The International Journal of Not-for-Profit
Law - Volume 2, Issue 1
A quarterly publication from The
International Center for Not-for-Profit Law
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Plenary
No. 3: What
Level of Accountability/Regulation is Appropriate for Public Benefit
Organizations? Summary of the Panel Presentation Suggested
issues and some topics for discussion: 1.
Why is there a need for
regulations regarding the accountability and transparency of public benefit
NGOs? On the subjective level ·
NGOs
claim to exist and operate in the public interest and in many cases serve for
the public benefit. ·
NGOs
need the support of donors and sponsors from the general public, therefore they
must also gain the general public’s trust. On the practical level ·
NGOs
would like to obtain tax benefits like tax exempt status or a reduction of tax
and other fiscal obligations. ·
NGOs
should meet the stakeholders’ interest. Therefore, NGOs must be transparent
and accountable: ·
to
the government (in the case of receiving any subsidies, governmental grants or
donations), ·
to
private donors, and ·
to
their own clients. 2.
What do we mean by
accountability and transparency? ·
What
information may or should be provided or disclosed? ·
What
is the level of reporting that is acceptable or required from an NGO? ·
Is
there anything that can or should be prescribed by law? ·
Should
there be any variations in the required information depending on the size or
type of the NGO? 2.1.
What types of information should be disclosed? The
disclosed documents should give a person sufficient information to make an
assessment of the organization’s achievements in light of the amount of money
spent by the organization. Relevant
information includes: Financial
information ·
Financial
statements (including balance sheets) prepared by an independent, licensed
auditor or an internal supervisory body. ·
An
accounting of the use of assets obtained from public sources and claimed to be
used for public benefit or in the public interest. ·
Functional
expenditure reports. Professional information ·
A
report (serving also for improving public relations) on activities made in the
public interest or detailing the use of public assets. ·
Any
evidence of performance contracts which are deemed important and of general
public interest. Personal information ·
Regarding
persons responsible for the NGO (founders, board of directors or executive
committee members, chief executive officers)
The purpose of this information is mostly to provide necessary contacts
and avoid perceived conflict of interest claims. 2.2.
What should be the extent of disclosure? The
information disclosed should be: In
such a detail as: ·
to
illustrate the trustworthiness of the NGO, ·
to
meet the NGO's own interest in informing the public, ·
to
provide the information required or expected from donors, and ·
to
show an open-minded approach on the part of the NGO, even when it is not fully successful in all areas of
operations. However, the information should not: ·
contain
intimate personal or financial data; ·
provide
valuable know-how to potential competitors; ·
harm
the interests of the NGO or its members; · harm the interests of third persons; or ·
provide
data in excess of established best practice in the country, unless the NGO wants
to set an example of reporting or to stimulate better practice. 2.3. How should the information be differentiated in
levels? The level of detail required from the organizations shall
be differentiated by the: · legal form, status or type of the NGO; ·
level
of income and expenditures of the NGO; and ·
level
of public funding available or provided to the NGO. Of course, the level of detail should always depend on: ·
the
importance of the information to the general public or the recipient of it; ·
its
value and relative weight in the overall sum of activities or assets reported; ·
the
need for, or establishment of, public relations or an image; and ·
the
proportion of publicly- oriented activities in relation to activities which may
be of purely mutual interest and which may not be reported at all.
3.
What are the possible roles and institutional options of a regulatory
body? 3.1.
What possible roles should be given to a regulatory body? In
general, there are four main roles: 1.
To
exercise supervision of NGOs by · ensuring accountability and transparency by requiring certain reports; ·
supervising
the activities of NGOs with respect to the requirements of the law and commonly
accepted ethical rules. 2.
To
decide upon or to provide recommendations concerning public benefit status. 3.
To
inform both the NGOs and the general public · of the certified registration of public benefit organizations; ·
of
activities recognized or welcomed as public benefit by the state authorities or
according to international agreements or conventions; and ·
of
the data needed for the interrelation of NGOs with third persons (e.g.- who is
entitled to represent the NGO and how may documents be authorized, etc.). 4.
To
provide certain services, such as ·
setting
and monitoring certain quality standards; ·
providing
legal assistance; ·
providing
a forum for discussion with the government or regional/local authorities; ·
calling
for tenders in general interest; ·
calling
for meetings of NGOs; and ·
disseminating
the information by initiating and/or co-organizing seminars and conferences. 3.2.
