Nonprofits Say “Ahhhh…”

This tax season, nonprofit organizations will, for the first time, be required to undergo what K&L Gates health care attorney Ed Weisgerber describes as a “corporate endoscopy”:

If the hospital has affiliated for-profit businesses, the IRS wants to know about them in detail. Do the executives fly first-class on business trips„ There’s a place for reporting that information. If two board members have a 10 percent stake in the same business, the IRS wants to know that, too — even if the business has nothing to do with the hospital. More people will have to disclose their salaries.

And the form will grow yet again a year from now, as hospitals will then have to fill out a special Schedule H to document exactly what “community benefit” they contribute to justify their tax-exempt status.

Though the article concerns itself primarily with nonprofit hospitals — the dominant sector of Pittsburgh’s economy — these more stringent rules apply to all nonprofits. Greater financial scrutiny of nonprofits is only a recent phenomenon at the federal level. GuideStar reported in 2005 that many states were ramping up nonprofit financial disclosure requirements in the wake of Sarbanes-Oxley, a series of accounting regulations applied to for-profits after the Enron scandal.

And they should. Nonprofits exist to provide public services that the government is unwilling, unable, or ill-equipped to provide. Devolving public responsibility to semiprivate organizations recognizes the innovation that competition and entrepreneurial spirit can spur. But the public responsibilities taken on by nonprofit organizations are just that — public. As institutions providing public services (often with public money), nonprofits must be held to the same levels of accountability and transparency as other public sector — that is, government — agencies are held to. Or should be held to.

With new technology like GuideStar’s online nonprofit financial profiles and Rhiza’s Folio portfolio management software, nonprofits can reinforce the trust of donors, clients, and community members through full disclosure of finances and decision-making processes. In addition to ensuring this information is comprehensible and reaches the public, using technology can also help nonprofits identify opportunities to improve efficiency in their own operations — just like it can for the government.

Further reading: BoardSource and Independent Sector, “The Sarbanes-Oxley Act and Implications for Nonprofit Organizations”