Thursday, June 23, 2005

The Costs of Compliance

I've never accepted "it's hard work" as an excuse for noncompliance or underperformance, but I wonder if the regulatory atmosphere in the third sector doesn't make the nonprofit CEO's job unnecessarily difficult. Not only does overly burdensome or unclear regulation divert precious charitable resources but such regulation prices the people out of the charitable marketplace.

From the Pittsburgh Post-Gazette:
Business executives who worry about meeting growth targets every quarter may think they would have fewer headaches running a nonprofit. In fact, the job is more stressful than ever as more nonprofit groups compete for limited funding. And while juggling myriad personnel and other duties, heads of nonprofits also feel pressured to strengthen governance practices and codes of ethics. In this post-Enron era, many nonprofits, including Juilliard, have adapted the governance practices laid out in Sarbanes-Oxley, the 2002 corporate reform law.

"Sarbanes-Oxley doesn't apply to nonprofits, but like ink in water it's changing the way they operate," says Charles Elson, director of the University of Delaware's Weinberg Center for Corporate Governance. "Suddenly you've got accounting firms that audit nonprofits clamoring for the same financial controls now in place at for-profits." And nonprofit trustees want more transparency. Although they're exempt from financial liability in most states except in cases of fraud, they worry that in this climate their reputations could be hurt if money is misused or the organization falters.

Charities worry less about actual instances of abuse and more about the appearance of abuse. It's understandable. Public trust is their stock-in-trade. On the advice of professionals, they adopt a regulatory framework that doesn't even apply to them, which increases the compliance headache, which pushes them back to professionals, and you get the idea. I don't have anything against the accountants, lawyers, and financial advisors who, to a great extent, have made the good work of this sector possible. Instead of or in tandem with the contemplation of creative, carefully crafted regulation and figuring out ways of installing the proper safeguards, we turned those professional energies to how to make compliance easier for nonprofits. If we want to do more to make the sector more effective and accountable, we should be exploring ways to make it easier to be such. Expanding e-filing programs and the capacity of the IRS come to mind. As Thomas Paine once wrote, "Laws difficult to be executed cannot be generally good."

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