Financial Disclosure Takes Root
July 1, 2005 Todd Cohen
In 1999, when GuideStar announced it would post on its Web site all Form 990 information returns that nonprofits file with the Internal Revenue Service (IRS), “all hell broke loose,” said Bob Ottenhoff, president and CEO.
“We got a lot of irate calls,” he said. “Everyone said, ‘Wait a minute, you can’t do that, that’s a private document.’ And it’s not, it’s a public document.”
GuideStar, based in Williamsburg, Va., still gets a lot of calls and email messages, roughly 100 a day, Ottenhoff said, but they now focus on “what is taking so long to post our 990.”
That sea change in nonprofit attitudes about disclosing financial data reflects both growing expectations by donors, funders and the public, as well as new technologies that nonprofits can use to share that data, experts said.
“Increasingly, today’s donors want to be better informed,” said Paulette Maehara, president and CEO of the Association of Fundraising Professionals (AFP) in Alexandria, Va. “What’s driven that, and what’s changed over the last five years is the technology,” she said. “Technology has allowed organizations to tell their story in a much more effective way.”
In June 2001, in a story on the international conference of AFP, known then as the National Society of Fund Raising Executives, The NonProfit Times reported that the growing availability of Form 990 on the Web was evoking fear among some fundraisers.
But today, Maehara said, “It’s no longer an issue as to whether or not you should disclose. It’s disclosed.”
Online all the time
GuideStar, with 1.5 million nonprofits in its database, last year drew 5 million visitors to its site, where daily traffic totals about 20,000 visitors, Ottenhoff said.
In addition to posting Form 990 returns, GuideStar encourages nonprofits to add other financial and organizational information to their pages on its site.
In 2004, 90,000 nonprofits provided additional information to those pages, Ottenhoff said, ranging from names of board members and background on senior staff to accomplishments in the past year and plans for the coming year.
“Those questions are more like the questions an investor would want to know,” he said. “People are much more engaged and much more involved in learning about an organization.”
Jan Masaoka, executive director of CompassPoint, a nonprofit consulting firm in San Francisco and San Jose that works mainly with community-based organizations, said greater access to Form 990s is “making people pay more attention to what’s in their 990s.”
The forms, required to be filed with the IRS by nonprofits, other than religious congregations, with $25,000 or more in annual income, provide information about expenses for programs, fundraising, and “management and general” operations.
Yet while nonprofits have paid more attention to the accuracy of data in their 990s, and to the way they state their message, Masaoka said, the wide availability of those forms has not changed the operating practices of the smaller organizations CompassPoint serves.
“They’ve always had low fundraising expenses,” she said. “They still have low fundraising expenses. They report their fundraising accurately on the 990. And, the reason why people give them money continues to be because they believe in their causes.”
Joan Lauck, development director at the Akron Art Museum in Akron, Ohio, said not a single donor had requested the museum’s 990. “I have not, to my knowledge, had anyone outside a foundation ask for the information,” she said. “Our funders in particular are more interested about the reach of our programs into the community.”
Most nonprofits are sharing financial statements with the public, according to a recent survey, and GuideStar last month launched a new feature that would let nonprofits upload financial statements, annual reports and other informational documents to the pages on its site.
According to preliminary results of a survey on financial disclosure by the Center for Civil Society Studies at Johns Hopkins University in Baltimore, 74 percent of nonprofits that responded make their financial reports available for public review on request; 70 percent distribute their financial reports to their funders; and 54 percent publish their financial statements in their annual reports.
Only 9 percent of the respondents reported posting the financial statements on their Web sites.
The survey also found that the 990s of most nonprofits, in a practice consistent with recommendations in the Sarbanes-Oxley law for the financial reports of private companies, are signed either by their chief executives, 73 percent, or board chairs, 8 percent. Some 65 percent of nonprofits surveyed relied on external consultants or firms to complete their Form 990 in the past year.
While GuideStar posts 990s as soon as it receives them from the IRS, the data in those forms can be more than one year old by the time of the posting, Ottenhoff said.
With their respective fiscal years ending on a broad range of dates, nonprofits have five months after the end of their fiscal year to file the Form 990 with the IRS, and can request up to two extensions of three months each that the IRS typically grants, Ottenhoff said.
Once a nonprofit files a paper copy of Form 990 with the IRS, the agency makes a TIFF file of the return, puts it on a DVD and sends the DVD to GuideStar, a process that can take another 60 to 90 days.
“We’re now starting to post 2004 returns on our site,” Ottenhoff said in late April.
Impact of disclosure
Fueled by donor demand, the widespread availability of Form 990s and other financial information has given nonprofits a powerful fundraising tool, Maehara said. The more information donors and constituents have, “the more connected they are and the more willing they are to give money,” she said. “It creates an environment that is very ripe and very positive for an individual to be asked for a gift.”
Nonprofits now can deliver information such as 990s, annual reports and financial statements on their Web sites and with email, providing information critical to a new generation of donors and volunteers, Maehara said.
“Donors of today are a little different than donors of two generations ago,” she said. “They want to be involved with the organization either by giving money or giving time, or both. And the more connected you make them feel, the more likely you are to have them as a donor or volunteer.”
Ottenhoff said greater disclosure of nonprofits’ financial data reflected big changes in the practice of philanthropy.
“Now, philanthropy is not something just for a wealthy individual and something that’s created as part of your estate planning,” he said. “Today, people have opportunities to be involved with a community foundation, in a donor-advised fund, to make donations online with a credit card, to start a small family foundation. There are many ways for you to be engaged.”
And while many donors still give “without question” to their college, local PTA or religious congregation, he said, “the era of assumed virtue is over, and to many of these people, it’s not even just about virtue, it’s about effectiveness.”
Moving to even greater financial disclosure is a focus of the Senate Finance Committee, which is looking at sweeping changes in the regulation of nonprofits. The committee staff, for example, has recommended that Form 990s include information about a nonprofit’s performance, not simply finances.
While disclosing performance is important in fundraising because it shows donors their gift made a difference, Form 990 is “not the appropriate place for that,” Maehara said. “Doing it through Web sites or annual reports is a much better place to show how your organization has made a difference in the community,” she said.
Ottenhoff agreed with Maehara. While Form 990 “in and of itself does not give a complete picture of an organization,” he said, disclosing performance is “part of what an organization voluntarily should supply.”
Masaoka said she favored changing the law to require that Form 990s be filed by all charities with more than $25,000 a year income, including religious congregations.
She also would like to see the IRS publish all 990s, rather than having the function GuideStar serves borne by private funding. “It’s a government form,” she said. “It’s about public access.”
Jason Saul, CEO of B2P Commerce, a Chicago firm that works with funders to help them measure the impact of their grants, said nonprofits should not fear the proposal by the staff of the Senate Finance Committee to require disclosure of performance. “They should not see this as a threat but rather as an opportunity to make more information public to donors about the good work their organization is doing,” he said.
“You have to be in a position to convince them you are the most effective organization at solving the problems they care about,” he said. “Nonprofits are concerned that donors are looking at the wrong ratios to judge their effectiveness. Here’s an opportunity where they can actually set the record straight.”