Bill Proposal Revisits Nonprofits

Bill Proposal Revisits Nonprofits
Attorney General Makes Governance Reform a Legislative Priority

The New York State Attorney General is making nonprofit accountability reform a priority for the 2005 legislative session with proposed legislation to minimize conflicts of interest and encourage the establishment of executive and audit committees.

Attorney General Elliott Spitzer’s proposed legislation, AG-68, 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 bill, which wasn’t introduced in either house as of this writing, also contains a provision to assist nonprofit “officers and directors sued by third parties in connection with the exercise of their responsibilities” to the nonprofit, according to a document in support of the proposal.

According to the support document, the internal control item is designed to prevent fraudulent practices, while the enhanced quality of financial information will make it easier for board members to fulfill their fiduciary duties. Nonprofits that choose to adopt an audit committee ostensibly would be able to discover potential financial problems and take steps to fix them sooner.

Spitzer’s new proposal differs from past legislation he sponsored that would have included Sarbanes-Oxley–style requirements for nonprofit organizations. Under a plan introduced in early 2003, officers of organizations with revenues over $250,000 would have had to certify the accuracy of financial statements and the adequacy of internal controls.

That proposal metamorphosed into a bill (S4836-B in the Senate and A10239 in the Assembly) introduced in the 2003–2004 session with some modifications.

Last year’s bill (which did not pass in either house) required officers of nonprofits to verify their organizations’ annual reports, but in different ways according to the size of the organizations. Not-for-profits, other than private foundations, with annual gross revenues of less than $1 million and total assets of 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, the bills would apply 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.

To read the proposal, go to www.nysscpa.org, click on the 2005 Bills link in the “Gov’t Center” section and scroll down to the link under the “Not-for-Profit Accountability.”