The U.S. Senate Finance Committee has announced plans to analyze the activities of nonprofit organizations. This analysis is in response to documented incidents of unethical behavior and fiscal mismanagement. As a result, the nonprofit sector has been inundated with calls for greater accountability and ethics among management and employees.
The purpose of this paper is to initiate discussion within the public sector concerning the documented cases of fiscal mismanagement. Incidents of potential corporate malfeasance have raised concern over the applicability of governance reforms within the nonprofit sector, such as the Sarbanes-Oxley Act of 2002. This paper also discusses how certain provisions of the Act may restore confidence in the nonprofit sector as well as improve corporate governance. Awareness of alternative strategies to restore confidence and improve corporate governance within the nonprofit sector is timely for both researchers and management.
According to the American Association of Fundraising Counsel (AAFC), contributions to U.S. nonprofit organizations in 2003 totaled more than $240.7 billion and are estimated to be 2.2 percent of the gross domestic product (AAFC, 2004). Bradley and colleagues in the May 2003 issue of Harvard Business Review argue that there is concern that nonprofit organizations do not use charitable dollars as efficiently as possible to advance their charitable mission (Bradley, Jansen, & Silverman, 2003). This potential lack of efficient flow of funds contributes to the need to examine accountability within nonprofit governance. An examination of nonprofit governance is relevant and timely due to the recent calls by Federal and state regulators to analyze the activities of nonprofit organizations within the United States.
The Senate Finance Committee has raised questions concerning improved corporate governance and accountability within the nonprofit sector. According to Senator Chuck Grassley, it is important for charities to "keep their trust with the American people" (U.S. Senate Committee on Finance, 2004), and many of the problems within nonprofit organizations are based upon poor governance or "failure to abide to best practices". Senator Grassley further argues that the Committee must concentrate on "more general reforms to address recurrent problems in the nonprofit sector" (U.S. Senate Committee on Finance, 2004). The Independent Sector, a coalition of nonprofits and corporations serving to strengthen nonprofit initiatives, commissioned the Panel on the Nonprofit Sector to investigate strategies to improve the oversight and governance of charitable organizations. The Panel was created in order to provide guidance on increased accountability, governance, and ethical conduct within the industry. The Panel calls on nonprofit organizations to implement measures to improve their governance and financial disclosure methods.
Calls for greater accountability within the nonprofit sector have occurred in response to several documented cases of fiscal mismanagement. One of the more prominent cases of fiscal mismanagement emerged amid disclosure of the William Aramony scandal within the United Way (Kolb, 1999). More recently, Oral Suer, former chief executive of the United Way of the National Capital Area, was sentenced to 27 months in prison for his role in a financial scandal involving the charity (Markon, 2004). Gibelman and Gelman (2001) document numerous scandals within the nonprofit sector reported in the press during the period 1992 through 2000. The United Way, Red Cross and New Era Philanthropy are several of the more highly publicized nonprofit scandals involving fiscal mismanagement in the United States. As a result of financial corruption within nonprofit organizations, calls for greater accountability and ethics among boards of directors, members of management, and employees have increased.
This paper discusses the existence of fiscal mismanagement within the nonprofit sector and the empirical research addressing ethical behavior in the nonprofit sector. …