The institutional options In
general, the organization of the regulatory body will depend on its role as
stipulated by law or as required by NGOs. The
regulatory body may be set up as: ·
the
revenue (tax collecting) offices (which is the usual case with respect to
revenue reporting and tax exempt applications); ·
an
agency or branch of the national government or some of its ministries (which
exists already in some countries- see e.g., the Charity Commission of the
England and Wales); ·
some
other national or regional governmental agency with special competence
provided/specified by the law; ·
an
independent commission with members of high public trust (elected according to
certain rules to represent certain groups of NGOs or fields of operation or
appointed by one or more authorities respected by both the government and the
NGOs (e.g., the commission proposed in the Republic of Georgia); ·
some
democratically elected body of NGOs; ·
the
court (usually only upon claims of misuse reported to it by some interested
party); ·
the
general public through annual reports published by the NGO (e.g., as conceived
under present laws in the Czech Republic). A
regulatory body will not be established if it does not suit both the government
and the NGOs, or if the existence of a regulatory body would contradict the law
or be unacceptable on some moral basis. 4.
What are the qualities required of any authority which supervises the
compliance of PBOs with criteria set for the PBO status? In
addition to general requirements like trustworthiness, transparency and
accountability in the use of public funds and other similar "moral"
qualities, there are certain requirements which we feel may be expressed as
follows: ·
In
general, the members, important managerial staff persons or any other important
decision-making persons or bodies should be made known to the general public. ·
The
body must be independent from any direct influence of political forces, to the
extent possible. ·
The
body must have procedural requirement ensuring, as much as possible, its
non-partisan decision-making. ·
The
staff and decision-makers of the body must have professional knowledge with
regard to NGOs activities and the legal environment in which the NGOs operate. ·
The
authority should be a supportive and advisory body concerned with the growth of
stability and self-sufficiency of the NGOs and civil society as a whole. ·
It
should be well informed, i.e. equipped with a well structured and permanently
updated database and have access to relevant data from the
governments and NGOs. ·
It
should have sufficient authority within the governmental structures to serve
both its supervision and supportive roles with respect to the NGOs in their
relations to the government. 5.
Which tools are available for regulatory purposes? Among
the many possible tools, we think the most important are: ·
regular
revenue reports for taxation purposes (as regulated by tax or revenue laws); ·
tax
benefit application forms submitted voluntarily by NGOs; ·
internal
auditing by an individual or some elected body (this is usually cheaper then
external auditing but may not be considered independent enough); ·
external
independent auditing by a licensed accounting/auditing officer (which is usually
very expensive and should be required only for very large NGOs which use
public assets or property and when the annual sum of incomes and expenditures is
in excess of certain well defined value); ·
obligatory
or facultative annual activity reporting with financial balance sheets; ·
on
site supervision, at any time or upon notice, during hours specified by
authorized officers (under some well defined conditions minimizing the level of
harm the supervision may have on the current activities of the NGO with respect
to third parties); ·
special
reports to a commission or agency on request or on a regular basis; ·
annual
reports filed at the registration office (an agency or a court) and made
available for making extracts or copies available (for a reasonable cost) to
anybody who proves legal interest; ·
reports
addresses exclusively to contracting parties, donors or sponsors; and ·
claims
to the court on misuse of the assets or non-compliance with the laws. 6.
May the general public effectively supervise the activities of PBOs
through availability of annual reports and,
if
so, how may
this process be facilitated? One of the aforementioned tools consists in allowing the
general public to exercise the supervisory role upon the behavior of the NGOs
with respect to the public benefit. The use of this tool would make sense, if ·
the
general public is well aware of the importance of NGO activities and what those
activities actually consist of; ·
it
is easy for an interested citizen to access and monitor the activity of NGOs; ·
the
information sources concerned are reliable and of the quality required; ·
the
market interests may not manipulate the access to information about NGO
activities (which is unfortunately often the case of the news media, especially
television and the central press in many countries); ·
conflicts
of interest are taken care of and there is a well defined balance between the
supervisory role of the citizen and the benefit s/he may have or expects to have
from the activity of the supervised NGO; and ·
the
citizens have a mechanism whereby they may express their satisfaction or
dissatisfaction with the activities of certain NGOs (e.g. such as the Hungarians
have when deciding on allocation of 1% of their personal income tax to certain
NGOs). 7.
The practice in Hungary and
the Czech Republic.
7.1.
