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Government Oversight and Not-for-Profits

Per an NYT article of May 29, 2016: “…the I.R.S. told the group seeking tax-exempt status, “You are not established pursuant to a statute, managed by government officials or funded by government grants,” and “there is no government oversight of your activities similar to that of an A.C.O.” in Medicare.” A.C.O. stands for an accountable care organization. For this and other reasons the I.R.S. denied the group’s application for tax exempt status.

An intriguing question: whether public sector organizations provide inspection and oversight superior to private sector organizations’ delivery of such services. There are a host of commercial (e.g., rating agencies, public accounting firms) and not-for-profit (e.g., PCAOB, which itself is overseen by the public sector regulator / civil law enforcement body – the U.S. SEC, the Federal Reserve Bank of N.Y., which itself is overseen by the quasi-public sector body – the Federal Reserve Board) organizations that more or less provide inspection and oversight. However, discovering an adequate sample of randomized controlled trials in which public and private sector inspection and oversight units are compared and analyzed under rigorous quantitative methodologies is a Herculean task.

In the U.S., where private sector ordering is paramount (cf. capitalism), the rebuttable presumption that the private sector can do just about everything as well, if not better and less costly, than the public sector is less difficult to discover. Other jurisdictions deploy more centralized controls (e.g., China). As a former practitioner, the qualitative difference between good and bad inspection and oversight more often depends on budgetary allowance and schedule of performance than on any one individual’s professional competence: Few perform well under austere budgets subjected to (artificially) compressed reporting deadlines.

Perhaps, the issue turns on the presence and effect of clientelism. Where the concern is cultivation of future revenue streams from specific clients (e.g., Enron and Arthur Andersen, a prominent but hardly unique exemplar), inspection and oversight is readily compromised. This type of risk may underlie concerns about the quality of private sector inspection and oversight. Have you ever wondered who gives a more accurate, complete, and timely expert opinion on their respective domains – the I.R.S. taxable income examiner or the Big 4 financial income auditor?

As automated tools become less expensive and more commonplace, both public and private sector inspection and oversight may become more effective and timely, so long as the respective IO entity has access to the full library of relevant information (cf. Panama Papers). If anyone wonders, a reason why I frequently reference the Panama Papers is not due to any overriding concern with tax evasion and/or avoidance; instead, these Papers illustrate the power of the covert – the undisclosed and secret – in the globalized financial and legal domains. Transparency of the library is only as useful as the extent of its collection of relevant materials.

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