Can’t Follow The Money

Transparency upended with grant confidentiality

Brian Mittendorf

Recent criticism of the American Red Cross and its efforts in Haiti highlighted a little-discussed but vital issue of nonprofit transparency. In responding to questions about the success of its spending in Haiti relief efforts, the Red Cross noted that much of its program spending was provided as grants to other non-governmental organizations (NGOs), and that at least some of these grants were made with confidentiality clauses that prevent public disclosure of details about the grantees’ spending practices, let alone specifics about how these particular funds were spent.

Of course, there is nothing fundamentally wrong with providing grants. The presence of a confidentiality agreement certainly means the Red Cross’ hands were tied in efforts to disclose public details of grantee operations. The end result, however, was an inability to be fully transparent.

The Red Cross is not alone in finding itself in such dilemmas. Even though being constrained by confidentiality clauses might not be widespread, very few nonprofits proactively provide details about how their grantees spend their funds or how the effectiveness of such grantee spending.

Though there are certainly circumstances where withholding information about grantees and their spending can be justified, it also undoubtedly runs counter to the principle of transparency espoused by many in the nonprofit sector. And while transparency is traditionally thought of as a nonprofit’s commitment to full and open records of its own practices, the fact that much of a nonprofit’s efforts are ultimately conducted by other entities means that total transparency might require a commitment of openness by and about grantees, as well.

A colleague and I have recently conducted research that highlights why this can be more than an isolated concern. We demonstrate that when donors rely heavily on reported program expenses (or their converse, “overhead”) as a measure of efficiency, it can cultivate an environment in which nonprofits seek to shed the burden of administrative costs on others, thereby creating a preference for providing grants rather than direct services.
This temptation to provide grants as a means of boosting an organization’s own perceived efficiency highlights a heightened need for donors to be able to “follow the paper trail” through the entire channel from donor to eventual beneficiary.

Taken together, these forces governing the environment of many nonprofits suggest that an organization’s commitment to transparency might need to extend beyond the organization proper to a broader commitment to revealing how funds flow through the entire charity supply chain.

Deciding how best to uncover the flow of funds through a charity supply chain is, of course, a delicate exercise. It might not be realistic or even feasible to fully follow the paper trail, but grant providers surely do (or no doubt should) have their own means of evaluating grant recipients and the success of their efforts. Complete transparency simply requires that grant providers make such information, perhaps in summary form, available to donors who themselves are simply seeking to evaluate the recipients of their funds.

Accounting standards and Internal Revenue Service filings might not require such additional disclosures, but a grant provider committed to total transparency can insist that grantees permit it to be shared. After all, donors who want to see where their money goes are really interested in seeing the entire picture, not just one piece of the puzzle.

Brian Mittendorf is a professor of accounting and MIS at the Fisher College of Business at The Ohio State University in Columbus, Ohio.