The case of Hungary: The law on public benefit organizations (1997). The
law classifies NGOs as organizations of ·
outstandingly
public benefit; ·
public
benefit; and ·
mutual
benefit. How
the law deals with these categories of organizations as far as reporting is
concerned may be illustrated by some excerpts from the law: §5b)
Outstandingly public benefit organizations should bring to the public the most
important data on their activities and finances through local or national media §7
(2)(d): The founding document or internal bylaws should contain the [method of]
publicity reporting §19
(1-2): Together with the approval of the annual report the public benefit
organization should make a Public Benefit Report, to be accepted by the highest
decision-making body. §19(3)
In addition to an accounting report and a short narrative summary of the public
benefit activity, the Public Benefit Report should contain information regarding
the: ·
use
of public (budgetary) support ·
use
of own assets (i.e. fund balance) ·
use
of earmarked support ·
level
of support from central bodies, governmental funds, local government, minority
local government, association of local governments, social security, and their
agencies thereof; ·
value
or amount of contributions to chief officers A
person responsible for the submission of information on behalf of an
organization should take into account the following loopholes, questions and
problems: ·
There
is no specification of the "most important data" or of
"publicity." ·
The
law does not specify the obligation to submit the Public Benefit Report to any
authority at any time nor there is any deadline for preparing the report. ·
The
emphasis placed on details of how the money was spent, while activities and
achievements are hardly mentioned (i.e.- mechanical criteria prevails over
substantial criteria). ·
The
requirement to publish details of contributions to chief officers can be in
conflict with personal data protection. ·
No
proper differentiation according to levels is provided, (i.e., there are too many
administrative obligations). ·
As
a result, the NGOs perceive these obligations as burdensome rather than as an
opportunity in their own interest, which does not help in raising the awareness
of the role of NGOs in society. 7.2
The case of the Czech Republic There
are two laws which regulate public benefit organizations specifically : A.
The
Act on Public Benefit Corporations (1995) B.
The
Act on Foundations with Endowment and Funds without Endowment (1997) The
first of these laws defines the new legal form - the public benefit corporation
- as a purely not-for-profit legal entity established by the Czech Republic or
any natural or legal person for the purpose of providing commonly beneficial
services to all of their users under equally accessible conditions. In fact,
this legal form may be regarded as an operating foundation from the American
point of view, or as a private version of the subsidiary or a budgetary
organization depending on the point of view of the present legal situation in
the country. The
second law defines private foundations serving exclusively for the public
benefit as legal entities endowed by their founders with certain assets, which
may not be sold or otherwise willfully diminished. In the pursuit of achieving its purpose, a foundation may use
the income generated from its endowment, which is fully exempt from the
corporate income tax when duly registered, and any other assets it may have. The
same law also defines funds which may not be endowed by the founders, but also
must be established explicitly for public benefit purposes. With respect to
economic activities, these funds have no freedom of action besides cultural,
sportive, educational and social activities, which serve their purpose. On the
contrary, an endowed foundation may use some of its assets to become
shareholders in joint stock companies. All
three types of NGOs, which should operate only in the interest of the general
public, have certain tax benefits which are common to any not-for-profit
established legal body. As
far as reporting is concerned all these forms of NGOs have a general obligation
to produce an annual report, which must be published not later then in June of
the following year. In the case of the public benefit corporation the report must be
made available to anybody. The same is valid for the foundations and funds, but
in this case the report must be also submitted to the registering court, where
it becomes a part of the register file, which is considered a public document. The
annual report of a public benefit corporation must include a)
a review of operations pursued in the calendar year
with specification of the relation to the purpose of establishment of the Public
Benefit Corporation; b)
an annual balance sheet of income and expenditures
and the critical review of the basic data included therein; c)
a statement of the auditor to the annual balance
sheet of incomes and expenditures, if an audit was made [which is required only
when state property or donations from the state are used or when a rather high
limit on incomes and expenditures was exceeded]; e)
a review of money received
and spent; d)
a review of income (revenue) structured by source; e)
the movements in, and the final balances of funds
of the Public Benefit Corporation; f)
the
movements and balances of assets and liabilities of the Public Benefit
Corporation; g)
the total amount of costs structured by those spent
for rendering the publicly beneficial services, for pursuing complementary
operations and administration costs of the Public Benefit Corporation; h)
any changes, modifications and amendments of the
Deed of Establishment and changes in the membership of the managerial bodies of
the Public Benefit Corporation as occurred throughout the year; i)
other data
as specified by the Board of Directors. Similar
regulations hold for the foundations and funds, where the report should include
a list of any donations received and grants provided in excess to certain limit
(about US$250). At
present, this is the only regulation besides the revenue reporting to the tax
offices, which is the same as for any other legal entity. The NGOs with profit
not exceeding a certain limit (about US$2,500) may even not report to the
tax office, but may be still supervised by the office on a random inspection. |
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