Differentiated regulation: the case of charities

Abstract

The increasing number and influence of charities in the economy, evidence of mismanagement and the need for information for policymaking are all reasons for establishing charity regulators. Public interest and public choice theories explain charity regulation which aims to increase public trust and confidence in charities (and thus increase voluntarism and philanthropy) and to limit tax benefits to specific organisations and donors. Nevertheless, regulation is resource intensive, and growing pressure on government budgets requires efficiencies to be found. This study proposes regulation differentiated according to charities' main resource providers, to reduce costs and focus regulatory effort, and provides a feasible segmentation.

Charity registration and reporting: a cross-jurisdictional and theoretical analysis of regulatory impact

“…For example, (a) governments increasingly contract with charities to deliver social services (Cordery, Sim, and van Zijl 2017;Mayer and Wilson 2010); (b) governments seek charities (and other TSOs) to develop social capital within communities through, for example, encouraging the arts and cultural diversity, and improving communities' environments (Bryce 2005); and (c) citizens support charities through private and corporate philanthropy; donating time, money and goods (James 1987). Recognizing potential social good from charitable activity, governments provide state support, including income tax exemptions (typically on surpluses from trading activities and income from investments), reduced state and local taxes, and preferential access to government funds (Abramson, Salamon, and Steurle 2006;Breen, Ford, and Morgan 2009;Smith 2012).…”

“…While charities operate outside of the capital market, information asymmetries in the 'market' for donations and contracts for services suggest that regulatory theory can be usefully applied to charities (Cordery, Sim, and van Zijl 2017). Six (2013) suggests responsive regulation theory (RRT) and self-determination theory (SDT) as explanations for regulatory operations and compliance.…”

“…Charity regulation recognizes a donor-and funder-market (Cordery, Sim, and van Zijl 2017) which requires charities to practise good governance, accountability, and transparency (Mayer and Wilson 2010). Primarily charities act to redistribute resources from donors and funders to beneficiaries in order to repair market and government failures (Salamon 1987).…”

“…Hence, a charity regulator driven by public interest theory will seek to build public trust and confidence by requiring charities to make public disclosures generally and financial disclosures specifically using harmonized, legitimate financial reporting standards. Such public disclosure should improve confidence in the donor-and funder-market (Cordery 2013;Cordery, Sim, and van Zijl 2017;Sinclair, Northcott, and Hooper 2014). Nevertheless, charities bear the cost of collecting and processing new information and obtaining assurance (Neely 2011).…”

“…Miscreants are located when, for example, a charity regulator monitors inappropriate application of charitable funds (Breen 2009;Phillips 2013;Irvin 2005) or checks for inappropriate amassing of tax-free assets by philanthropists (Frumkin 1998). Public complaints and regulators' investigations (Cordery, Sim, and van Zijl 2017) also result in charity de-registration. Charities thus incur compliance costs to gain and maintain their regulatory status, assuming that the regulatory framework beneficially creates and supports the market within which they operate.…”