The NISPAcee Journal of Public Administration and Policy, Vol. XIII, No. 1, Summer 2020 10.2478/nispa-2020-0007 isciendo ^NISPAcee THE NETWORK OF INSTITUTES AND SCHOOLS OF PUBLIC ADMINISTRATION 3 EASTERN EUROPE CORVINUS The Transparency of Czech Foundations Jakub Pejcal1 Abstract Non-governmental non-profit organizations can strive to gain the confidence of the general public in various ways, one of which is the meeting of basic legal requirements for transparency - the disclosure of financial statements. Based on a set of 528 Czech foundations, the article illustrates how the organizations approach their legal obligations and look for features that contribute to the long-term fulfillment of this obligation. On average, 51.32 % of entities do not fulfill their obligations across the years. The organizations with a website (35.58% of entities do not fulfill their legal obligations to disclose financial statements) and organizations that received public support in the form of a contribution from the Foundation Investment Fund (25.62 % of subjects do not fulfill) are better off. Statistical testing has revealed that younger organizations (14 years or less) are more responsible (continuous performance). They usually have a functioning website, are headquartered in the capital, and have a single founder (natural or legal). With the help of an expert panel composed of both academics and representatives of the non-governmental non-profit sector, the conclusions are set in an overall context. In its approach and results, the article builds on previous Czech (the description of the conditions of fulfillment of duties) and foreign (the search for signs contributing to the fulfillment of duties) findings and complements them appropriately. Key words: Transparency; non-governmental non-profit organizations; foundations; financial statements. 1. Introduction Non-governmental non-profit organizations (NGOs), whose activities affect the lives of all of us while providing a whole scale of services (for more see, e.g., Pej- 1 Faculty of Economics and Administration, Masaryk University, Czech Republic. 157 Q Open Access. © 2020Jakub Pejcal, published by Sciendo. IC'OUJJIJJJJ This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License. The NISPAcee Journal of Public Administration and Policy, Vol. XIII, No. 1, Summer 2020 cal and Dostál 2017; Zabolotnaya and Larionov 2019), have recently faced attacks by some politicians or public representatives. Part of the criticism (e.g. concerning the use of public resources) can certainly be considered unjustified and based on false claims. It is precisely such criticism that may contribute to the low public confidence (according to the Public Opinion Research Centre results of September 2019, only 37 % of respondents trust NGOs in the Czech Republic, whereas 53 % of respondents do not). This kind of false criticism may be handled in various ways. Perhaps the best defense or credibility tool (Ball 2009; Gazzola and Ratti 2014) is to use all possible communication activities serving to the open and transparent behavior of NGOs. This kind of open behavior may also be beneficial when acquiring additional funding to cover the NGOs' activities (for more see, e.g., Hladká et al. 2017; Makýšová and Vaceková 2017). The aims of the article presented here are as follows: to reveal the reality of meeting the basic legal requirements in the case of a selected group of Czech NGOs (the legal form of the foundation), as well as to identify the features that contribute to the long-term fulfillment of these obligations. In comparison with previous -rather fragmentary - knowledge of Czech practice, the article deals with the long-term approach of individual organizations to their "disclosure" through the publication of their basic financial statements (balance sheet and profit and loss account) as an elementary tool for building credibility. The article will briefly introduce the terms "transparency" and "accountability." The research that has dealt with the issue so far both in the Czech Republic and abroad will be mentioned. Furthermore, the article will focus on the fundamental legislative requirements including their fulfillment, which have been imposed on Czech NGOs as a prerequisite for gaining public confidence. The fulfillment of the basic requirements of a selected group of Czech NGOs has been verified by analyzing both their websites and the relevant Collections of Instruments of the Public Registers (administered by the Czech Ministry of Justice). The results of the analysis (both descriptive and econometric) are then presented and subjected to a discussion. This discussion takes into account the opinions of the expert panel. The conclusion of the article contains, in addition to a summary of the basic findings, an outline of possible implications, especially in the framework of public policies or in the framework of further research. 