VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations

, Volume 24, Issue 3, pp 881–905

Shining Light on Charities or Looking in the Wrong Place? Regulation-by-Transparency in Canada

Authors

    • School of Public Policy and AdministrationCarleton University
Original Paper

DOI: 10.1007/s11266-013-9374-5

Cite this article as:
Phillips, S.D. Voluntas (2013) 24: 881. doi:10.1007/s11266-013-9374-5

Abstract

The nature of charity reporting and transparency is changing significantly; while the longstanding focus on financial reporting remains, there is much greater emphasis on illuminating governance systems and impacts. Regulatory regimes are becoming more polycentric with the expansion of third party watchdogs and emergence of new self-regulatory bodies. With more open access to data, transparency has become an independent force in these regimes. The article outlines a conceptual model of charity regulatory regimes and applies this to analyze recent developments of regulation-by-transparency in Canada. Although the intent of encouraging greater transparency is seldom questioned, this Canadian case study demonstrates how transparency can become politicized, damaging the relationship between the regulator and the charitable sector. In addition, the open data movement means that charities now operate in a world in which neither they nor state regulators control access and use of information.

Keywords

Charity regulationTransparencyCharity reportingCo-regulationCanadian charitiesRegulation-by-transparency

Résumé

Les rapports d’activité et la notion de transparence sont en train de changer de nature dans le domaine de l’action caritative : même si l’importance donnée de longue date aux rapports financiers subsiste, on constate une insistance de plus en plus grande sur l’attention portée aux systèmes de gouvernance et à leur impact. Les régimes réglementaires sont de plus en plus multipolaires, avec une multiplication des organismes de surveillance tiers et l’émergence de nouvelles structures autorégulées. Parce que l’accès aux données est maintenant plus ouvert, la transparence est devenue une force autonome au sein de ces régimes réglementaires. L’article esquisse un modèle conceptuel des régimes réglementaires des organisations caritatives et fait usage de ce cadre pour analyser les développements récents dans la régulation-par-transparence au Canada. Alors que l’on s’interroge rarement sur ce qui motive les efforts pour promouvoir une plus grande transparence, l’étude du cas Canadien démontre comment la transparence peut être politisée, avec des conséquences néfastes pour les relations entre le régulateur et le secteur caritatif.

Zusammenfassung

Die Art der Berichterstattung und die Transparenz von Wohltätigkeitsorganisationen unterlaufen derzeit wichtigen Änderungen: Während die dauerhafte Konzentration auf die finanzielle Berichterstattung weiterhin bestehen bleibt, rückt jedoch die Erläuterung der Regulierungssysteme und deren Auswirkungen mehr in den Vordergrund. Die Regelwerke werden mit der Zunahme von dritten Überwachungsbeauftragten und der Entwicklung neuer selbstregulatorischer Institutionen zunehmend polyzentrisch. Durch einen freieren Datenzugang hat sich die Transparenz zu einer unabhängigen Einflusskraft in diesen Regelwerken entwickelt. In dem Beitrag wird ein Begriffsmodell für regulatorische Regelwerke für Wohltätigkeitsorganisationen dargestellt und angewandt, um neueste Entwicklungen einer auf Transparenz begründeten Regulierung in Kanada zu untersuchen. Obwohl die Absicht zur Förderung erhöhter Transparenz selten in Frage gestellt wird, zeigt diese kanadische Fallstudie, wie die Transparenz politisiert werden und der Beziehung zwischen den Regulierungsbehörden und dem gemeinnützigen Sektor schaden kann.

Resumen

La naturaleza de la información y de la transparencia de las organizaciones benéficas está cambiando de manera significativa. Aunque permanece el foco de atención de siempre sobre la información financiera, existe un énfasis mucho mayor sobre la puesta en evidencia de los sistemas de gobernanza y los impactos. Los regímenes reguladores se están volviendo más policéntricos con la expansión de organismos de control terceras partes y el surgimiento de nuevos organismos autorreguladores. Con más acceso abierto a los datos, la transparencia se ha convertido en una fuerza independiente en estos regímenes. El presente documento esboza un modelo conceptual de regímenes reguladores de las organizaciones benéficas y lo aplica para analizar los recientes desarrollos de la transparencia mediante regulación en Canadá. Aunque el propósito de alentar una mayor transparencia raras veces se cuestione, este estudio de caso canadiense demuestra cómo la transparencia puede llegar a politizarse, dañando la relación entre el regulador y el sector de las organizaciones benéficas.

摘要

慈善报告和透明度的本质正发生很大的改变:尽管长期关注财务报告机制,但是对展示管理系统和影响的关注越来越高。随着第三方监督部门和全新自我监督机构的涌现,法规机制正变得越来越多中心。随着更加开放地访问数据,透明度已经成为这些机制的独立力量。本论文概述了慈善监管机制的概念模式,并应用以分析加拿大的最新法规透明度发展。尽管很少质疑鼓励更大透明度的目的,但是本加拿大案例研究还是展示了透明度如何变得政治化,损坏监管机构和慈善机构的关系。

要約

慈善活動の報告と透明性の本質は著しく変化している。長年、財務報告に焦点を当ててきたが、本論文では啓発的な統治システムと影響を一層重視する。規制制度においては、第三者の監視者と新しい自主規制機関の出現の拡大が多極化している。データのアクセスでは、透明性がこれらの統治形態における独立的な力となった。本論文では、慈善活動の規定制度における概念的なモデルについて説明して、カナダでの規則の透明性における最近の進展の分析を行う。高い透明性を求めているにもかかわらず、このカナダの事例研究は、監視委員と慈善活動のセクターとの関係が損なわれて、どのように透明性が政治との結びつきが強いかを示している。

ملخص

طبيعة المعلومات التي تقدمها الجمعيات الخيرية والشفافية تتغير بدرجة كبيرة: في حين أن التركيز على تقديم التقارير المالية منذ فترة طويلة لا يزال، هناك تركيز أكبر على إلقاء الضوء على نظم الحكم و الآثار. الأنظمة التنظيمية أصبحت متعددة المراكز أكثرمع توسع رقابة الطرف الثالث وظهور هيئات تنظيم ذاتي جديدة. مع وصول أكثر إنفتاحا˝ على البيانات، أصبحت الشفافية قوة مستقلة في هذه الأنظمة. البحث يضع الخطوط العريضة لنموذج نظري من الأنظمة الخيرية التنظيمية ويطبق هذا على تحليل التطورات الأخيرة للتنظيم بالشفافية في كندا. على الرغم من أن نادر˝ا ما يسأل القصد من تشجيع قدر أكبر من الشفافية، فإن هذه الدراسة لحالة كندية توضح كيف أن الشفافية يمكن أن تصبح في مجال السياسة ، وتلحق أضرار على العلاقة بين المنظم والقطاع الخيري.

