Corruption and scandals have put businesses such as WorldCom Inc. and Enron Corp. in the headlines for everything from embezzlement to accounting fraud, and landed some executives in prison.

In the aftermath, the federal government clamped down on the corporate world through tougher regulations. Now, legislators are casting a suspicious glance on the non-profit sector as well. Under the leadership of Sen. Charles Grassley, members of Congress are pushing for new regulations intended to increase the accountability of non-profit organizations and protect the financial interests of taxpayers and charitable donors.

“I think all of the scandals in the past years have put under a very bright light that there are obligations for running any corporation, especially a non-profit corporation,” said Bill Havekost, president and CEO of Hospice of Central Iowa. “We get certain advantages for being a not-for-profit, and in turn we have certain obligations to the community. One of those is taking care of how we spend those dollars.”

With federal legislation looming and the Internal Revenue Service vowing to crack down on abusive practices by charitable organizations, Greater Des Moines non-profit leaders are taking measures to protect themselves, their organizations and their donors. Though it has required a great deal of extra work, from training for board members to mounds of paperwork, they say it’s worth the effort to protect the integrity of the organizations to which they’re so devoted.

“People assume non-profits are flying along doing their own thing, and we really have a sense of responsibility,” said Terry Hernandez, executive director of the Chrysalis Foundation, which funds community programs that serve women and girls. “And that’s true across the non-profit sector. (Non-profits) understand they have to be completely accountable. It’s like retail sales; people always have a choice where they give their money. If they sense something doesn’t feel right, then you lose an important part of your operating budget. So we realize we have to be very transparent and communicative and responsible.”

Congressional debate

Though government leaders such as Grassley acknowledge most non-profit organizations are well run and do reputable work, there are other organizations, some that perhaps do not even fit the definition of a non-for-profit entity, that have engaged in excessive compensation and shady business practices.

Grassley is gaining bipartisan support for reforms outlined in Section III of the Tax Relief Act of 2005, which would provide a number of incentives to encourage charitable giving, such as new opportunities for tax deductions, as well as reforms applicable to charitable organizations, many of which resulted from recommendations from the non-profit sector itself. Grassley told a group of non-profit leaders in October that the need for greater responsibility on the part of donors and charitable organizations is “to safeguard the public trust.”

“Reform and oversight also safeguard the donors and taxpayers,” Grassley said in remarks made at the Independent Sector Annual Conference. “For donors – to safeguard that the money is being used appropriately. For the taxpayers – to safeguard that the tax benefits that both donors and charities receive are balanced by benefits to the community and especially those in need.”

The U.S. Senate passed the Tax Relief Act in November. The House passed the bill as well, but without the provisions related to non-profit reform. Grassley spokeswoman Beth Pellett Levine said the bill is awaiting consideration by a House-Senate conference committee, which could convene early this month. Grassley is hopeful the bill in its final form will include the reform provisions, Pellett Levine said, but a great deal of negotiation lies ahead as both houses of Congress are comfortable with.

Grassley announced Jan. 12 that even with the inclusion of the non-profit reform provisions, all of his goals will not likely be accomplished through a single piece of legislation. He intends to propose additional reforms later this year that extend well beyond those in the bill.

IRS scrutiny

But congressional legislation is only non-profit leaders’ first concern. The IRS, which learned many lessons about government oversight from the corporate scandals, has vowed to get tough with the non-profit sector.

The agency’s avowed top priority for 2005 was strengthen its enforcement presence among tax-exempt organizations. It planned to have contacted approximately 2,000 organizations by the end of the year, primarily to conduct compensation inquiries, and expects it will conduct about 1,400 similar reviews annually in the foreseeable future.

Ted Lodden, a principal of Brooks Lodden P.C., a West Des Moines public accounting firm that works with non-profit organizations, said the tightening of standards and regulations is presenting non-profits with the biggest changes they’ve seen in 30 years.

“This will affect a significant number of non-profits,” Lodden said. “We plan to tell all our clients about these regulations and how it may affect them, how they can keep themselves safe from them.”

The IRS’s Tax Exempt Organization Compensation Enforcement Project will focus on organizations’ compensation practices in determining what are “reasonable” salaries and benefits for top leaders in an organization. But excess benefits can extend to anyone who receives insider profits at the expense of the organization – whether it’s a consultant who charges higher-than-normal fees, a real estate owner who charges the organization exorbitant rent or a donor whose charitable deduction for a car donation far exceeds the automobile’s market value.

Sanctions will be issued not against the organization, but against non-profit insiders who take advantage of excess benefits. The IRS will assess against such individuals an surtax ranging from 25 percent to 200 percent of the excessive benefit. Even more severe, however, is the threat of a revocation of an organization’s tax-exempt status.

But those guilty of glossing over any compensation agreement are at fault as well. Lodden said board members will face a 10 percent surtax if they are found to be in violation of excess benefit guidelines.

“If they approved it and it’s excessive, they’re guilty,” he said. “If they didn’t review it and still approved it and it’s excessive, they’re still to blame.”

Preemptive action

Rather than sit back and wait for reform to be mandated, many organizations have taken the lead and enacted internal changes, in some instances adopting reforms similar to those that have been imposed upon for-profit companies.

“Some are concerned ahead of time; some are not,” Lodden said. “But if they get audited, they may be scrambling.”

At United Way of Central Iowa, President Shannon Cofield said the organization spent much of 2005 focused on addressing the increased scrutiny coming down from the federal level and how that organization can comply with tougher standards.

