Tyler Cowen posts at The Volokh Conspiracy about the IRS audit of The Nature Conservancy

The tax records of the institution are considered a complete mess. The institution has over $3 billion in assets, so this is hardly a small matter.

At least one of the lessons is simple: know something about the non-profits you support. This area is just ripe for institutional failure. Too many donors would rather look the other way and pat themselves on the back for their generosity. They do not want to hear bad news, which is one reason why news about bad non-profits often remains hidden for so long. Feeling good about oneself is a worthy endeavor, but it also can interfere with the smooth functioning of voluntary institutions.

The earlier post Mouse-based Monitoring spoke of the ineffectiveness of conservation NGOs due to their lack of common management practices to measure, monitor and report about operations. It is starting to look like the problem wasn't just incompetence.

This isn't an isolated problem affecting only The Nature Conservancy, it seems widespread. There are problems ranging from covert support of terrorist organizations to embezzlement for personal gain and money laundering for drug cartels in NGOs and non-profit organizations in addition to reprehensible but non-criminal failures to return social value for donations. Too often such organizations seem more like jobs programs for their employees and management than useful voluntary entities.

Why do we allow such organizations to evade so many of the normal monitoring and reporting requirements imposed on other institutions? How is society served? It seems to have originated in the centuries long struggle to separate church and state and so allow freedom of conscience among citizens and subjects. The power of the state to demand accounting and collect taxes stopped at the church door. But when exceptions are made for one powerful interest group others will mine the same vein. And so we have a range of entities - from religious institutions to organized crime - that function without adequate monitoring and engage is activities that shade from light grey to black from the perspective of society as a whole.

We only hear about the worst of them, the ones that get caught. Commercial entities that get caught - such as Parmalat or Enron - make it clear to us that every commercial entity does its best to evade monitoring and accountability for its acts. It isn't just commercial entities that behave this way, all human institutions do so. It seems that the time has arrived to eliminate special privileges for favored organizations, time to eliminate subsidies given in the form of tax breaks for institutions and donors and demand high levels of transparency and accountability. If there were no incentives to support such organizations there would be greater scrutiny by donors since the only value they would get for their money would be results.