The Real Meaning of Transparency

What does transparency really mean? Is it enough to list receipts and disbursements? Is it enough to have a yearly audit? Is it enough to meet the reporting requirements of the government?

You cannot answer these questions without first defining what fiscal transparency means in the nonprofit world. After all, there are different levels of transparency and the organization is monitored by a number of different bodies. Let’s start with being transparent with board of directors, as well as the relationship between the agency’s professional administration and its volunteer finance committee. Ideally, the finance committee receives a monthly report of all receipts and disbursements and knows exactly what money is coming in, including donations and grants, as well as any fees for service or other funds. This monthly accounting should also reflect all funds expended to cover expenses and other financial commitments.

The finance committee is not only responsible for reviewing an accounting of the funds, but also, when necessary, for analyzing the cash flow and suggesting adjustments to the proposed monthly budgets. The finance committee should report to the board of directors at monthly or quarterly meetings. It is a common practice to also have the steering committee or executive committee, composed of the chairpersons of the various board committees, review the budget and then open it up for discussion. Members of the board are then able to ask questions or comment.

Another aspect of the finance committee’s function is to approve reporting to funders and foundations that are supporting agency programs. Often there are potential conflicts of interest in the organization’s reporting of foundation/funder’s support of specific projects. Since all funds are fungible, it is important to know when it is ethical to replace funding; when it is a breach of the organization’s ethics to use funds in place of other funds; and when it is appropriate to report to a foundation about a discrepancy in matching funds necessary for receipt of a grant.

I was recently asked to consult with an organization about an interesting situation. The nonprofit received a challenge grant from a foundation for a unique program. The $100,000 grant was contingent upon a match of $50,000 from other funders. Soon after the grant was received, the agency received a $50,000 unrestricted contribution and reported as such to the foundation. They were pleased and forward 60% of the funds with the promise that the balance would be received once the organization received the additional funds from the private donor.

In the meantime, the organization secured an additional restricted gift for $25,000 for the program. The program was implemented and when it came time for the foundation to report its financials to the foundation a difference of opinion ensued within the organization. Do they just make the switch in the funding and use the $25,000 restricted and $25,000 from the unrestricted for the match to receive the foundation’s allocation? Or do they first report to the foundation on the change in the use of funds from two different sources?

Within the organization there was a very strong difference of opinion. The director of finance said it really did not make a difference since they were meeting the match. After all once they met the terms of the matching grant did the source of the funds really matter? She thought that by opening the issue with the foundation the nonprofit was inviting unnecessary discussions and questions. She was prepared to do the regular reporting and just show the organization’s match of 50% of the foundation’s $100,000 grant.

The financial resource development (FRD) professional, on the other hand, wanted to be very open and to provide complete transparency. He was interested in protecting the supportive relationship with the foundation, and he said by informing the foundation the nonprofit would be strengthening its relationship with a valued partner in providing the support of the organization’s program. The staff members met with the CEO who decided that the chairperson of the finance committee should be brought into the discussion.

Thus, an issue involving funds that was perceived as fungible went from a short discussion between two colleagues to an issue involving the CEO and one of the volunteer leaders. Although the issue appeared simple it warranted further discussion because of the policy implications of the action to be taken. Was it a simple bookkeeping procedure of substituting funds from the initial unrestricted contribution? Or was it necessary to have complete transparency and inform the foundation of the change in the matching from the initial donation to splitting the match between an unrestricted and a restricted source?

When I was consulted I said that it was better to have complete transparency and for the foundation to know that the nonprofit was being open and direct with them about how the 50% match was secured. By sharing the information with the foundation they would be demonstrating their view of the foundation as a complete partner.

It was also important for the foundation’s program officer to know that the agency took its financial reporting seriously and that both volunteer leaders, as well as the finance and FRD professionals, were involved in reviewing the grants. In building credibility with funding sources and by being open and sharing information you can go a long way. Transparency is not a static state and it is really an important and fluid process incumbent upon funders and the nonprofit’s leadership.

Stephen G. Donshik, D.S.W., is a lecturer at Hebrew University’s International Nonprofit Management and Leadership Program and has a consulting firm focused on strengthening non-profit organizations and their leadership for tomorrow. Stephen is a regular contributor to eJewish Philanthropy.