Introduction

Transparency, as one component of accountability, has long been an important principle in the charitable sector and is a requirement of most charity regulators. The analogy of the drunk looking for his keys under the street light may be apt to the practice of transparency in the charitable sector, however. When asked by a passerby if that is where he dropped his keys, he replies, “no, but the light is better over here.” Understanding what is being illuminated, for what purpose is a prerequisite to assessing the effectiveness of current and evolving practices of transparency.

Mandatory disclosure of financial information through annual reports is often the flipside of official status as a “charity” or “public benefit” organization, and is primarily intended to ensure honesty, prevent fraud, and demonstrate that charitable funds are substantially devoted to charitable purposes (Brody 2002; Breen 2013). Making the case that good governance enhances compliance, the US Internal Revenue Service (IRS) is now requiring reporting on governance and management practices (Lerner 2012). In seeking to demonstrate that a public benefit has been realized, which became a legal requirement under the Charities Act 2006, the Charity Commission of England and Wales (CCEW) now mandates inclusion of public benefit results in the trustees’ annual reports (TARs) that accompany the annual return (Morgan and Fletcher 2013). An emphasis on helping donors identify which are “good,” well-run charities has led to the rise of a variety of third party information intermediaries that not only provide improved visualizations of the public regulator’s data but also have developed their own standards on which they independently rate charities. As a means of being proactive about its own accountability, based on standards perceived to be more appropriate than those used by the rating agencies, as well as a means of staving off greater state regulation, many charitable sectors have in recent years expanded and enhanced self-regulation through a variety of certification systems. A highly competitive funding environment has encouraged more voluntary, narrative reporting of activities and outcomes: indeed, a cottage industry has sprung up which teaches charities to better “tell their stories.” At the same time, the emergence of open data and the ability to aggregate digital data and then “repurpose” or “mashup” these data in ways not imagined or controlled by their owners is creating new agents of transparency who can tell equally plausible stories about charities with just a tablet and an internet connection (Markets for Good 2012). In effect, regulation of transparency by charities has become more polycentric, involving various combinations of state, sector and third party “regulators” which all put a premium on information disclosure.

Regulation-by-transparency rests on the power of information, assuming that organizations value their reputations and that maintaining public trust matters to them. The principle is that information needs to become “doubly embedded” by both users and disclosers: that is, information must cause users to “systematically incorporate new responses into their decision making that in turn change disclosers’ decision calculations” (Weil et al. 2006, p. 158). For instance, knowing that a charity has extraordinarily high fundraising costs, a potential donor decides to give to a different charity whose fundraising costs are more in line with her expectations and notions of accepted good practice. Knowing that supporters have access to such information and will use it to determine how to direct their financial support or volunteer hours means that the well-performing charity will voluntarily improve its behavior so as to be in line with or exceed public expectations. The ability of transparency to influence behavior, whether of charities, donors, funders, or citizens at large, depends on more than an increased quantity of information, however. The information needs to be relevant, accurate, comparable, and useful, and the means of collecting and reporting feasible and reasonably efficient. Studies from a diversity of sectors (e.g., restaurant hygiene, environmental regulation, and financial services) indicate that when the information is targeted to the right audiences, user-oriented, timely, and relevant to the decision at hand consumer behavior will be influenced (Pawson 2002; van Erp 2010; Weil et al. 2006). But, such occurrences appear to be relatively rare.

A shortcoming of regulation-by-transparency for charities is that often the information suffers from basic problems of accuracy and of under-reporting or lack of compliance in providing what is required by regulators (Independent Sector 2005; Keating and Frumkin 2003; Breen 2013; Hyndman and McMahon 2010). In addition, it is often neither relevant nor timely to decision making. In an examination of charity ratings, Sloan (2009) found that positive ratings have a slight positive effect on contributions, but bad ratings have no effect at all, while Szper and Prakash (2011) found no effects on donor decisions of either good or poor ratings. One reason is that the information that is required to be disclosed is mainly related to financial inputs, while the primary concerns to donors are program content and organizational reputation.

Most of the extant research has examined a single system of disclosure, notably charity annual filings with the state regulator or third party ratings. Given that polycentric regulatory regimes have multiple sources of information we need to look to the composite. What kinds of information are being illuminated in the emerging polycentric regimes? Perhaps there is greater transparency but not in ways that have relevance or influence on the behavior of charities, their donors or stakeholders. In addition, most research on transparency embraces an instrumental premise, assuming that the underlying rationale is to serve some public good (Reichard 1998). The politics underlying regulation-by-transparency are rarely considered. This article explores the types of information that are being required or voluntary disclosed at the intersection of state, sector, and third party systems of regulation, with a focus on Canada where both the government regulator and the charitable sector are in the process of developing new approaches to enhancing transparency. These are taking place in the aftermath of the misuse of charities as abusive tax shelters through which $5.4 billion CDN in donation receipts were issued from 2003 to 2009 (Hawara 2010). As a result, the regulator has aggressively stepped up its oversight. A new private charity monitoring firm has become very active in investigating and benchmarking charities, and the charitable sector has launched one of the most ambitious certification systems in the world. The main factor at play in Canada, however, is that government regulation has become politicized. A political backlash against advocacy by some environmental organizations has produced increased reporting of “political” activities and international funding, and a politician’s attempt to more tightly restrict compensation of charitable staff exposed considerable misperception, indeed animosity, toward the sector. The likelihood that this increased light will contribute to finding the keys to improved accountability and effectiveness seems minimal.

Drawing on the literature on regulation-by-transparency and regulatory compliance (e.g., Levi-Faur 2011; Prakash and Gugerty 2010; Parker and Nielsen 2011; Coglianese and Mendelson 2010), this article first outlines a conceptual model of the institutional factors that shape transparency in a polycentric charity regulatory regime and identifies general patterns in the transparency requirements of different agents in these regimes.

