If the recently announced self-governing code of ethics proposed by Imagine Canada is not enough to restore confidence in the transparency of the Canadian charitable sector—and I don’t believe it is–what additional steps could realistically be taken?

Set fair guidelines for administrative and fundraising costs varied by sector and type of charity:

The first step that everyone seems to miss is that we need to establish what is a fair expectation of the percentage of funds needed for administration and fundraising. No non-profit can function without paying the rent, insurance, office supplies and staff salaries. And to be fair, it has to be noted that the percentage of the budget spent on administration and fundraising can vary widely in different charitable sectors. We want to remove any excuse for obfuscation in reporting by allowing adequate costs for legitimate administration and fundraising costs. Consider these two scenarios:

Charity A runs musical after-school activities for children. The charity has one paid staff member who does grant-writing, foundation appeals and writes letters to private donors for donations to support the work of the program. The bulk of the staff members time is spent in organizing the programs, contacting schools, preparing program materials. The charity operates out of donated school space. Less than 20% of the charitable organizations budget is spent on administration and fundraising.

Charity B exists to organize one annual high profile special event to raise money for a health related charitable purpose. Special Event fundraising is the most expensive method of fundraising. All of Charity B’s staff are involved in fundraising and organizing the charitable fundraising event itself. Charity B provides no direct charitable programming but transfers profits to charitable organizations that do. In a good year, the large fundraiser realizes 40% profits on the investment in the event. In a bad year, only 20% may be available for transfer. Arguably it may be money that could not be obtained any other way.

These are extreme examples of the apples and oranges that make up the charitable sector. Too often unrealistic goals of lean administration and fundraising costs are expected by donors, foundations and government programs, without any consideration of sectoral differences or other factors affecting a non-profit corporations real costs. These unrealistic expectations by some funders leads to a certain climate of obfuscation in the charitable sector. If a good organizational leader knows that showing an administration cost low enough to qualify for project support is impossible, she/he will naturally think of ways of funding the extra very real administrative costs from another program. The administrator thinks “it’s all in a good cause”. Volunteer Boards become used to hearing that we have to “rob from Peter to pay Paul” because the portion allocated to be spent on administration and fundraising is just too low. And Boards will be tempted to think “everyone’s doing it”. In such an atmosphere it becomes hard to draw the line and know just what are the real programming expenses and just how high is your fundraising and administrative costs.
Funding bodies, sectoral umbrella/advocacy groups, and non-profit administrators have to come clean with each other and set realistic standards for administrative and fundraising costs in order to set realistic benchmarks that organizations can then measure themselves by going forward.

Introduce standardized accounting systems that are geared to non-profit management

If it is all about the numbers, then how we count and what we count becomes very important.

Current systems of accounting only make donors aware of the hard dollar costs and benefits of non-profits without offering any other tangible cost/benefit analysis. There are some huge misses as a result. One of the most obvious is the benefit to the community when huge groups of volunteers are involved in a charitable activity. The volunteers benefit in training and a sense of well-being. They take skills back to their jobs and communities. Their work gives huge benefits to the charity whom they work for. Conversely what are the costs when a non-profit turns over its full staff almost annually because of poor management? Donors are funding unnecessary staff training and potential law suits when human resources practices are below par. But that’s not on the balance sheet either. A charity that is creating great work in the community with a mainly volunteer force supervised by a few paid workers may look identical on the books with a floundering charity with the same number of staff and little real activity.

We also need standard accounting practices to separate project versus operating expenses because so many of us are paying operating expenses out of portions of project funds. This is a legitimate practice when a number of project budgets have small amounts of administrative costs factored in. Keeping track of what is allowable becomes complicated as number of project streams increases. Having worked in one charity where large sums of project funds were allocated to administrative and fundraising costs, while being posted as program costs, I have seen that it can be done without ringing alarm bells at audit time.

Professor Jack Quarter, at the Ontario Institute of Studies in Education, Social Economy Centre, has been doing some ground-breaking work on Social Accounting that should prove useful in any initiative to restore public trust in our charitable sector.

Once new non-profit accounting standards are adopted it will be necessary to communicate these new standards through professional accounting bodies to assure that accountants, bookkeepers and auditors are aware of the new practices.

