknesses in an organization’s internal control structure that can lead to theft and diversion of funds. The New York Times recently reported on findings that in 2006 over $40 billion was lost to the charitable sector from theft and embezzlement.

The IRS examines only about 2,400 990 Forms annually and there are 1.5 million exempt organizations. The truth of the matter is that State charity regulators are on the front lines of charitable oversight and are the “eyes and ears” of the IRS Exempt Organization Division. Sixty two percent of the cases referred to the IRS by State regulators have resulted in significant corrective actions. This shows that State reporting laws are not only necessary, but effective.

Fitzgibbons’ proposal overlooks the fact that the protection of charitable assets is inherently a function of State Attorneys General, not the IRS. The IRS confers tax exempt status and imposed excise taxes on certain prohibited transactions. It is the states that take action to protect the actual charitable assets from diversion and prevent, investigate and remedy charitable solicitation fraud.

— Hugh Jones Apr 25, 11:47 AM #
While the state attorney generals are responsible for non-profit oversight,they will pick and chose the charity they want to review,based primarily on politics and not routine audits nor complaints.The attorney general in Texas,for example, has received multiple complaints on state university spending of donor funds.He has yet to respond to a complaint letter nor investigate.That leaves the IRS to audit and they have no real plan for routine audits,nor do they have a methodology for reporting spending abuse of non-profits.This leaves the citizens of the state with almost no options to report abuse of non-profits.Mr. Fitzgibbons proposed legislation simply allows a larger loop hole.In Dallas, we saw an investigative reporter exposing a large state public medical institution,UT Southwestern Medical, for abuse of donor funds.The end result,because of politics,was the reporter was fired.The messenger was shot and its back to business as usual and the prevailing polictics of the state are safe and cozy.

— Steve Apr 27, 08:08 AM #
The debate about the direct-to-donor disclosure is important. The proposal applies to disclosure of fundraising and other data, and does not impede one iota the ability of states to regulate and investigate theft within charities, nor the ability to prosecute fraud.

First, let me point out where comments by Mr. Jones of NASCO mistakenly characterize the proposal.

1. The online fundraising disclosure system is not a voluntary one. The proposal makes clear that nonprofits that neither register with the states nor report online are subject to existing state penalties for non-registration, and the system applies only to fundraising conducted among multiple states. Nonprofits that solicit only in one state are ineligible for the state solicitation registration exemption unless the respective states were to pass laws allowing online disclosure instead, because federal law cannot regulate such activity occurring in just one state. States remain completely free to regulate charities and nonprofits within their physical boundaries, and does not impede the ability of states to prosecute out-of-state miscreants.

2. The proposal does not exempt nonprofits from filing the 990s, and in fact the disclosure form requires nonprofits to disclose information from their 990s, with citation to the line items on the 990 from which to disclose that information.

3. The online disclosure statement requires nonprofits to disclose whether their financial statements have been audited. Mr. Jones’ comment raises another issue of whether states should compel nonprofits to obtain audits versus less expensive but formal CPA reviews.

4. State regulators admit they don’t have data showing the amount of solicitation fraud that occurs. That’s an entirely different issue from what is described in the New York Times article cited by Mr. Jones about internal employee embezzlement. Theft occurs within all forms of businesses and government offices, and within charities such as universities and hospitals that do not solicit from the general public and are therefore already not subject to state solicitation registration laws. The online fundraising disclosure proposal does nothing to inhibit state or federal laws, investigations and prosecutions when employee embezzlement occurs. In fact, states would remain quite free to pass better laws to protect charities physically located in their states from theft.

Added benefits from the online disclosure proposal not addressed by Mr. Jones include:

5. The proposal clarifies that state enforcement would apply to federal political committees that solicit donors in the states of these regulators, and would require federal lawmakers to disclose their own fundraising data and practices. Recent federal political committees scandals demonstrate a need for this.

6. An assistant attorney general recently testified before Congress that 92,000 nonprofits including those from around the country register in her state, but 90,000 within her state do not even register. A less-than-50-percent in-state registration ratio under forced registration doesn’t seem to be working so well. It is apparent that the failure to register has something to do with the existing system.