2. The transparency of NGOs - previous findings Transparency is close to meeting predetermined requirements (e.g. contractual or even legal ones). Thus, it is possible to consider it an essential element of fulfilling the principles of accountability (Stone and Wilbanks 2012), i.e. the ability to be answerable to all stakeholders from the ranks of clients, donors, public sector and, 158 The Transparency of Czech Foundations last but not least, to all taxpayers through a narrowly defined retrospective activity in the form of statements, reports or accounts (Pospíšil 2006). The pressure on transparency or accountability has been increasing in recent, years mainly due to three aspects related to the functioning of the non-governmental non-profit sector. They are as follows: 1) growth in the number and size of NGOs; 2) increased flow of funds to NGOs; 3) higher "loudness" of NGOs in shaping public policy (Jordan and Tuijl 2006). NGOs are subject to the three imaginary levels of responsibility: 1) organizational (linked to informing about day-to-day NGO operations); 2) resulting from the fulfillment of the mission (by NGOs towards the needy); 3) arising from stakeholder requirements (both influencing NGO activities and influenced by them) (Jordan and Tuijl 2006). Thus, the public - as indicated above - is increasingly asking for more information on how NGOs work, how they are funded, managed, etc. (Cornforth and Edwards 1999; Stone and Wilbanks 2012), which also implies greater interest from researchers. Research in this area has started relatively recently, especially in the US, where it is associated with a decline in NGOs' confidence due to various problems in their functioning (Jordan and Tuijl 2006; Ball 2009). Research enters the Czech milieu at a later stage and, to a certain extent, follows foreign trends. Foreign researchers are concerned with the definition of the terms "transparency" and "accountability" (at the different levels of responsibility according to Jordan and Tuijl 2006), as well as with the search for good practice (various associations such as GuideStar 2009 or CharityNavigator). They also deal with the practical fulfilment of these terms in the functioning of the selected groups of NGOs, or they are involved in the search for variables that directly influence the open behavior of the organizations. An example of the first approach to research is Ball (2009), who deals with the issue of transparency or accountability from different perspectives, or McConville (2017), who looks for the strong points related to organizational transparency. The fulfillment of transparency or accountability (at various levels) in the reality of the non-governmental non-profit sector has been dealt with in the USA, for example, by Lee and Joseph (2013) who examined the content of 154 organizations' websites with the conclusion that the majority of NGOs did not publish the recommended information (e.g. audited financial reports had been published only by 4.5% of NGOs). Gazzola and Ratti (2014) analyzed the websites of 100 Italian NGOs to find whether the organizations released their Sustainability Report (the financial report was disclosed by 64% of NGOs in 2010 and by 67% of NGOs in 2011). The search for the variables that affect the openness of the organization (again at different levels) has so far been dealt with by a greater number of authors. For example, in the USA, Behn et al. (2010) investigated the willingness of 300 big organi- 159 The NISPAcee Journal of Public Administration and Policy, Vol. XIII, No. 1, Summer 2020 zations to disclose their key audited annual reports over 4 years to the public. 67.6 % of the addressed NGOs sent researchers their financial report. Authors found out that the decision to share audited financial statements is related to the larger size of the organization (total asset), higher debts, higher contribution rate, higher executive compensation ratio and to the area of activity (Higher Education). Saxton and Guo (2011) researched the content of 117 community NGOs' websites within the so-called web-based accountability (including both "disclosure" and "dialogue" dimensions with the incorporation of the following indexes: "Financial Disclosure Index" and "Performance Disclosure Index"). They found that web-based accountability practices are significantly related to the organizational capacity (total asset) and governance (board performance) of NGOs. Authors revealed that the audited financial statements were disclosed by 44 % of NGOs included in the research. Lee et al. (2012) looked at 125 NGOs' websites and financial data at a level similar to the previously mentioned approach (Saxton and Guo 2011). The authors revealed that "online accountability implementation efficiency" is connected to younger and smaller NGOs (total revenue and total asset). In other countries, it is certainly worth mentioning the research of fulfilling the obligation to submit financial statements to the supreme authority for 40 NGOs in the field of health care in Taiwan conducted by Saxton et al. (2012) with the conclusion that 37.5 % of NGOs disclose their reports. Authors detected that smaller organizations (total revenues) with lower financial leverage (ratio of long-term debt to total asset) and with larger boards with more inside members tend to disclose their financial information voluntarily. More recent research conducted by Zainon et al. (2014) examined the accountability practice (through its own "NPOs Reporting Index" comprising 489 items) on the sample of 101 Malaysian NGOs. The research detected a positive effect of an external audit and type of funding (high share of governmental funds on the NGOs financial portfolio) on information disclosure. Within the Chinese non-profit sector, Nie et al. (2016) examined (through a "Voluntary Disclosure Index" composed of 14 variables) 2,074 Chinese foundations over the years 2005-2011 with the emphasis on the relationship between openness and public support. The authors revealed that foundations that depend more on donations, collect more restricted funds, receive fewer government funds and are under less government control have a higher probability of offering voluntary disclosure. We cannot neglect the research carried out in Portugal, where Carvalho et al. (2017) examined the reasons for reporting (the fulfillment of the "Statement of Recommended Practice" including 31 variables) in 142 foundations. The researchers found out that organizations' characteristics (large organizations with more projects, staff members and with more public funds) reflect the willingness to have regular auditing and to volunteer information disclosure. And it is also important to mention a follow-up article (Carvalho et al. 2020) focused on websites and self-publishing (in the form of a higher number of indexes: "Operational Disclosure Index," "Human Resources Disclosure Index," "Management Disclosure Index," "Financial Statements Disclosure Index," 160 The Transparency of Czech Foundations "Annual Report Disclosure Index," "Total Disclosure Index") in a similar group of 287 charity organizations in Portugal. This research signifies that the willingness to disclose information is related to the certification of accounts (external auditing) and organization size (total asset). As can be seen from the above, most authors who search for variables affecting NGOs' open approach work with the evaluation of the organizations' transparency or accountability by means of operationalizing the terms into their own or previously defined indexes. These indexes cover a greater number of aspects of the organizations' activities. There have been rare reports (Behn et al. 2010; Saxton et al. 2012) that dealt only with a partial aspect (e.g. in the form of financial statements), which is an approach commonly used in Czech research work. To a certain extent, the research carried out in the Czech milieu follows foreign studies and is connected mainly with the examination of transparency, which is the first and basic level of accountability (according to Jordan and Tuijl 2006). The Czech research focuses primarily on a short period of meeting the statutory obligations by a limited group of entities defined according to the legal form as foundations (Hyánek et al. 20042; Vajdová 20053; Stránský 2007, 2009; Bachmann 2012). The research carried out in the Czech Republic also aims at a limited number of the addressees of public support (Bachmann 2017, 2018), or it aims at the combination of the above - at foundations supported from the public budget (Jošt 2016, 2017). In the Czech Republic, the researchers mostly deal with the analysis of the content of the Public Register (more precisely, the Collection of Instruments) or of the websites of the organizations concerned. In their research, they monitor the presence of documents required by law. In particular, the authors focus on the presence of the statute, annual reports, financial statements. Exceptionally, they focus on audits and information about auditors, strategic documents, etc., which is largely followed by the existing certifications of Czech associations bringing together various types of NGOs (e.g. the Association of Foundations4 or the Association of Public Benefit Organizations5). In order to indicate the approaches used so far, including the identification of other facts about the individual types of realized Czech research (e.g. other monitored variables), see the table below. 2 Carried out as part of a larger project aimed at exploring different legal forms from different perspectives. Compliance with legal obligations is therefore only a partial segment of a larger study describing the functioning of the Czech non-profit sector. 3 Carried out within the CIVICUS project, involving 50 countries. The project resulted in an evaluation of civil society in the given country through the Civil Society Index. Legal compliance is only part of a larger study. 4 Asociace nadací herein the Association of Foundatios. 5 Asociace veřejně prospěšných organizací herein the Association of Public Benefit Organizations. 