Non-profit sector comprises those organizations that distribute their income to meet various needs globally, instead of distributing it as a profit. Thus, such organizations are not meant to make profits. They are supposed to use the resources under their control to offer services and assist in mitigating crisis (Powell & Steinberg, 2006). It is a common practice to have organizations operating under the non-profit sector exempted from taxation. Therefore, they are not required to prepare income statements and file returns for tax assessment purposes (Worth, 2011). In this case, the issue of accountability for these organizations arises. Considering that they are not supervised by revenue authorities for the purpose of taxation, they are liable to account for their incomes. This way, the board of directors of these organizations bears the responsibility of determining which activities to support. The board is also mandated to determine the amount of resources it can provide to any activity it wishes to support (Herzlinger, 1996).
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Therefore, the operations of the non-profit sector are autonomous, making the issue of accountability complex. This is because whenever the issue of accountability in the non-profit sector arises, more questions are generated. For example, talking about accountability in this sector, the question of accountability is to whom, for what and how (Alnoor, 2010). Thus, this discussion embarks on evaluating the accountability aspect of non-profit sector through answering the above questions.
The focus is on the four key loopholes applied to evade accountability in the non-profit sector. Under the discussion, factors that complicate the accountability aspect for non-profit sector are analyzed. Additionally, the possible solutions to overcoming this complexity are discussed.
Accountability for non-profit sector is a complex issue since non-profit organizations are expected to be accountable to different parties (Worth, 2011). While the organizations working for profit are responsible to answer to the tax authorities and the owners of the organization, the case is different from that of non-profit organizations. The last are expected to be accountable to the donors, government, and clients who receive their services as well as the organization itself and its mission (Alnoor, 2010).
Therefore, meeting the accountability requirement for all these parties becomes a challenge. This makes the issue of accountability for this sector difficult since it is hard to harmonize different expectations from different interest groups (Herzlinger, 1996).
Key loopholes for evading accountability
Non-profit organizations are expected to be responsible in the way they run their projects. However, there are several key areas that grant them loopholes to escape their accountability duty. For example, on a story running on the Daily Inquirer, some US top executives of Visayan Forum Foundation Inc., an NGO operating in the Philippines, were sued for allegations of misappropriating 210 million pounds (Ceres, 2012).
This is a classic case of financial misappropriations and poor governance on the side of the NGOs board, who falsified documents to cover up for that misconduct. The National Bureau of Investigations is probing the case, to trace where the funds granted to the NGO by US aid could have been taken (Ceres, 2012).this indicates a loophole in finance and governance, allowing such misappropriations to occur. The key loopholes for Non-profit sector include:
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Non-profit organizations are expected to have accountability in the way they spend their finances. Therefore, donors and other financiers expect that the amount of resources they give to the organizations will be utilized appropriately (Powell & Steinberg, 2006). It is required that such organizations are to disclose their financial transactions to their funders, detailing how the resources granted to them have been utilized.
However, there is always some overlapping in transactions since a single activity can be funded by more than one financier, making it difficult to address the issue of all resources consumed by the project (Salamon, 2002). This being the case, the financial statement for these organizations might fail to tally with the records of resources allocated to them since it is almost impossible to differentiate the portion of contribution made by each financier in a project funded by multiple financiers (Worth, 2011).
Since all the financiers do not contribute equally to a project, it is difficult for them to assess their contribution accurately. This creates a loophole for the management of non-profit organizations to misappropriate funds given to them since it is a hard task for any financier to detect the misappropriation (Alnoor, 2010).
Additionally, while profit-making organizations discuss their operations at annual general meetings, there is no forum of such kind where non-profit organizations are supposed to disclose their actions (Herzlinger, 1996). This eliminates the possibility of financiers to assess the utilization of their resources by the non-profit sector. For example, the United Nations and other Non-profit partners have always found it difficult to trust Kenyan NGOs, due to their poor history of managing donor funds (Mbatia, 2012).
This is another key area that grants non-profit organizations a loophole to evade accountability. The governance of these organizations is entrusted in the hands of the Board of Directors. The board is empowered to make decisions where directors determine the projects they can fund using the resources they receive from all the financiers (Worth, 2011). The responsibility of the board revolves around the acquisition and utilization of resources to meet the mission of the organization. This way, the board is authorized to determine which activities allow to achieve the mission and vision of the organization as well as the intent of the donors (Salamon, 2002).