7. Under the online disclosure system, nonprofits would disclose a URL on their solicitation communications, so donors and regulators would have access to information that only regulators now have. Overwhelmingly, most enforcement actions are the result of donor complaints, so online disclosure to donors widens the net, and more law enforcement officers will have instant access to information themselves. Scam artists can actually hide more easily under the current state system.

8. The proposal contains strict time limits within which nonprofits must update their forms to remain eligible for exemption from state registration.

9. Nonprofits are not cookie cutter in their purposes or fundraising needs. The online disclosure proposal requires standard information be disclosed, but allows nonprofits to explain more. The current state system does not accommodate the differences in the purposes or needs of nonprofits, and in fact is responsible for fostering misperceptions among donors.

I could go on. Those who study the proposal with an eye towards accuracy will see other flaws with what NASCO says. The bottom line is that the proposal is revolutionary in providing direct-to-donor disclosure, saves money, and expressly protects genuine state law enforcement.

By the way, most state charitable solicitation offices violate constitutional case law and even statutory law. The online disclosure system would help protect charities from that. The proposal allows for better lawfal enforcement, and protects nonprofits from abuses.

Mark Fitzgibbons

— Mark Fitzgibbons Apr 28, 12:24 PM #
According to at least one published report, at least ten percent of all charitable donations result from some form of solicitation fraud. http://www.abcnews.go.com/print?id=4228271

Of course, solicitation fraud is a under-reported offense, because many donors and consumers either are unware that they have been “duped” or if they learn that they’ve been “duped” are too embarrassed to report it, particularly when they’ve donated a relatively small amount, $10, $25, $50, or $100.

The fact that state regulators have access to a charity’s 990 form does not really answer this classical “Horton Hears a Who” dilemma. Without state registration, state charity regulators cannot connect up the 990 form with charities that are actively soliciting within their state which like “Horton” puts state regulators in a hundred mile stretch of clovers looking for the mayor of Whoville who resides on a speck of dust on one tiny clover.

Also, state registration becomes even more critical when the IRS raises the reporting threshold for the filing of the 990N (the postcard) to $50,000 in 2010. In many states like Hawaii, close to 90 percent of charities will no longer file a 990 or 990EZ and state registration data will be the only source of operational and financial data available to the public, beyond the tidbits reported on the 990N

Hugh R. Jones
President of NASCO

— Hugh R. Jones Apr 29, 01:49 PM #
Hawaiian charities that solicit only in Hawaii would still be required to register with Mr. Jones. The proposal makes that clear that the federal statute may not constitutionally preempt regulation of purely in-state activity. Hawaii could of course pass a law that allows for direct-to-donor online disclosure.

The proposal applies only to nonprofits that communicate and raise money nationally, and are required to register under the tangled web of 39 state laws. Nonprofits should not need to register in 39 states to send communications remotely. They must of course obtain licenses to do business in the states in which they are physically located, and the online disclosure form requires that information be disclosed too.

Also, given that state charitable solicitation officials are the only real repositories of information about donor fraud, it is a bit disconcerting that they need to rely on anecdotal evidence about the quantity of fraud. Some state regulators have contributed to misperceptions in those anecdotal data. If state regulators don’t want donors to get information without going through the regulators themselves, then both donors and nonprofits have plenty to be concerned about.

— Mark Fitzgibbons Apr 29, 03:02 PM #
Speaking solely in my capacity as a State charity regulator and not for NASCO, the democratically elected representatives of the State of Hawaii voted today to adopt a registration law for charities that solicit funds in Hawaii whether they be mainland or Hawaii domiciled. Hawaii will now become the 40th state with a charity registration law.

Mr. Fitzgibbons’ reply offers no defense to the important point that many charities will be filing the equivalent of a postage stamp with the IRS.

— Hugh R. Jones Apr 29, 07:14 PM #

Commenting is closed for this article.

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Debate Begins Over Proposal to Overhaul Fund-Raising Disclosure Rules

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