Transparency in Polycentric Charity Regulation

As a public management principle transparency refers to the availability and accessibility of relevant information in a timely manner. Its application involves the combination of: (1) “regulated information,” which regulators require be disclosed subject to sanctions for noncompliance (FSA 2008); (2) voluntary disclosure by organizations, although the state regulator or third parties may have established incentives for disclosure; and (3) “regulatory transparency,” referring to the “accessibility and intelligibility of laws” and “the openness and consistency of the processes by which they are made” (Deighton-Smith 2004; see also OECD 2002). A distinction needs to be made between information availability and utility, that is between simply providing information and providing appropriate types of information presented in forms that illuminate and improve policy or organizational behavior (FSA 2008). “Good” disclosure thus rests on what is reported, its accuracy and comparability, and what we do with it (see Breen 2013). How regulators and regulated organizations get to good disclosure is an important focus of the growing institutional literature on regulation-by-transparency (Doern et al. 2013; Levi-Faur 2011).

As a foundation for explaining the different foci of transparency in polycentric charitable regulatory regimes, this article takes an institutional approach, concentrating on three sets of factors. First, the regulatory goals of the different sets of actors, as influenced by broader ideas about the purpose of transparency and regulation at all, affect the kinds of information required and voluntary disclosed as well as the openness of the process. A goal of preventing fraud, for example, is likely to focus primarily on financial information, while an interest in promoting learning for continuous improvement may have a greater emphasis on governance practices. Second, a variety of institutional factors, including the regulator’s authorities, preferred regulatory instruments, organizational capacities and lifecycle, shape the behavior of both the regulator and the reactions of regulated organizations to it (e.g., Rodrıguez et al. 2012; Saxton and Guo 2011). Different regulatory institutions naturally possess different instruments (e.g., states can command rules with sanctions in a way that the sector cannot). Even using the same instruments, however, different regulatory agents may adopt different styles and approaches (Gunningham 2010). For example, some charity regulators have adopted a more “responsive” (Ayres and Braitwaite 1992) approach, placing emphasis on education and information for compliance and using sanctions only when more relational strategies prove ineffective. Enforcement may also vary in its degree of formalism and coercion, level of effort, and consistency of application. Interestingly, size and threat of sanction has been demonstrated to be much less significant than other factors, notably learning for continuous improvement, in promoting compliance (Parker and Nielsen 2011).

The third set of factors relate to the context, including the nature of the organizational field and relationships of regulator to the regulated. Whether the sector is comprised of a fragmented set of small organizations or dominated by a few large organizations affects the interest in and ease of compliance (Bernstein and Cashore 2007). Research indicates that, particularly in self-regulation, the organizations that will be most readily compliant and transparent are the large ones which are already meeting standards or for which the costs of compliance are minimal, those that have a niche or brand to protect, those whose top level management believes compliance is a professional responsibility, and those that fear more extensive rules if they do not conform (Auld 2011; Borck and Coglianese 2011; Huising and Silbey 2011). Important also is how the regulated organizations view the regulator(s)—as irrelevant, incompetent and incapable, or as credible and fully capable institutions that are good sources of advice—and the extent to which the regulatory agency understands the sector, its capacities, and how to work with it. In addition to having an impact on the regulated organizations, a byproduct of regulation is a relationship with the public. What is required to be reported provides an information base that may influence donor and volunteer behavior but also shapes the broader public perceptions of the sector and how well it performs, creating potential demand for additional information.

In polycentric regimes, do different regulators of transparency converge in the types of information they require of charities, or do differing regulatory goals and institutional factors produce a multiplicity of different requirements? This exploratory analysis draws on existing literature, websites, and other primary information of state, sector, and third party regulators in the cluster of “Anglo-Saxon” countries (Salamon et al. 2003)—England and Wales, USA, Canada, New Zealand, and Australia (most of which are covered in this special issue)—to identify the primary patterns of required information by different sets of regulators, and link these to underlying regulatory goals and institutional factors.1 Table 1 presents a comparison of information that is required and made public by state regulators in each of these jurisdictions.
Table 1

Comparison of state regulators across the Anglo countries

Jurisdiction (in order of greater to lesser transparency)

Approx # of registered charities/requirement to be listed

Regulatory goals

Institutional factors

Required public information (beyond very basic)

Accessibility and regulatory transparency

Recent developments in transparency

England and Wales

 Charity Commission of England and Wales

163,000

Required if recognized as a charity/public benefit organization (except small and “exempt” charities)

Public trust through accountability

Guidance to the sector

Investigation of wrongdoing

Current emphasis on compliance

Independent commission established 1853

Financial information

Activities (general)

Trustees

No of employees, volunteers

Serious incidents (e.g., loss of funds)

Trustees annual report inc narrative on activities, financial accounts and public benefit results

Standardized accounting; expected compliance with the statement of recommended practice (SORP)

Public, free searchable online registry (not open data)

User-friendly website provides extensive guidance to charities, and some research

High degree of regulatory transparency

Requirement of public benefit reporting required

Mandatory e-filing

New Zealand

 Department of Internal Affairs

25,000

Voluntary but charities must register if they wish to issue tax receipts

Public trust

Transparency

Financial accountability and effective use of resources

Educate and assist re good governance

Unit within a line department as of 2012 (formerly an independent commission created in 2007); independent board of 3 for registration decisions

Financial information

Activities

Beneficiaries (by category)

Officers (current and past)

#s paid employees, volunteers

Spending internationally (charities may request information be restricted if a compelling reason)

Public, free searchable online registry; open data

User-friendly website provides some guidance; explains the process of monitoring and investigation

Moderate, evolving regulatory transparency

Financial reporting standards to be introduced 2015

Website provides instruction on how to mashup its open data

Canada

 Canada Revenue Agency

86,000

Required, if seek to be registered as a charity and issue tax receipts (no exceptions)

Protect the integrity of the tax system

Ensure charitable resources used for charitable purposes

Compliance and audit

Tax agency

Financial information (detailed for larger charities)

Fundraising activities

Political activities

Ongoing and new programs (general)

Directors

Compensation levels

Foreign activities

Public, free, searchable online registry; quasi-open data

Provides guidance as to the rules, limited guidance as to good practice; website is not user friendly

Limited, but increased regulatory transparency; limitation that cannot share information or comment on investigations until charitable status is revoked

