A Milder Nonprofit Bill Proposal
A Quiet Shift Away from a Sarbanes-Oxley–Style Rule

By Simon Eskow

Proposed legislation to overhaul nonprofit accounting governance differs from past bills in tone, making recommendations instead of mandates and abandoning Sarbanes-Oxley–style rules for implementing internal controls.

While the newest nonprofit proposal waits quietly for sponsorship the state legislature, other states like Massachusetts and California have taken New York’s lead and passed reform bills of their own, according to Julie Floch, a member of the New York State Society of CPAs’ Not-for-Profit Organizations Committee. Floch pointed out that even Washington has turned its sights on reform with a recent hearing held by the Senate Finance Committee.

“What’s fascinating about this is that New York started this entire trend,” Floch said.

But the current proposal has yet to be picked up in the New York legislature. The bill would require nonprofit organizations to institute financial controls; subject directors and officers to removal for persistent and willful failure to file complete and accurate annual reports; and encourage nonprofits with more than 25 directors to establish executive committees.

It would also encourage nonprofits with at least $2 million in revenue and support to form an audit committee that would be responsible for overseeing the work of the organization’s external auditors.

The major difference between this and past bills, Floch said, is the lack of any language similar to Section 404 of Sarbanes-Oxley and internal controls, a reflection of the idea that while there is a recognition of the need to reform nonprofit governance, it shouldn’t be a legislative burden.

“This is soft-pedaling the 404 requirements,” Floch said. “Perhaps they felt that for not-for-profits, at this time, education is deemed sufficient, and that there is so much discussion of internal controls going on that perhaps it isn’t something that needs to be legislated. People are way more aware of their responsibilities.”

The concept seems to be a shift away from mandates that could be too costly to many nonprofits. The shift from requiring an audit committee to recommending one testifies to that, as much as Sen. Charles Schumer’s comments during his committee’s charities hearing on April 5.

Schumer pointed out that in New York City alone there are 27,000 nonprofits, employing a half-million people and responsible for $22 billion in annual payroll. These organizations serve 2.2 million indigent people, Schumer said.

“So it’s immensely important to both the economy and the provision of social service in my state that the nonprofit sector be healthy,” Schumer said. “The truth is that most of these tax-exempt organizations are actually very small….So as the commission ponders necessary reforms, I urge them to consider…that crafting new, one-size-fits-all rules for all tax-exempt groups, regardless of size, may be unduly burdensome for many of the smaller organizations that support or directly provide important social services.”

Floch said that, while Washington takes up the cause of nonprofit reform, there is a sense in New York state that regulation has to strike a balance.

“From one standpoint, the state would like to see the area cleaned up and that the bad guys get chastised and that they fix the problems,” Floch said. “But they recognize that we can’t overregulate. So we have to have a trade-off. We already tell people that they have to have an audit, and now we strongly suggest an audit committee.”