Nonprofits provide valuable services to many communities across the United States. The shape of our governments would be vastly different without them. Nonprofits provide many services that the government and the private sector are not able or willing to provide. Millions of dollars pass through nonprofits each year. These funds come from many sources. So who regulates the actions of nonprofits? To answer this question, we must first understand the reason for the existence of nonprofits and the stakeholders they serve. Nonprofits exist to provide a specific charitable service to a particular community or group. Stakeholders may consist of community members, customers served, government, the private sector, etc. It all depends on the services offered and the resource dependencies that form the stakeholders for a nonprofit. Regulation can come from a variety of sources. Government regulations certainly affect nonprofits depending on the services they provide. In the financial realm, the Financial Accounting Standards Board (FASB) sets accounting regulations for private, for-profit entities. The Governmental Accounting Standards Board (GASB) sets accounting regulations for the public sector. Many times, nonprofits are lumped in with the public sector. However, the function of government/public sector can be very different from the nonprofit sector.
Nonprofits all must be approved by the Internal Revenue Service in order to receive tax-exempt status as a charitable organization. As part of this, nonprofits do have some reporting requirements. They must have bylaws sufficient to demonstrate the organization’s mission. Other policies should discuss board development and recruitment, programs, funding sources, etc. Nonprofits must not deviate from the mission, or they risk losing their tax-exempt status. However, there is little enforcement by the IRS to determine if nonprofits are still endeavoring to fulfill their original mission. In the wake of the Enron debacle and the implementation of the Sarbanes-Oxley Act, financial regulations are much stricter. This still only affected the public and private sectors. The Sarbanes-Oxley Act mainly focuses on corporations who are publicly traded on a stock exchange. There has even been a focus of the FASB recently to try to become the standard setting body for private companies who would not normally fall under the accounting regulations. Governments are required to have an annual audit. These accounting standards are designed to provide stakeholders with information to determine if their organizations are accomplishing their goals and providing proper stewardship over the funds under their control. Corporate shareholders can then vote for changes to the corporation’s board and voters can elect new representatives on their government bodies. Nonprofits are still untouched by these accountability mechanisms.
The nonprofit sector should be next in having a regulatory body set standards for ensuring they are complying with their mission and exercising proper stewardship over their funds. This is being accomplished in a roundabout way by some mechanisms. Government funding usually requires certain accountability measures to ensure the funds are spent properly. This may include an annual audit or some other reporting mechanism. Nonprofits also may provide annual reports to satisfy large donors or communities that they serve. The best run nonprofits will already have an annual audit, prepare an annual report, and/or provide specific information to ensure stakeholders that they are providing proper stewardship over the funds they control. Nonprofit boards are charged with ensuring their organization stays true to its mission. They must monitor the programs and activities of the organization and ensure the mission is accomplished with a proper stewardship over their resources. Sufficient data does not exist to determine the success of nonprofit boards in accomplishing these tasks. All it takes is one Enron in the nonprofit sector to put public pressure on better regulating and monitoring nonprofits. This would severely hurt the fund capabilities of some nonprofits. Hopefully, a better understanding of the nonprofit sector leads to tighter regulations and better accountability.