Political activities, including foreign funding

Fundraising/program cost ratios

Ineligible individuals

Australia

 Australia charities and not-for-profits commission

57,000

Voluntary, but charities must register if they wish to issue tax receipts

Public trust through transparency

Support a robust sector, education

Broader red tape reduction agenda

Broader nonprofit reform agenda

Consistency in fundraising regulation across states

Independent commission established 2012

Only basic contact information to date; financial reports required in 2014 (voluntary for small charities; not required for religious charities)

Free, searchable online register

New institution; regulatory transparency evolving

Creation of the commission and public register as part of a package of nonprofit reforms is underway

USA

 Internal revenue service

1.5 million

Qualifying organizations that seek federal tax exempt status and wish to issue tax receipts (except religious organizations)

Protect the integrity of the tax system

Financial accountability

Promote compliance

Tax agency

Financial information

Officers

Compensation

Fundraising

Governance checklist

Individual copies of annual return provided upon request from IRS or the filer; not fully public or open data

Full data (as scanned images) available on DVD for a fee

Searchable online data from 3rd party (GuideStar); requires registration and some fees

Limited regulatory transparency

Governance checklist

Additional information on finances and activities (inc foreign investments and activity, related organizations)

These state regulators are at different stages of maturity and take quite different institutional forms. Whereas the regulators for England and Wales, US, and Canada are at a “mature” lifecycle, those for New Zealand and Australia are relatively young institutions (indeed Australia’s new commission was established in December 2012). They also represent quite different institutional forms: charitable regulation in the US and Canada is under the auspices of the tax agency; England/Wales and Australia have independent commissions; and New Zealand’s regulator is housed in a line department, having been absorbed into government in 2012 after 5 years as an independent commission. With the exception of the Australian informational return which is quite minimal (given subnational authorities and the broader regulatory agenda of reducing “red tape” by avoiding duplication), most include questions that are ready pointers to potential fraud: for example, the CCEW requires indication of previous “serious incidents” (such as evidence of criminal activity that is under police investigation); New Zealand requires indication that any of the officers have not been disqualified (for instance due to bankruptcy or being convicted of a crime), and Canada has recently introduced similar disqualification and disclosure. The regulatory goals of the tax agencies are squarely on ensuring that charitable funds are spent for charitable purposes, and they thereby require substantial financial information (to varying degrees of specificity and subject to variations in standardization of accounting). In the US and Canada, this includes disclosure of the compensation paid to officers and directors (with protections on individual privacy). The additional goal of supporting a robust sector by providing advice and guidance regarding good practice is explicit among the regulators housed independently of tax agencies, almost silent for the tax agencies. In general, the design of the form for administrative purposes to ensure regulatory compliance has tended to squeeze out much attention to narrative information on programs and results, with questions on activities designed primarily to ensure that charitable purposes are still being met. Australia’s form provides space for up to 300 words to describe programming and the recent requirement in England and Wales that the TAR be appended facilitates a charity’s ability to provide such narrative.

Regulatory transparency varies considerably. Both the CCEW and the Australian commission go to considerable lengths to explain their regulatory approach, which for the former is risk-based (CCEW 2012) and for the latter is built on the responsive regulation pyramid (ACNC 2012; Ayres and Braitwaite 1992). In contrast, the tax agencies reflect more of a rule-based style in which the requirements are articulated and information provided for meeting them, but without much explanation of the regulator’s decision-making processes. The tax agencies are also constrained by the overriding principle of the protection of privacy that is inherent to income tax legislation. In terms of public accessibility of its data, the IRS is the most limited: while it makes public, upon request, the annual return (the 990 and related schedules) for individual tax exempt organizations, it does not operate a free, searchable online database. Rather, it sells the data to a third party, GuideStar, which converts the returns (at considerable expense) into an online searchable database that requires registration and potentially a fee depending on the level of detail sought. Not surprisingly, there is growing movement in the US to make the 990s open data—“data that are available to all, free of charge, in a standard format, published without proprietary conditions, and available online as a bulk download rather than only through single-entry lookup” (Noveck and Goroff 2013: 2). In contrast, not only does the New Zealand department provide open data but also provides its website instructions on how they can be aggregated and mashedup for a variety of uses. While open versus merely public data may not make a difference to the curious donor checking out a charity before making a donation, open data will greatly facilitate secondary use in research and the creation of a variety of electronic apps for specialized purposes.

Two recent developments in regulated information are significant as they reposition the charity return from being primarily an administrative instrument for regulatory compliance to being more informative for the donor and public as well as part of a broader learning process for charities. The first is the attention to public benefit results which became a requirement of the TAR that must accompany the annual return in England and Wales. Morgan and Fletcher (2013) assess that there are still fairly low levels of compliance in reporting public benefits, largely due to ignorance of the requirement particularly among small charities. For those aware of the requirement, however, its value is generally accepted and used as a means of promoting internal understanding of the relationship of public benefit to accountability. The second is greater interest in internal governance which is occurring in different ways to meet slightly different regulatory goals. In revising the 990 in 2008, the IRS introduced a 26 question governance checklist based on the rationale that good governance enhances compliance. Initial evidence provides some support for this premise, indicating that having a mission statement, always using comparable data for compensation rates, having procedures in place to ensure proper use of assets and ensuring the board signs off on the return are all positively correlated with compliance (Lerner 2012: 5). An alternative soft law approach is intended to pull charities toward better practices. In 2008, the CCEW introduced hallmarks of good governance to this end, and in 2012, the Canadian tax agency issued new guidance on fundraising which includes a set of governance “best practices” that charities should have in place to mitigate unduly high fundraising costs (Phillips 2012).