161 Table 1 The survey of realized research on the topic of transparency in the Czech Republic Hyänek et al. 2004 Vajdovä 2005 Stränsky 2007, 2009 Bachmann 2012 Jost 2016 Jost 2017 Bachmann 2017 Bachmann 2018 time period: 2002 2002 2004-2006 2011-2012 2009-2013 2009-2013 2015 2016 sample: 178 foundations NA 164 foundations 2400 NGOs (100 foundations) 74 beneficiaries of public support -NIF (73 foundations, 1 philanthropic fund) 140 foundations (70 non-beneficiaries and beneficiaries of public support -NIF) 22 (without foundations) 28 (without foundations) object of analysis: Public Registers (and their Collection of Instruments) yes NA yes - yes yes - - websites of NGOs - NA yes yes yes yes yes yes share of transparent NGOs: 56.18% 50% 78% 19% (profit and loss account) 18% (balance sheet) average: 86.49% average: 89.71% (beneficiaries) average: 97.99% (non-beneficiaries) 46.4% 45.5% other variables: annual report yes NA yes - yes yes - - statute (or other documents about NGOs) - yes yes yes yes yes yes information about audit (auditors, audit report...) - yes yes yes yes - - grant rules - yes yes - yes - - rules on administrative costs - yes yes yes yes - - websites of NGOs - - - - - yes yes strategic documents of NGOs - yes - - - yes yes other - e.g. list of donors and beneficiaries of foundations' contributions, list of important peoples etc. - - e.g. list of donors and beneficiaries of foundations' contributions - - Source: the author's own processing based on literature review. The NISPAcee Journal of Public Administration and Policy, Vol. XIII, No. 1, Summer 2020 While the above-mentioned transparency studies in the Czech milieu dealt with rather a limited period of time and a limited group of entities, this article looks at the segment of NGOs denned by the legal form throughout the entire existence of their individual representatives. This article also enriches the existing findings with the determination of the features that contribute to the long-term fulfillment of obligations. In this way, it follows the foreign inspiration in the form of the above-mentioned contributions by Behn et al. (2010) and Saxton et al. (2012). 2.1 The operationalization of transparency for the Czech milieu The "new" Civil Code (Act No. 89/2012 Coll.) plays a fundamental role in defining the narrowest circle of NGOs in the Czech Republic. It also names the basic reporting obligations associated with their existence (extends the related Act No. 304/2013 Coll. on the Public Registers of Legal and Natural Persons, or, in better words, Act No. 563/1991 Coll. on Accounting).6 Since 2014, all NGOs, registered in the Public Registers (they cannot be established without registration) managed by the Ministry of Justice, are obliged to publish their financial statements (i.e. a balance sheet and a profit and loss account; Nebuzelska 2016). The obligation to disclose financial statements is related to all entities regardless of their size (e.g. number of employees or amount of economic activities) or purpose of existence. The disclosure requirement is connected to the principles of Public Registers (principle of material and formal publicity); their aim is to protect the general public in contact with NGOs (Act No. 304/2013 Coll.). Until 2014, the fulfillment of this obligation was associated only with some less numerous but not less socially important legal forms (foundations and public benefit corporations). Other legal forms were left out by the original legislation (Brhlikova 2004, for example, points out the lack of transparency in some legal forms). By its very nature, the current regulation is intended to enable the general public to look into the economics of all non-governmental non-profit entities (mentioned, for example, by Ronovska et al. 2015). Thus, it is supposed to offer opportunities for their evaluation or mutual comparison. However, for the purposes of this article, it will serve to define the essential aspects of credibility. 3. Materials and methods 3.1 A selected group of NGOs This article follows the above-mentioned facts and seeks answers to the following questions: How do the representatives of the granting organizations (defined by Fric 6 However, the authors of the current legislation wanted to go even further by creating a so-called public-benefit status that would bring more light to the NGO sector. Due to the opposition of some strong players, the intention was abandoned after longer discussions. 164 The Transparency of Czech Foundations 2015) deal with their legislative obligations in the long run? What are the common features of the organizations that contribute to the long-term fulfillment of obligations? The granting entities, more specifically foundations7, can be considered a suitable group of organizations for the actual research, mainly because they represent the large property representatives of the non-governmental non-profit sector (based on their assets). Despite their small number (out of a total of approximately 140,000 NGOs in the Czech Republic, they account for approximately 1 % - Czech Statistical Office 2019), these organizations have a significant social impact (such as public support). They are also characterized by a high level of activity (e.g. in comparison with the previously mentioned associations - according to the conclusions of the Supreme Audit Office 2018). In our territory, foundations, as important actors of public benefit and charitable activities, were active already before the Second World War. After a period of repression (the Nazi German occupation and later the communist regime8), which were connected with the restriction or direct cancellation of civic activities, the foundations could start again after 1989. The