Nonprofit Financial Accountability: Does Self-Regulation Work?

The mission of the Wise Giving Alliance (WGA), a national organization affiliated with the Better Business Bureau, is to monitor nonprofits that receive the majority of their funding from private contributions. Nonprofits are rated as passing or failing on certain standards regarding transparency, spending, governance, and fundraising costs. The data used to determine compliance is either self-submitted or retrieved from the IRS Form 990 that all nonprofits above a certain production level are required to file. Defining financial accountability in terms of percent spent on program services (dollars spent on programs/total revenue for that fiscal year), the team used regression analysis to examine if compliance to these standards is significantly related to spending—essentially if the WGA measures the right organizational components or inputs, and if so, which of these are most highly correlated and need to be focused on in the future. The research question also challenges the validity of the standards: do they actually matter? Are they measuring essential organizational components? The study concludes with comments on self-regulation and the potential need for government regulation to monitor the tax-exempt status granted by the federal government. The results of the regression on the standards can be used to hone in on areas to inform policymaking decisions as well as efforts of organizations focused on improving nonprofit infrastructure.