Making Disclosure Regulation Work in the Nonprofit Sector
Robert A. Britton | 2008 U. Ill. L. Rev. 437
Following the Sarbanes-Oxley Act’s success using corporate disclo-sures to help regulate for-profit corporations, some state and federal lawmakers have sought to apply similar principles to nonprofit organiza-tions. Significant differences exist between the for-profit and nonprofit sectors, however, that Britton argues make Sarbanes-Oxley-type provi-sions inappropriate in the nonprofit context. Under market-based theory, for-profit disclosure permits the securities market to internalize public in-formation and more accurately value corporation securities. With no such market in the nonprofit sector, donors rather than investors, and no public valuation process, Britton argues that greater nonprofit disclo-sures will not result in increased corporate accountability or law en-forcement in the nonprofit sector. Instead, Britton suggests adopting a voluntary disclosure system in which state and federal governments, act-ing in their roles as significant donors to the nonprofit sector, withhold government grants unless potential recipients voluntarily provide en-hanced financial and management disclosures. In addition, Britton pro-poses new governmental agencies that will compile, organize, and com-pare these nonprofit disclosures. These agencies will then rate each nonprofit organization based on these disclosures, creating a false market that will enhance or harm the organizations’ abilities to attract or retain donors.