The point of conceiving of regulatory regimes as being polycentric is to recognize that state regulators are not the only sources of information, as both self-regulation and third parties generate information or create incentives for voluntary disclosure of additional or different types of information. As indicated in Table 2, which is based on a review of the main self-regulation and third party systems across the Anglo-Saxon cluster, the focus of self-regulation is quite consistent. While self-regulation may be donor-interested or sector-driven, it is normally centered on promoting learning and self-improvement by charities and confidence building in the public that relevant standards are being met, with potential secondary goals of preventing additional state regulation or filling a gap created by weak state regulation (Gugerty et al. 2010; Bies 2010). As nonprofit sectors professionalize, pressures are generated that push self-regulation from voluntary codes to more formal systems of certification and accreditation (Gugerty et al. 2010, p. 1036). From a transparency perspective the self-regulation standards almost always encompass aspects of governance in addition to financial management. For example, a peer-reviewed certification process recently launched by the sector in Canada absorbed a longstanding but greatly under-subscribed voluntary code of Ethical Fundraising and Financial Accountability into a comprehensive set of 73 standards, of which 46 pertain to board governance, staff, and volunteer management, 14 to fundraising, 9 to financial accountability, and 4 to financial transparency. As a basis for information dissemination, self-regulation is inherently decentralized: certified organizations display their hallmark of “excellence,” advertising that they have met the standards, with the relevance and timeliness of information coming at the point of contact with potential supporters or beneficiaries. While the certifying associations normally provide a list of organizations meeting its standards, this central repository often contains minimal additional information, although a new generation of sector-associated web portals seek to encourage charities to upload more extensive information about what they do and what they achieve.
Table 2

Comparisons across regulators in polycentric regimes

Regulatory goals, institutions, and context

Instruments

Traditional focus for information

Recent additions

Primary shortcomings

State

Goals

 Ensure charitable funds used for charitable purposes

 Prevent maladministration and fraud

 Protect the integrity of the tax system

 Ensure compliance in an efficient manner

 Fit with broad goals of “smarter,” “better,” efficient regulation, and risk-based management

Regulations with sanctions

Standards and guidance

Education and training

Public data base (variations in accessibility)

Financial reporting

Missions and programs

Governance (US)

Demonstration of public benefit/impact (England/Wales)

Fundraising ratios (Canada)

Accuracy of the data

Small charities and nonprofits required to provide minimal information

Comparability, absence of common accounting practices

Capacity of the regulator (e.g., to audit effectively; regulator receives more information than can integrate)

Limited public accessibility of the information (US, Ireland)

Some tax agencies not able to share information when fraud being investigated/provide public reasons for sanction (Canada)

Institutional factors

 Considerable variation, where a regulator exists, has regulatory authorities with sanctions

 Differing degrees of independence (low when part of the tax agency, higher when an independent commission)

 Command and control style, with more recent emphasis on responsiveness, standards, guidance, and education

   

Sector

Goals

 Build/maintain trust and support of public and funders

 Learning, continuous improvement and capacity building

 Avoid more state regulation

Voluntary codes

Standards and benchmarks

Certification

Voluntary disclosure (websites, portals)

Training

Fundraising, financial management

Quality of services

Comprehensive sets of standards, with strong focus on governance

Collective action dilemma: high standards reduce participation, weak standards lack credibility; criticism that most are weak with limited enforcement and incentives to reveal noncompliance

Involvement primarily by larger charities

Reliability of information

Institutional factors

 Self-regulatory body has limited means of enforcement

 Capacity and sustainability may be an issue

 Works most effectively when a focus on learning and improvement and accompanied by organizational field building

   

Intermediaries

Goals/institutional factors

• Rating agencies

Donor focused, support informed giving

No authorities to obtain information from charities, rely on voluntary disclosure

Regulator’s data may be expensive to obtain (e.g., US)

Public and subscription websites using annual return data; may include data from charities

Standards and rating systems

Fundraising, financial

Ratios (program/cost), reserves

Governance

Results

Constituency voice (user feedback)

Quality of reporting by charities

Narrative reports by charities

Limited performance information reported

Standards of rating agencies questioned, particularly the focus on ratios

Availability of open data from the regulator varies greatly by country

Charitable sector not prepared for the impact of open, aggregated data; are not good users of it

• Sector-hosted websites

Build/maintain public trust

Informed giving

Public awareness

Learning and improve practice

Requires an infrastructure organization with capacity, charities willing to share information

Public websites

Education

Assistance completing the annual return

 

Narratives on programs and results from charities

Annual return data in user-friendly form

• Independents

Variety of goals: better giving; education; specialized purposes

Small entrepreneurs, may not have longevity or are specialized in their interests; can sprung up quickly

Public and subscription websites and apps, using open, linked data, crowdsourcing

 

Financial data from all sources

Specialized purposes with or without potential for generating revenue

The involvement of “third parties” is more diffuse, consisting of three quite distinct types, with different underlying goals. One type, the information intermediaries (for example, Charity Navigator and BBB Wise Giving Alliance in the US, and Guidestar, in the US, UK, and entering other countries) focus primarily on financial information with the goal of informing donors. Guidestar provides good visual displays of the annual tax return data and enables charities to supplement this with their own statements of impact as well as providing for public reviews. The BBB Wise Giving Alliance and Charity Navigator go further by establishing their own performance metrics as the basis for rating charities, of which cost ratios and indicators of voluntary disclosure figure prominently. Evidence is mixed on the extent to which such ratings influence donor behavior. Gordon et al. (2009) found that charitable contributions are sensitive to Charity Navigator ratings and to changes in them. Szper (2012) makes the case, however, that we do not need to look to changes in donor behavior to see the effects of third party ratings. Even when there had been no change in donor behavior, charities acknowledge that they “play to the test” (Szper 2012), reporting slightly increased program expenditures but decreased fundraising costs, which has the salutary effect of improving their Charity Navigator ratings. While still concentrating on financial metrics, the online intermediaries are rapidly moving to rating results and crowdsourcing external reviews. This shift is already underway for Charity Navigator which seeks to move away from the “selective reporting” of storytelling and case studies to impact measures, including the strength of a charity’s theory of change and independent evaluations when available (Charity Navigator 2013: 1).

In addition to these self-declared watchdogs, a variety of sector-associated websites operate in most regulatory spaces, sharing with self-regulation a focus on learning and continuous improvement by charities and awareness building for the general public. For example, as an information portal accompanying the sector’s certification process in Canada, the national lead (Imagine Canada) with support from government as well as private funders has created Charityfocus.ca to encourage charities to supplement the tax return data with detailed narratives about their work and offering an online tool to aid in completing the annual return accurately. The take-up is as yet very minimal but it is still getting its feet.

