Accountability in the Nonprofit Sector: The Donor’s Role in Financing and Monitoring Social Change

The popular press and other mass communications outlets are replete today with expressions of concern about accountability in the nonprofit sector. The topic is also the focus of scholarly research that typically highlights the multifaceted responsibilities of nonprofit organization managers and trustees to meet the often competing and evolving mission and resource demands of their funders and the groups and communities they seek to serve.  The significance of the role of donors in financing and monitoring nonprofit programs and services must not be underestimated. Indeed, it is critical as the sector seeks to address the shifting and evolving challenges facing communities today.  This essay provides a brief overview of the growth of the sector and highlights the importance of the dual roles of donors as monitors of nonprofit organization internal controls and reporting and of serving as financiers and cheerleaders of social innovation.  These responsibilities are not always readily reconciled but must be managed adroitly if nonprofits are to serve as agents of positive social change.

The Growth of the Sector

The economic impact of the nonprofit sector reaches far beyond the individual organizations and immediate groups and communities it serves.  Based on data collected from 1990-1999, for example, the annual cost incurred by governments, directly and indirectly, to sustain the nonprofit sector was estimated to be approximately $165.8 billion, a figure that includes tax deductions, tax exemptions (local, state, and federal), and the “indirect value of other tax preferences” (Lee, 2004, p. 172).  Meanwhile, Petrovits, Shakespeare, and Shih (2011) have estimated the sector is responsible for more than $3.4 trillion in assets.  Furthermore, charitable giving in 2013 exceeded $335.17 billion, representing approximately 2% of the Gross Domestic Product (GDP), an increase of 4.4% in such contributions compared to the prior year (Charity Navigator, 2015). During the past four decades, the sector’s organizations have maintained this share of the GDP, despite sometimes challenging economic conditions and episodic public concern regarding their accountability, performance outcomes and effectiveness (Charity Navigator, 2015).

The continued growth of the sector has been driven, in part, by donors who believe nonprofits are positioned to offer more cost-effective services that better meet the needs of marginalized populations than many governmental entities (Ebrahim, 2003). Ebrahim (2003) has highlighted the relationships these expectations create, “There is thus a resource interdependence (albeit often asymmetric) in which NGOs [nongovernmental organizations] rely on donors for money, and donors rely on NGOs for their reputations in development” (p. 814). Funder beliefs and aspirations create a variety of often competing accountability claims that play significant roles in shaping the management and governance contexts and potentials of the nonprofit organizations they support.  In particular, funders provide NGOs incentives to serve certain social needs and groups and not others, and to do so only in the ways their supporters perceive to be appropriate and effective.

Administrative Controls and Reporting

Although they vary widely by organization within the sector, metrics of effectiveness and performance can reveal both community support for a nonprofit’s mission and how its backers envision its services will affect those targeted. Donors play an important role in holding nonprofits accountable for exercising strong internal controls, which often results in more accurate and transparent financial reporting and stronger allocation of resources to key strategic priorities. As Petrovits et al. (2011) have reported, “donors give less to organizations that overstate mission-related expenses and understate fundraising expenses, providing support for the idea that donors can unravel low-quality financial statements” (p. 332).  They further assert that, “organizations with internal control problems receive 3.8% less public support and 2.1% less government support in the years following the exposure of an internal control weakness” (Petrovits et al., 2011, p. 335). Supporters do not appear to be concerned with organizational compliance with national initiatives as a criterion for giving, as robust as those are. However, their financial investments often lead to deeper involvement in governance functions within the organizations they support.

For example, Callen, Klein, and Tinkelman (2003) found that major donors serving on finance or audit committees sought systematically to reduce administrative costs and increase program-related expenditures, thus enhancing the relative capacity of their organizations’ efforts to achieve its mission.  This finding was consistent with prior research that major donors can influence management expenses by securing representation on an appropriate committee (Hodge & Piccolo, 2005).  Yetman and Yetman (2004) have asserted that “market-based governance” (i.e., the involvement of donors, lenders, and other intermediaries in oversight and governance activities) consistently results in higher-quality reporting due to the immediate, personal and pragmatic relationship among management and governing stakeholders.  The authors also have suggested that the accuracy of reported charitable expenses varies in expected ways such that users, often donors, lenders and other regulatory agencies can have more confidence in the financial reports of organizations employing market-based strategies (Yetman & Yetman, 2011).  Donor involvement in governance constitutes a critical component of organizational oversight, shaping the perception of financial reports, the quality of internal controls and the mission-orientation of the organization.

Tension at the Intersection of Philanthropy and Accountability

The tension at the intersection of primary funder responsibilities—supporting social change and holding organizations accountable for their effectiveness and mission attainment—highlights the significance of donors’ engagement in philanthropy as a cornerstone of the nonprofit sector. As Ebrahim (2003) has observed, the interdependence of these responsibilities may serve the sector well, inspiring engagement and active citizenship to ensure that the charitable purposes of one’s investment are achieved. This tension, one of competing roles, places donors in a position to influence the character of social change. It also allows givers to play significant roles in determining accountability measures and the design of relevant public policy. Nevertheless, ultimately, supporters’ rights are limited—legally and socially.  Aside from pursuing an active role in governance and oversight efforts, a dissatisfied donor has few options except to limit future financial contributions.

Is this tension adequate to moderate the value of philanthropy within the sector, and simultaneously, result in effective accountability measures for nonprofits?  Does this present risks that may jeopardize donor engagement?  How are these tensions managed, practically, within the complex and ever-changing environment in which nonprofits find themselves situated today?  As the sector responds to these and other tensions that arise as a result of engaged governance and management, it is imperative to reconsider the role of donors in financing and monitoring social change and in securing NGO accountability.

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References 

Callen, J. L., Klein, A., & Tinkelman, D. (2003). Board composition, committees, and organizational efficiency: The case of nonprofits. Nonprofit and Voluntary Sector Quarterly, 32(4), 493-520.

Charity Navigator (2015). “Giving Statistics.” Retrieved from http://www.charitynavigator.org/index.cfm/bay/content.view/cpid/42#.VRBRADtg6vN

Ebrahim, A. (2003). Accountability in practice: Mechanisms for NGOs. World Development31(5), 813-829.

Hodge, M. M., Piccolo, R. F. (2005). Funding source, board involvement techniques, and financial vulnerability in nonprofit organization:  A test of resource dependence. Nonprofit Management & Leadership, 16(2), 171-190.

Lee, M. (2004). Public reporting: A neglected aspect of nonprofit accountability. Nonprofit Management & Leadership, 15(2),       169-185.

Petrovits, C., Shakespeare, C., & Shih, A. (2011). The causes and consequences of internal control problems in nonprofit organizations. The Accounting Review, 86(1), 325-357.

Yetman, M. H., & Yetman, R. J. (2004). The effects of governance on the financial reporting quality of nonprofit organizations. In Conference on not-for-profit firms, Federal Reserve Bank, New York.

Sarah HanksSarah Hanks is a Ph.D. candidate in Agricultural, Leadership & Community Education, and is the Graduate Assistant for the Residential Leadership Community. Her academic and research interests include leadership studies, problem solving, and nonprofit management.  Prior to returning to graduate school, Sarah enjoyed eight years as a leader within the YMCA movement, including four years as an executive director. In addition to her academic pursuits, Sarah serves as a member of the Community Voices team, a Court Appointed Special Advocate (CASA) for children in the New River Valley, and an active member of Northstar Church, as well as several professional organizations.

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