“We have followed the issue very closely,” she said.

The organization’s finance committee has followed the recommendations of United Way of America, studying the rules established by Sarbanes-Oxley Act as they apply to non-profit organizations. United Way of Central Iowa is currently in the process of adopting all of those recommendations.

“Because without us being accountable and transparent, we’re nothing,” Cofield said. “Many organizations have faced scandal, and I went through it in 1992. I would rather err on the side of openness and accountability than have to face something like that. It’s terrible.”

In fact, many organizations have looked to Sarbanes-Oxley as a guidepost in achieving greater accountability. Cofield said United Way reviews the law and its applicability to non-profits with its board regularly. Easter Seals of Central Iowa has made the effort to comply with each of those regulations. President and CEO Donna Elbrecht and the organization’s chief financial officer are required to sign off on financial statements, and the board recently signed off on a conflict-of-interest policy.

In 2003, BoardSource, which provides educational and consulting services for non-profit organizations, and Independent Sector, a leadership forum for charities, summarized the act and its relevance to non-profit boards and made recommendations on how the provisions could be applied. They recommended that non-profits establish an independent audit committee, enact a conflict-of-interest policy for board members, exercise financial disclosure with private donors, clients, public officials, media and others and establish a whistleblower policy, as well as several other recommendations.

Before the IRS comes knocking, Lodden said, non-profits should review their financial arrangements, everything from leases to expense reimbursements as well as any transactions involving the top officers in the organizations.

In addition, establishing an internal audit function is one component of Sarbanes-Oxley that he said could be applied to non-profit organizations at little or no cost.

“It’s fairly easy to do and it makes sense from a fiduciary standpoint,” he said. “If they’re strapped for resources and they have a volunteer board, you still need to have some kind of internal audit system.”

Easter Seals of Iowa is one of many organizations that have established an independent audit committee, and United Way works closely with its financial and audit committees, regularly reviewing their reports with the board.

“We’re very open about where our investments are and where we spend our dollars,” Cofield said.

To further address accountability and responsibility for donor dollars, many non-profits opted to deal with compensation issues before the IRS drew its focus to the issue. Though the organizations are concerned about the risk of financial penalties, their greater concern rests in their relationships with their donors.

Look at the base salary and additional benefits, “then make sure all of that makes sense and it’s backed up by documentation,” Lodden advises. “We think documentation needs to happen before, during and after the transaction so you’re sure you don’t slip up. Appearance is very important here.”

He also suggests that non-profits consult with accountants who can research databases to compare the salary and benefits paid by peer organizations to ensure the total compensation packages for top officers are not considered excessive under any guidelines.

Hospice of Central Iowa’s executive committee and board of directors examine compensation annually. At a minimum, Havekost said, they review market surveys for health-care and non-health-care organizations so that salary reviews can extend to all of Hospice’s employees.

Easter Seals’ board typically requests an independent salary survey of similar non-profit organizations, as well as some for-profit corporations. Elbrecht said it’s as much about being a responsible user of donor dollars as it is about knowing what it takes to be a competitive employer.

The directors of these organizations are acutely aware that they’re under greater scrutiny. Their challenge is to make sure board members are even more aware of their responsibilities to the organization and the possible effects that could result from their actions, or lack thereof. Just as board members in the for-profit sector have been faced with stricter regulations and tougher standards, so too have members of non-profit boards.

Elbrecht said a major factor in remaining an accountable, trustworthy, well-run organization can be traced back to orientation and efforts to improve familiarity with legal and financial responsibilities. Easter Seals spends a great deal of time with its new board members to ensure they are familiar with policies and procedures. The Chrysalis Foundation’s staff and board routinely participate in training activities focused on governance and financial standards.

“Serving on a board has changed considerably,” Elbrecht said.

Concerns outweighed

But all of these changes place a greater workload on a non-profit organization’s paid staff and on its volunteer board members.

Hospice of Central Iowa, like some other non-profits, has appointed its finance committee to function as an audit committee as well. But Havekost worries about the added burden placed on his organization’s volunteer board. Others expressed concern that, though additional training is necessary for the organization to stay on top of compliance issues, it too could further strain board members.

“At some point it becomes a workload issue for these volunteers,” he said.

Many non-profit leaders have expressed concern that added regulations could overburden small charities.

“We’re a staff of two, but that scrutiny demands that every charity show accountability,” Hernandez said of Chrysalis. It has been challenging, she added, but said her organization has benefited from committed board members who have been “vigorous about monitoring policies and procedures.”

But even Hernandez, who must improve training, documentation and general oversight with a $615,000 annual budget, understands the importance of tougher standards. In addition to the struggle of operating programs and keeping their doors open, small non-profits might find additional reporting cumbersome, she said. “But if they’re able to show they’re financially responsible, they’re going to benefit by getting more support from funders.”

Cofield doesn’t think any reforms that have been enacted or proposed are excessive, simply because non-profits are held to a higher standard.

“I think we all needed a wake-up call,” she said. “My sense is there is not a lot of illegal or unethical activity going on. But it doesn’t hurt to be shaken up so you’re on your toes about what’s important.”

Elbrecht calls the changes “well-intentioned,” but expressed concern about one-size-fits-all regulations on non-profits of various sizes and missions.

“With any regulation, to find one that fits every need without creating additional expense is difficult,” she said. “Sarbanes-Oxley has a price to it, and certainly the non-profit sector is going to see that same kind of a price. So there has to be a balancing act.”

Erin Morain can be reached by e-mail at erinmorain@bpcdm.com