The third type is comprised of the social (and for-profit) entrepreneurs working with open data whose innovation is to aggregate different sources of digital data; as long as they are published online, almost any digital data can be “scraped” by a computer program and even without permission of the “owner” can be legally repurposed (see Davies and Bawa 2012; Sonvilla-Weiss 2010). A leading example is a small Montreal-based company, Ajah, founded in 2010, which has compiled a comprehensive list of financing of Canadian charities. Ajah goes beyond presenting the tax return data in a more user-friendly form (which it does) by extracting detailed information from the returns filed by grant-making foundations to identify their funding recipients, adding data gleaned from annual reports on other funding sources such as government lottery funds and contracts and corporate support (see Lenczner and Phillips 2012). Such aggregation enables the user to get a full picture of charity financing, obtain a composite picture of funding by locale, or see how directors are connected to a variety of charities and other directors. Open, linked data would appear to be the next major development in charity transparency, putting pressure on state regulators to release open, reliably accurate data, and enabling new definitions of what is relevant information as new purposes for the information emerge. One implication is that neither charities nor government regulators can assume they own and control their information so can chose to be more or less transparent; information about them will be available, linked, and repurposed in ways they never contemplated.

This high level overview indicates that, while transparency has been and remains largely focused on financial information, the involvement of a variety of nonstate actors exercising quasi-regulatory functions working with the power of information is expanding the amount and types of publicly available information about charities, albeit with significant differences by jurisdiction. The case study of Canada reinforces the importance of taking context into account. Although transparency is often assumed to be value neutral and an unmitigated public good, recent events in Canada demonstrate that what is required to be reported, and the justification of the need for such reporting, can be very political, with questionable public value.

The Politicization of Transparency in Canada

Canada has been a classic example of a state-dominated regulatory regime focused on the goal of ensuring charitable funding is dedicated to charitable purposes while protecting the integrity of the tax system. The Charities Directorate of the Canada Revenue Agency (CRA) makes determinations on which organizations qualify to be registered as charities, requires annual reporting by the 86,000 registered charities, makes these reports (known as T3010s) publicly available on its website, audits for compliance and sanctions for noncompliance and in administering the Income Tax Act develops occasional “guidance” to clarify and interpret the law. Two major sets of reforms have recently been attempted to enhance transparency. The first is pragmatic, an initiative driven by the CRA to improve the accuracy of reporting of charity finances and ensure proper receipting of donations in light serious abuse of charities as tax shelters. The second set appears to be politically motivated, generated by a legislator’s perception of excessive executive compensation and as a response by the political executive to its displeasure over advocacy activities of some charities. This politicization presents significant dangers to a credible regulatory process, and the new requirements are not only a diversion but also make Canada an anomaly compared to other countries.

The Pragmatic: Better Financial Reporting

The T3010 has a primary focus on financial data with only limited information on programming and no requirement for reporting on governance or public benefit results. As is the case in other jurisdictions (Breen 2013; Cordery 2013; Froelich et al. 2000; Keating and Frumkin 2003; Verbruggen et al. 2011), there are substantial inaccuracies in reporting (Ayer et al. 2009; Blumberg 2012a; Salterie and Legresley 2010). First, the amount of missing information is significant: on the 2011 returns, almost three-quarters of charities failed to answer the basic question of whether they had issued tax receipts for donations (Blumberg 2013). A 2009 study of the T3010s found that over one-third of charities had made at least one mistake (Ayer et al. 2009). Although the probability of mistakes was much greater for small charities, even 23 percent of the largest charities had issues with their returns (Ayer et al. 2009). While a variety of arithmetic errors are common, a review by Blumberg (2012a) notes that responses to certain questions, particularly expenditures on fundraising and political activities, are “uniformly unreliable” for reasons that pertain to the design of the form and complexity of the questions. This may lead to confusion, particularly on the part of volunteers, as to what qualifies as appropriate expenditures or may be due to lack of knowledge of the person—most likely a finance person—of the activities of the organization and lack of a second person to check the information on the return. To address these types of inadvertent inaccuracies CRA has funded training programs, aimed particularly at small charities, to aid them in preparing the annual report more accurately and in a more timely manner.

In 2007, a more overt lack of compliance issue came to light, the illegal use of charitable gifting arrangements as tax shelters, often involving getting tax receipts for amounts greater than the value of the gift. Although perhaps only 500 people were involved in perpetrating knowing fraud (Blumberg 2012b), the amounts involved were quite staggering: since 2003 over 172,000 Canadians became involved in tax shelter schemes involving claims of inflated receipts totaling more than $5.4 billion CDN (Hawara 2010). Auditing all potential charitable tax shelters over the past 5 years, the CRA rejected $2.5 billion CDN in tax claims for donations (Hawara 2010) and revoked the charitable status of 47 charities and amateur athletic associations.2 Through its continued auditing, the CRA has reported that 89 percent of registered charities do not issue proper receipts (Blumberg 2012b).3 As a result, the Directorate has greatly stepped up its scrutiny of receipting. In 2011, it was also given discretion to refuse registration or sanction a charity on the basis of past conduct of any of its directors or senior management. These measures will take the regulator onto new ground in balancing protection of the public interest with respect for individual privacy (Hawara 2012) and will require charities undertake more diligent screening of directors and staff.

It appears that the regulator’s efforts at reducing abuse of charitable status are working as the number of participants and amounts of donations involved in illegal gifting schemes has declined substantially since its peak in 2006 (Hawara 2010). In terms of promoting greater transparency overall, however, the regulator remains strained by two limitations on its current authorities. The first stems from the privacy constraints of the Income Tax Act which restrict the CRA’s ability to inform the public or provincial authorities responsible for investigating fraud that a charity is under investigation, so such problems often become apparent to the public only when the letter revoking the charity’s status is posted on the CRA website, which could take years (see Blumberg 2012b) The second institutional constraint is that the transparency requirements apply only to registered charities and not to the equivalent number of “nonprofit” organizations, those that do not pay income taxes but cannot issue charitable receipts. Opening nonprofits to greater transparency requirements appears likely as the next tranche of reform.

Finally, as part of its interest in tracing where charitable money goes, the CRA also introduced new guidance on fundraising in 2012 (Canada Revenue Agency 2012). The Charities Directorate asserts that this is not new policy but merely clarifies and makes more explicit—for both charities and internal auditors—the difference between fundraising and other expenditures, and what it has long expected of charities (Phillips 2012). The new guidance defines fundraising conduct that is prohibited, clarifies what constitutes expenditures on charitable activities versus fundraising, and identifies acceptable fundraising cost ratios (35 %) beyond which further investigation may be triggered. In addition, it articulates the expected governance practices to decrease the risk of unacceptable fundraising, which are expected to be treated as soft guidance rather than hard rules. To the extent that the CRA becomes involved in shaping norms related to governance systems, however, it will add a new dimension to charity transparency and could significantly alter the work of the regulator. The recent involvement of the political level in directing regulatory goals also opens concerns that the CRA may be pushed into a more stringent interpretation of the fundraising guidance.