functioning of new foundations was provisionally and vaguely regulated by the amended Economic Code (Act No. 109/1964 Coll., or Act No. 103/1990 Coll., amending and supplementing the Economic Code). The provisional period associated with the growth in the number of foundations was only completed by the adoption of the Act on Foundations and Funds (Act No. 227/1997 Coll., Effective as of 1 January 1998), which determined the basic requirements for establishing and administering foundations as well as the scope of their performance (including the requirement to publish financial statements as part of the mandatory annual reports). Among other things, the new law brought a reduction in the number of foundation entities (according to Hyánek et al. 2004, the number decreased to 1/5 between 1997 and 1999). After 1998, the state contributed significantly to strengthening foundations through the distribution of the so-called Foundation Investment Fund (Nadační investiční fond - NIF). It collected part of the funds obtained from the second wave of voucher privatization. The distributed NIF funds thus contributed significantly to the increase in endowment assets (managed assets of foundations) of selected foundations9 and indirectly contributed to the transparency of these entities. (The beneficiaries of NIF contributions and their annual reports were temporarily under closer supervision by the Government Council for NGOs.) The current regulation of foundations and philanthropic funds is provided by the aforementioned new Civil Code (Act No. 89/2012 Coll.). 7 Another example of Czech granting organizations are philanthropic funds, which we will not deal with for capacity reasons. 8 An exception is the period from 1945 to 1953, when foundations could be established in a relatively free way and could carry out their activities. 9 Foundations applied for a contribution from the Foundation Investment Fund in the form of a selection procedure (tender). 165 The NISPAcee Journal of Public Administration and Policy, Vol. XIII, No. 1, Summer 2020 According to the Business Register of the Czech Statistical Office, as of March 2019, there were 543 foundations in the Czech Republic. Despite the lack of detailed data, the small segment of the Czech non-governmental non-profit sector can be attributed a significant share of employment (overall 2.01 % for NGOs - Czech Statistical Office 2019) as well as the share of the gross domestic product of the Czech Republic. 3.2 Data and data sources The period from 1997 to the present day can be considered a suitable period for reflecting on how foundations have met the basic credibility-building requirements. (For the sake of simplicity we identify credibility building with the disclosure of previous financial statements.) Nevertheless, the actual observation ends with the financial statements for the period 2017, because according to Act No. 563/1991 Coll., On Accounting, financial statements for the subsequent accounting period need not be published yet (at the time of preparation of the article). For this reason, it is necessary to narrow the population to the entities that existed until the last included year - 2017: Their number is 528. The following sources were used to collect quantitative and qualitative data on the denned group of NGOs: the relevant Public Registers (Foundation Register and its Collection of Instruments), statistical data processed within the Business Register, a list of beneficiaries of the Foundation Investment Fund (obtained from the relevant Czech Government Resolution) as well as the websites of the given foundations (set up at 53.41 % of subjects). The table below provides a list of collected variables: the organizations own characteristics, data on their functioning, and data on submitted financial statements and their form/completeness. The table also contains a basic description of the actual situation (absolute case frequency for defined variables, average and median values). 3.3 Methods used Basic research methods were used to fulfill the expected goal: general analysis, synthesis, deduction, and induction. In addition to descriptive statistics used to outline how the selected organizations are dealing with their responsibilities in the long run, the independence test - the Pearson chi-square test - was used to find common features contributing to long-term fulfillment of obligations. The chosen statistical test is the basic and most frequently used test of independence in the table of correlations (based on a comparison of observed and expected frequencies). The null hypothesis was, in this case, the existence of independence between the variables mentioned and the fulfillment of the basic requirement for building credibility (i.e. the disclosure of financial statements). In addition to the above, the interpretation of the conclusions was strengthened by the view of the expert panel, which included 166 The Transparency of Czech Foundations researchers dealing with the topic in the past as well as the representatives from the foundation sector. Thanks to the above-mentioned basic and advanced interpretation methods, as well as to consultations with the representatives of the expert panel, it is possible to submit the processed data in the form of conclusions and recommendations. 