In this case, the board has an overall authority to determine the resources to be used in the appropriate projects. This gives them an opportunity to settle on those projects that allow them to evade accountability. Additionally, they can easily choose the project that places their interest over the objectives of the organization (Herzlinger, 1996). This way, a loophole to evade accountability is created by having the overall authority bestowed on the board of directors. This is well exemplified by the situation in the Kenyan NGOs, where the local Non-profit organizations are only funded if they have a foreigner heading the finance of management department (Mbatia, 2012). The credibility of local people in governance is highly doubtful.
It is expected that the success of any organization, either profit or non-profit, is determined by its performance. However, while there are set standards that evaluate the performance of organizations working for profit, there are no principles for assessing the performance of the non-profit organizations (Salamon, 2002). This creates a loophole for such companies to avoid accountability.
The performance of profit organizations is measured by the results they achieve in terms of growth, efficiency and profitability (Powell & Steinberg, 2006). On the other hand, the performance of the non-profit organizations is measured by the achievement of their set mission and vision. Considering that there are no quantifiable measures for missions and visions, their accuracy in measuring performance is questionable (Worth, 2011).
Additionally, the duration dedicated to goal achievement, which is the measure for non-profit organization performance, is relative. While some missions can be realized within a short duration, others will take a long time before their fruits are born. This makes it difficult to fix a standardized measure of performance based on missions and visions (Alnoor, 2010). This also serves to create a loophole for evading accountability since the resources committed at present are expected to be accounted for in the future.
This is the final aspect of accountability that creates some loopholes for non-profit sector to evade accountability. Each non-profit organization is established with a given mission (Powell & Steinberg, 2006). Such mission acts as the guiding principle for the organization’s activities. However, since there are various avenues through which a mission can be achieved, flexibility in selecting the avenue is essential. While this flexibility touches personal interest of various groups and individuals who opt to follow the avenue that satisfies their interests. This allows the parties involved to opt for projects that favor them, thus evading accountability (Salamon, 2002).
Solutions to the loopholes
There are various proposed solutions for removing loopholes that allow the non-profit organizations to evade accountability.
Disclosure is one of the solutions where the non-profit sector should be required to adopt financial disclosure. This can be achieved through a requirement for such organizations to prepare financial statements that conform to the GAAP (Herzlinger, 1996). By preparing their financial statement conforming to these principles, a standardized method of assessing their accountability is established.
The analysis of financial information for non-profit organization is yet another avenue through which their accountability can be achieved (Herzlinger, 1996). This is difficult considering that there are no standardized ratios and techniques that can be applied to carry an analysis of their financial statements out (Herzlinger, 1996). However, this challenge can be overcome through the establishment of ratios and techniques that are specific to non-profit organizations (Salamon, 2002).
Dissemination is yet another possible solution that can be applied to eliminate the loopholes. This is applicable through the provision of information regarding non-profit organizations and their operations concerning the public (Herzlinger, 1996). Considering that such information is barely accessible, then, increasing the frequency of its access and broadening the channels from which it can be retrieved may help to remove the loopholes (Herzlinger, 1996).
This is a necessary measure applied towards ensuring that the non-profit organizations are accountable to their funders. It involves the application of punitive measures, such as imposition of fines and removal of certain privileges like tax exemption, etc. (Herzlinger, 1996). Stricter measures can also be applied to enhance accountability. Such measures include the imprisonment of some directors who fail to adhere to the implemented principles of disclosure (Powell & Steinberg, 2006).
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Alnoor, E. S. (2010). The many faces of nonprofit accountability. Harvard Business School.
Ceres P. D. (2012). Human face: corruption in NGOs. Philippine Daily Inquirer.
Herzlinger, R. E. (1996). Can public trust in nonprofits and governments be restored? Restoring Public Trust.
Mbatia, B. (2012). Corruption and local NGOs. My Kenyan Eye.
Powell, W. W., & Steinberg, R. (2006). The nonprofit sector: A research handbook. New Haven: Yale University Press.
Salamon, L. M. (2002). The state of nonprofit America. Washington, DC: Brookings Institution Press.
Worth, M. J. (2011). Nonprofit management: Principles and practice. London: SAGE.