Accounting professionals to be held accountable

When things go off the rails in the corporate world, everyone looks to the corporate auditors. How did they miss this? Was there collusion? Should the auditing firm be punished?

But does this happen when it is disclosed that charitable funds have been misallocated to admin and fundraising in charitable institutions? Why not?

In the past I have attempted to make an auditor aware of deceptive practices in an organization I was employed by and was frozen out. I reported the auditor and the Board Treasurer ( a chartered accountant) to their professional regulating organization and got no response. Why? The rationale I received was that they were volunteers or working below the usual fee, doing a good deed, and therefore couldn’t be expected to give the due diligence of a professional accounting job. This didn’t strike me then or now as acceptable.

Should accounting professionals be held accountable when private donations and public charitable funds are misused? That’s a question for the profession and the public to consider.

Sharing of information among charitable funders

Currently in researching information about a charitable institution you can find their charitable return information online which gives you broad categories of where they receive their funding from. You can also access information from some of the big foundations and government programs and discover the size of their program contributions to the char
ity.

What you can’t find out and what isn’t shared between funding bodies is what they have actually funded. This results in charities being able to double-fund activities and staff salaries with impunity while channelling the dollars into those administrative costs and fundraising costs that they really don’t want to report.

More information has to be publically available.

Volunteer Board Training and Information

In theory all non-profits and charities are governed by a volunteer Board of Directors who exercise a stewardship function within the organization. In actual practice, the Board is often comprised of very busy people with good hearts who really want to believe that their charity is doing the good job. Most of the time they are right.

Unfortunately, the main source of information and training on Board functions is often a non-profit manager who could have a vested interest in making the charity look more successful than it is. Boards need some measure of independence and Board members really need training and information on charitable standards of business practice that comes at least in part from somewhere outside their organization. As all charities have to provide a list of Directors as part of their annual information return, Revenue Canada could serve as a source to send all Directors a regular update on industry standards and provide the means for Board Members to be alerted to the tell tale signs that something might not be quite right in their organization.

Providing Disincentives for Breaking Ethical Standards

There are currently few mechanisms in place to deal with organizations that break existing ethical standards in raising charitable funds or who misallocate charitable funds. While it may be difficult for the small donor to trace the use of their funds, the same is not true of government programs that make tax dollars available for charities. When a public funder discovers a major breach of ethics, there should be repercussions and disclosure.

It is in the interests of all ethical and hard-working charities to see charitable licenses revoked for those that don’t play by the rules and contribute little or no social good.

Whistle-blowers

Almost everyone who has worked in the charitable and non-profit sector has had at least one horror story about unethical practices. Most never get reported. One simple reason is that there simply is no one to report the situation to outside of the organization’s own Board of Directors. Plus there is a lot of pressure to disregard the accounting irregularities on an “ends justifies the means” argument. Employees who take the step of going to the Board can find themselves jobless and without a reference, often not listened to at all. I know of one instance where a loyal staff member stealed themselves to take a troubling set of facts to a Board Member. The next day the manager came to her office and said, “Everything you tell a Board Member will come back to me in a few hours and if you ever do this again you will be fired and you will never get a job in this sector again.” Even when groups of staff go to Boards of Directors, they are often simply labelled troublemakers. One of the first things a non-profit manager with something to hide does is try to isolate the Board from the Staff and discredit any staff member who might have knowledge of misdeeds. Boards should be highly suspicious of managers who inform them that direct communications between organization staff and Board is “inappropriate”. After seeing this suppression of staff in organizations I’ve worked with in the past, I’ve come to the conclusion that we need a Canadian tip line for charitable and non-profit wrong-doing and whistle-blowers need protection from reprisals in the workplace. We can’t solely depend on over-worked, under-informed volunteer Board members. Imagine Canada has taken the lead in formulating a new ethical standard for charities. They may the be the logical body to administer a tip line on charitable fraud and other unethical practices.

With all these steps in place, we can establish what the standards are, communicate those standards and weed out the few bad apples. The result will be restored public trust, an end to misallocation of charitable dollars, and a better working climate for some of the most idealistic and selfless workers in the Canadian workforce.