Not-for-Profit Governance Legislation Introduced in State Assembly

Not-for-Profit Governance Legislation Introduced in State Assembly
Companion Bill Already in State Senate

New York legislator Richard Brodsky last month introduced in the Assembly State Attorney General Eliot Spitzer’s proposed legislation to establish protections against financial fraud and abuse in not-for-profit corporations.

The bill, A10239, which would impose Sarbanes-Oxley style provisions on the nonprofit community, is similar to a state Senate bill introduced last April and amended two months later, but not ever reported from committee. As recently as February, Spitzer suggested the legislation was unlikely to advance in Albany this year.

Cause and Effect

In his memorandum in support of the bill, Brodsky says that the revenues that New York foregoes as a result of the tax deductibility of charitable contributions and the tax exempt status of not-for-profits are a central reason for needing to better protect the assets of the nonprofit community. The memo also states that the federal, state and local government grants and contracts awarded to nonprofit organizations necessitate New York’s “clear obligation to its taxpayers to ensure that those funds are spent only for their intended purposes.”

To do this, A10239 would require that the president or chief executive officer and the treasurer or chief financial officer of each not-for-profit verify the corporation’s annual report. (The bill would exempt religious corporations from this requirement.)

These verification requirements would differ according to the size of the nonprofit. Not-for-profits, other than private foundations, with annual gross revenues less than $1 million and total assets less than $3 million would have to verify that the annual report “fairly presents” the financial condition of the corporation. More-comprehensive verification requirements would affect nonprofits with annual gross revenues of at least $1 million or total assets of at least $3 million.

For nonprofit entities (excluding private foundations and Type A corporations that do not register with the attorney general) that meet this second threshold, A10239 applies strict financial reporting standards. Among other provisions, these standards would require the president or CEO and the treasurer or CFO to certify the accuracy and validity of the annual report as well as the adequacy of the internal controls.

The signing officers of private foundations would have to verify that the foundation has complied with the various financial requirements and restrictions of Section 406 of the current Not-for-Profit Corporation Law.

The bill also encourages but does not require the establishment of an executive committee for entities with boards of more than 25 members. Similarly, nonprofits that meet the second revenues or assets threshold, or whose financial statements are audited by a public accountant, are encouraged but not required to establish an audit committee. The bill would allow for exemption to these requirements through an amendment to the nonprofit’s bylaws or certificate of incorporation.

According to the bill, not-for-profits that choose to have an audit committee would be responsible for overseeing the work of the outside auditor. Audit committee members would be prohibited from accepting any consulting, advisory or other compensatory fee from the corporation or from participating in any interested party transactions within the previous year. The audit committee would also have to establish procedures for handling complaints regarding audit, accounting and other financial matters.

Under the bill, the board of directors would be responsible for the duties of the audit committee if the nonprofit organization’s bylaws or certificate of incorporation prohibit the appointment of an audit committee.

The legislation also would tighten the reins on interested-party contracts and board compensation.

A10239 has been referred to the Assembly Committee on Corporations, Authorities and Commissions. The similar Senate bill, S4836-A, is in the Senate Committee on Corporations, Authorities and Commissions.

At the time this article went to press, the attorney general’s office could not be reached for comment.

To read the bills, go to www.assembly.state.ny.us or www.senate.state.ny.us and look for the bill search links on the left-hand side of both websites.