4. Results and discussion 4.1 The fulfillment of the basic requirement of the Czech NGOs' credibility building A continuous series of financial statements covering the entire existence of the organizations (i.e. beginning in 1997 or in the year of their establishment and ending in 2017) could only be generated for a fraction of the NGOs considered. Out of a total of 528 entities, only 90 foundations (i.e. 17.05% of entities) meet the basic requirement for publishing financial statements. These are usually generally known foundations, such as the Charter 77 Foundation, the Jan Hus Educational Foundation, the Open Society Fund Prague Foundation, the Česká spořitelna Foundation, the ČEZ Foundation, the 02 Foundation, etc. Some organizations only made financial statements available for selected periods. Aside from the continuity requirement, it can be stated that 51.32 % of organizations have not respected their legal obligations over the years. Taking a more cautious look that would disregard the first three years of the available time series of data (from 1997 to 1999) and thus offer the sector a certain "protection season" from the start of the new legislation, the average for the organizations that did not comply with their legal obligations would be 46.86% of NGOs. On the other hand, with a more critical view of the last 7 years (2011 to 2017), which also took into account the quality10 of the individual financial statements (i.e. balance sheets and profit and loss accounts), the share of "dilettantes" will increase to 53.1 %. The figures below show the development of the number of foundations over the years and the proportion of compliance and non-compliance with legal obligations. If the sample is narrowed only to the foundations that have a functional website (i.e. a number of 282 entities) and for which a greater effort to build credibility in the eyes of the public can be expected, there will be a significant reduction in the number of NGOs that have not respected their legal obligations over the years. There are 35.58 % of such organizations. A more cautious view (excluding the period from 1997 to 1999) is more favorable to the outcome of organizations and rests at the level of 29.56% of entities that have neglected the legal requirement. The critical view (taking into account only the period from 2011 to 2017) offers a value 10 For example, completeness, readability, and the mathematical correctness of statements were taken into account. 167 Table 2 The overview of the variables used with the data sources and the values they acquire (frequency average, median) Variable Operationalization Frequency Average/Median Source continuous series of financial statements 1 yes 90 - own data collection 0 no 438 - employees 1 1-5 93 5.68/3 Business Register (classification adopted) 2 6-9 12 3 10-19 14 4 20-24 1 5 25-49 3 NA 405 age 1: 29-25 153 17.33/19 Business Register (own calculation) 2: 24-20 109 3:19-15 79 4: 14-10 70 5: 9-5 63 6: 4-0 54 web accessibility 1: yes 282 - own data collection 0: no 246 founder 1: natural person 271 - Foundation Register 2: legal entity 92 3: other NGO 52 4: public sector 45 5: mix 38 NA 30 number of founders 1 1 302 2.14/1 Foundation Register 2 2-5 161 3 6 and more 35 NA 30 registered capital (CZK thousands) 1 500 220 17,366/568 Foundation Register 2 501-1,000 107 3 1,001-2,000 38 4 2,001-5,000 31 5 5,001-25,000 32 6 25,001-50,000 43 7 50,001 and more 31 NA 26 registered capital - structure (%): 1 0-20 - - Foundation Register • money 2 21-40 80.56/100 • securities 3 41-60 2.25/0 • real estate 4 61-80 10.06/0 • movables 5 81-100 6.20/0 • other NA 0.74/0 registered office 1 Prague 255 - Business Register 2 regional centre 103 3 other 170 addressee of public contribution - NIF 1 1 yes 36 - resolutions of the Government 0 no 489 2 return 3 Table 2 (continuation) Variable Operationalization Frequency Average/Median Source addressee of public contribution - NIF 2 1: yes 64 resolutions of the 0: no 464 Government adressee of public contribution - NIF - in general 1: yes 73 resolutions of the 0: no 455 Government sum of public contribution - NIF (CZK thousands) (n = 73) amount - 33,683/32,110 resolutions of the Government Source: the author's own processing based on data from the Foundation Register, the Business Register and relevant resolutions of the Government of the Czech Republic. Graph 1 Year-on-year development in meeting the obligation to publish financial statements of foundations (n = 528) ■ did not exist ■ not published ■ published cncncnoooooooooooooooooo *H *H *H CNJ (N (N (N (N (N (N (N (N C\J (N (N (N (N (N (N (N (N Source: the author's own processing based on data from the Foundation Register, the Business Register and other sources (e.g. websites of individual NGOs). The Transparency of Czech Foundations of 34.17% of "dilettantes". The development of the number of foundations - with a functional website - that have or have not fulfilled legal obligations over the years is again shown in Graph 2 below. j-i sp sP sP sP sp \0 0s- 0s* 0s* 0s* 0s* 0s* o o o o o o O M ID N u s- o co !-