The Political: Executive Compensation and Policy Advocacy

Transparency of officer’s compensation is a standard component of the charitable tax return which requires disclosure of compensation ranges for a charity’s 10 most-highly paid employees, absent names or exact salary figures. In March 2010, a private member’s bill (470) was introduced into the federal parliament which proposed that the salaries of all staff of charities (even very small ones) be publicly disclosed and that a salary cap of $250,000 be instituted, beyond which charities could be deregistered. The bill was aimed at fixing a problem that most observers would argue does not exist despite some sensationalized media reports. In 2009, it was estimated that approximately 1,800 charities (0.02 %) had one or more employees earning more than $120,000 CDN a year (Imagine Canada 2010); most of these were in the university and hospital sector. The fact that universities and hospitals are registered charities seems to have been completely missed by the proponents of the legislation. Under the leadership of Imagine Canada, the sector lobbied hard against the Bill. Although it had to be clear that it favors transparency, the concerns were raised that Bill 470 undermined the fiduciary responsibility of directors, placed unreasonable limits on large organizations, led to privacy issues for small charities as individuals could potentially be identified, and manufactured an issue that does not exist (the real issue being low not high compensation). As important was the public message that the bill sent about the sector: “It conveys the sense that charities in general are doing something wrong…and that charities therefore need to be reined in” (Imagine Canada 2010). The discussions in parliamentary committee hearings were quite acrimonious, indicating the low regard that some politicians hold of the sector. Eventually, amendments were made but the bill died on the order paper when parliament was dissolved in March 2012 following an election call (Blumberg 2011). Although there is no indication that the bill will be reintroduced, its content and the destructive political debate surrounding it has been a wake-up call for the sector: it needs to be much more proactive about disclosure and transparency.

The second incursion into greater transparency focused on political activity and is of greater consequence because it emanated not from an opposition MP but directly from cabinet ministers, leading to increased reporting requirements being announced in the 2012 federal budget. Under current regulations, which had been clarified and updated by CRA in 2003 (see CPS-022), all partisan political activity is prohibited, but some “political” activity is permitted, with political being defined as explicit calls to political action or public communication or advocacy that a law be changed, opposed, or retained. The extent of such activity is restricted on a sliding scale, from 20 percent of all of resources for small to 10 percent for larger charities. Although this “10 % rule” has long been seen as too restrictive by the sector (Scott 2005), Canadian charities do not come close to spending what they legally could on policy advocacy (Elson 2011). Analyzing the tax return data for 2011, Blumberg (2013) reports that charities spent a total of $21 million CDN on political activities, out of total spending of $200 billion CDN, or about $1 for every $10,000 on charitable purposes, more than half of which is accounted for by just five charities.4 In spite of these modest amounts of spending, a “dust-up” between environmental organizations and the Minister of Natural Resources in early 2012 made such advocacy activity seem widespread, radical, and an affront to national interests.

During federal environmental regulatory hearings on the controversial Northern Gateway Pipeline that would transport oil from the Alberta oilsands to tankers on the west coast, a number of environmental groups were very active in making representation to the hearings as well as advocating more widely in opposition to the project. Many of these groups were funded by Tides Canada, a partner of Tides International, which runs both a charity and grant-making foundation that receives substantial support from US foundations (which could not fund Canadian charities directly). Although the foundation does not engage in political activity, it funds a variety of other charities engaged in environmental and social justice causes which do undertake advocacy work. Reportedly frustrated by how the opposition was delaying project approval, a pro-oilsands group complained that environmental groups were accepting funding from large US foundations to support their interventions, and the Minister of Natural Resources launched a very public attack on “environmental and other radical groups” which he noted are funded by foreign donors that seek to “hijack our regulatory system to achieve their radical ideological agenda” (McCarthy 2012; see also Paris 2012). The Minister of Environment soon joined in, raising the heat, when he accused an unnamed charity essentially of engaging in “money laundering” (McCarthy 2012). The media feasted on the inflamed debate; Tides Canada found itself being audited by CRA, albeit initiated before the ministers’ remarks and in spite of its public recognition as a leader in transparency and good governance (Stoymenoff 2012). The 2012 federal budget, while not formally altering the rules on political activity, introduced more detailed reporting (a separate schedule listing the types of activities involved and their relationship to charitable purposes) and new sanctions on incomplete reporting, and allocated $8 million to CRA for educational resources and increased monitoring and auditing for adherence to these rules. In addition, foundations or other charities that fund other qualified donees to carry out political activities are now required to count these donations against their own 10 % limit, thus substantially constraining what grantmakers support. The budget also requires charities to disclose amounts received from foreign sources for political activities (including country of origin and activities for which donations were intended). Given that foreign funding constitutes less than 0.5 percent of the revenues of Canadian charities, this issue has been described as mere distraction (Blumberg 2012d).5

The reporting system is now clearly centered on two goals—false receipting and political activity—and the regulatory style is dominated by audit and sanction. If there was not already an advocacy chill, there certainly is now. Relationships between the sector and the political executive are more strained than even, and the regulator is caught in the middle. More than damaged relationships, the greatest consequence of the recent actions is that the state regulatory system has become politicized which, as the regulatory literature has long stressed, is a serious impediment to its legitimacy.

Toward a Multifaceted Regime: Self-Regulation and Third Parties

Not all recent developments in Canadian regulation-by-transparency are negative; a constructive addition has been the establishment of a certification system for charities and nonprofits which, if successful, could be a world leader in enhancing effective practices (see Phillips 2012). The Standards Program led by Imagine Canada was prompted by the recognition that the sector needs to be out in front of its critics in terms of accountability, as the alternative is more control-based rules by an activist regulator driven by its political masters. Developed on the basis of extensive consultation with charities, the Standards Program is a full-blown certification system rather than a voluntary code. Following a pilot phase, 17 organizations were successfully accredited and the program officially launched in May 2012. While enhancing transparency, it puts a heavy emphasis on learning through self-assessment and has the ambitious goal of creating a community of practice to work toward continuous improvement. Although the standards are rigorous and may be a barrier to participation for many, particularly small organizations, such stringency was deemed essential to credibility in a somewhat poisoned environment. Almost all of the organizations which went through the pilot process noted that the standards are reasonable and that the self-assessment process provided a good opportunity for collective reflection and learning.

