A Pattern of Problems
New Charities Bureau Chief Discusses Array of Abuse in Nonprofits

By Jay Dismukes

The overseer of New York’s charities sector will take “strong action” against boards of nonprofits that fail to meet their governance and management responsibilities, the head of that agency said last month.

That action, according to Gerald A. Rosenberg, new chief of the state’s Charities Bureau, could include modifying internal control procedures, implementing conflict of interest policies, reshaping boards, and even requiring directors and trustees to make restitution to the organizations in which they are serving.

While inattentive boards and the ability of the Charities Bureau to take regulatory action against them is nothing new in the nonprofit world, the issue is receiving renewed attention under Rosenberg. The veteran attorney, whom New York Attorney General Eliot Spitzer appointed in August after William Josephson, former assistant attorney general-in-charge of the Charities Bureau, retired, has made several speeches in recent months stating that negligent boards and four other problematic areas would be the primary focus of his office. These five areas are the result of more than 120 case filings that Rosenberg and his staff reviewed last fall to target the most common types of abuse in the state’s not-for-profit sector.

Rosenberg delivered one of these speeches at the Dec. 2 Exempt Organizations Conference, held at the State Society’s headquarters in Manhattan. There he said that dissolution of certain nonprofits, fund-raising abuses, compensation issues, and fleecing of the elderly, in addition to board performance, will be closely examined.

Complementary Acts

Nonprofits engaged in fraudulent or illegal acts may need to be dissolved, and this certainly would include terrorist fronts posing as charitable organizations, Rosenberg said. Though the Internal Revenue Service can also put an organization out of business or revoke its 501C3 exemption, Rosenberg noted that the Service’s resources are stretched thin.

“The advantage to dissolution is that it closes down organizations, which cease to have bank accounts, so we can cut off conduits of money,” Rosenberg said. “Our efforts would complement the IRS’ efforts.”

In an interview following the conference, Julie L. Floch, partner and director of Eisner LLP’s Not-for-Profit Services, noted that budget constraints throughout the Service and general lack of manpower in the Exempt Division, despite an increase of 72 field agents in the past year, have forced the IRS to pick and choose its battles carefully.

“The resources that it takes the IRS to track them down, to find out why they are not filing, to start the process of putting them out of business, and to revoke their exemption…that’s an intense process,” Floch said. “They can’t do it with all those little low-lying organizations.”

Though a terrorist front would be the obvious candidate for dissolution, Rosenberg said his office would also consider dissolving nonprofits that do not comply with their legal requirements, such as filing Form 990, the annual information return filed by most exempt organizations. Speaking about this matter last July, Josephson said that approximately 12,000 of New York’s 50,000 tax-exempt registrants were considered delinquent for not filing their annual report on a timely basis.

Equally disturbing is the compensation that is paid to the directors and trustees of some of these registrants, which Rosenberg said is “wildly variable.” Compensation should be commensurate with the services rendered, Rosenberg said, noting that his office compares compensation packages among nonprofits and examines the decision-making process that charities use to determine the size of those packages. A proponent of compensation for large exempt organizations, Rosenberg added that the Charities Bureau is “sensitive” to the distinctions between major grant-making foundations, for example, and small nonprofits, and the amount of time and energy that directors and trustees have to invest in these organizations.

Sudden Change of Plans

Because of the possible implications for the nonprofit sector, the Charities Bureau also has the authority to look into situations where a family member or acquaintance may have tried to take advantage of an elderly person’s feeble mental condition, resulting in last-minute changes to a trust or will and the diversion of money and assets that otherwise would have gone to a charity. If his office finds that a decedent was a victim of undue influence or fraud by what Rosenberg referred to as “love and care givers,” he said the Charities Bureau would make sure that the charity “is not deprived of its lawful dollar.” Though individuals have the right to make changes to their estate plans and the majority do so in a conscious manner, Rosenberg said he and his staff want to make sure that gifts are “voluntarily and knowingly made and not under other circumstances.”

The Charities Bureau also wants to rein in fund-raising abuses, and is interested in helping the public find out how much of their charitable dollars are going to charity and how much of their donations are going elsewhere, such as to a telemarketer soliciting contributions, for example.

This objective is more difficult than it may seem, however. Rosenberg noted that recent decisions at the federal court level, which essentially have been leery of inhibiting fund-raising practices and of requiring more disclosure, have “hobbled” the ability of state regulators like the Charities Bureau to target abuse.

In New York, professional fundraisers and telemarketers must register with the state. Charities that hire these organizations to ask for contributions from New York citizens also have a responsibility to make sure they are registered with the state.

“New York is really watching those relationships and those contracts, and, in fact, New York has all these disclosures that say, ‘Tell us what campaign went on, how much money was raised, how much went to the charity, how much went to the telemarketer,’” Floch said. “So New York has pretty stringent rules…and I think what Gerry is saying is, We’re going to continue to watch all of this.”

What Is Being Done?

Following Rosenberg’s remarks, Karin K. Goldman, assistant attorney general with the Charities Bureau, spoke about the significance of internal controls in not-for-profits. Her office, she explained, has engaged in an educational program to advise exempt organizations about good governance policies and internal control procedures. As a result, the Charities Bureau created a booklet that outlines best practices for implementing effective internal controls. This book can be obtained by visiting www.oag.state.ny.us.

Later in the day, David G. Samuels, a former attorney with the Charities Bureau, emphasized the need for board members to conduct business at an “arm’s length” in a time of renewed regulatory vigor.

“There is a pendulum,” Samuels said. “There was a lot of work in enforcement in the late 1980s. Now…Sarbanes-Oxley and Sen. Charles Grassley (R-Iowa) pressing for best practices, make it important to understand the pendulum is swinging back toward greater enforcement. Existing laws now are being enforced, and it is important for our clients to understand that.”

Samuels said that the attorney general has certain “remedies” at his disposal, including surcharges, monetary judgments and removal of directors. At the federal level, the IRS has announced they are expanding efforts to identify abuses among nonprofits, with plans to contact 2,000 charities on their compensation practices and procedures.

That fact may make the further application of Sarbanes-Oxley principles to the nonprofit world seem like overkill, Samuels said, but raising the profile of the lessons of abuses, like excessive compensation for nonprofit board members, is an important service CPAs can provide to their nonprofit clients.

Samuels pointed to the recent Grand Marnier Foundation case, in which the state attorney general alleged that the foundation’s board received as much in compensation as it granted in the function of its charitable purpose. Members were forced to return $1.6 million to the foundation.

In another, older case that Samuels was involved in, real estate developer William Levitt, “who had set up a foundation in good times, but fleeced it when times got tough,” faced an $11 million judgment for filtering money from the foundation, endorsing a check and signing his name as the borrower and the witness as well.

“That is the epitome of how not to do things,” Samuels said. “That’s not arm’s-length dealing.”

CPAs can help nonprofit clients avoid excessive compensation by applying certain tests, benchmarking board compensation against organizations of similar size, geographic location and charitable intent. Clients should hold on to their records, including timesheets, journals and anything else that can illustrate that board membership is not an overpaid sinecure. Sanctions that the state can use against nonprofits for excessive compensation can involve an entire board of directors.

The NYSSCPA’s Exempt Organizations Committee, chaired by Alan Woghin, of American Express Tax and Business Services Inc., sponsored the Foundation for Accounting Education Conference. Floch served as conference chair.