The contribution of the Standards Program is likely to be twofold: to provide information on governance and to stimulate a community of practice for continuous improvement. Where will it fit in the regulatory regime? So far, the CRA has given few clues as to whether it will integrate this certification into its own approach to risk regulation, giving certified charities a lighter touch in monitoring and audit. A likely possibility is that the CRA takes a “tiered” (Gilad 2010) approach in which it focuses on accurate reporting and monitoring of finances and political activity, and leaves the sector to deal with the second and third tiers of improving and evaluating performance. The unfortunate consequence of the politicization of the government regulatory regime, however, is that the two systems may operate as two solitudes, without any of the benefits that coordinated co-regulation could bring.

A distinctive feature of the transparency “industry” in Canada is that there have been very few entrepreneurial, self-declared charity watchdogs as exist in the US (Sidel 2005) and elsewhere. When a small new firm (now itself converted to charitable status), Charity Intelligence (CI), began evaluating charities a few years ago, it enjoyed the freedom of limited competition in spite of having a small staff and an annual budget of only $300,000 CDN (Bahen 2012). Beginning from the premise that some charities fundraise because they can rather than because they need the money, CI emphasizes ratios of funding reserves relative to program costs and gives substantial attention to officers’ compensation. Although their annual “top picks” of charities—87 charities were analyzed, 45 picked in 2012 (Charity Intelligence 2012)—is by no means a systematic coverage of the field and probably has limited influence on donors, CI gets considerable attention from the media, often being invited to provide the “counter point’ to a charity. The reaction from the charitable sector ranges from wariness to open criticism of its methodology. CI has in some respects undermined its own cause. For instance, it had its own charitable status revoked in 2012 (since restored) when it failed to file its T3010 (Waldie 2012). Will this new watchdog greatly enhance transparency? Probably not, but its presence and media interest in it buttresses the need for the sector to take hold of its own transparency and accountability through the Standards Program and related means.

The application of open data will present an additional challenge and opportunity for the sector. Although as a whole, the Canadian government lags behind other countries in making data available as open source, the exception is the charitable tax return database. As companies like Ajah begin to creatively expand linking these data with other sources, new forms of transparency focusing on a variety of different dimensions will undoubtedly emerge. Open data is likely to be a game changer for charity transparency, and the challenge for the third sector lies in developing the skills, particularly data analytic skills, to be both better consumers and producers of such data.

Conclusion

Regulatory spaces are becoming more crowded as charitable sectors professionalize self-regulation and as a variety of third parties exercise regulation-type functions using the instrument of transparency. Analysis of transparency thus needs to look to the aggregate, taking into consideration the impact of the requirements of both state and nonstate “regulators.” Although transparency still has a heavy emphasis on financial information, it is evident that there is marked trend toward greater reporting of governance and of impact. This will pull charities in different directions: the demands of financial reporting have been on accounting standardization and accuracy. Governance and impact are much less conducive to standardization, and will thus demand somewhat different regulatory styles and sophistication in how information is reported, treated, and interpreted. Judging by the limited take-up by charities on impact reporting or even provision of compelling narratives of their activities that is being encouraged by information intermediaries and sector-based websites, most charities have been slow to see the value of such transparency, have not made it a priority or find the costs of providing such information too high. With new opportunities for crowdsourcing public reviews on these websites and reinforced by the potential of the open data movement, transparency is becoming an increasingly independent force in regulation so that charities need to operate in a world in which the basic assumption of transparency—that the “owner” of information choses to share it—is no longer relevant.

The Canadian case illustrates the development of such a polycentric regulatory regime, although the state is still the dominant presence. With the tax agency as the lead regulator, the emphasis in transparency is still on financial reporting and on ensuring better accuracy of that reporting aimed at catching abuse, appropriately so for a tax agency and a context of recent abuses. There are several aspects that are not illuminated in the return, however, that would appear to be a growing part of public expectations such as basic governance practices, evidence of public benefit, indication of major risks or the absence of any meaningful reporting by nonprofits. In contrast to independent commissions, the regulatory goals of supporting a robust third sector and of providing support and guidance in a manner aligned with a model of responsive regulation are barely evident, and such an approach would sit uncomfortably in the culture of the agency. The primary lesson from Canada is that transparency, as principle and practice, should not be assumed to be a neutral tool; rather, it can be used for political ends. New politically motivated requirements on reporting advocacy activity and foreign funding are directed toward addressing the apparent under-reporting, but are intended to do much more than this: to serve as a deterrent to advocacy and a means of sending a message to environmental groups in particular. Such politicization has compromised the legitimacy of regulatory goals and strained relationships with the sector. After years in which the image of the charitable sector in Canada has taken a beating in the media its task is now one of rebuilding a narrative that allows it to move beyond the tarnished view that tax shelters, compensation caps, and debates over political activities have created. The new rigorous certification system will be part of that narrative, and so too must be proactive “radical transparency.”

Footnotes
1

As Breen (2013) notes, the implementation of new charity legislation has been delayed in Ireland, and it does not currently have a public register or other centralized disclosure of information about charities.

 
2

Donors claiming they believed they had acted legally initiated several class action law suits against the major law and accounting firms which had provided opinions, one of which was tossed out (and is under appeal), one was mediated out of court for $11 million, and one in the amount of $300 million is still alive (Gray 2012).

 
3

The failures include not deducting the cost of any service or “advantage” to the donor, not including all the required elements, or lending their charitable number to another organization.

 
4

These top five are: Ducks Unlimited; World Vision; United Israel Appeal of Canada; Multiple Sclerosis Society of Canada; and the United Church of Canada (see Blumberg 2012c).

 
5

Environmental organizations do not top the list of organizations in receipt of foreign funds; not surprisingly, the main recipients are international humanitarian relief organizations and universities (Canadian Press 2012).

 

Copyright information

© International Society for Third-Sector Research and The Johns Hopkins University 2013