By Jay Dismukes

NEW YORK—The New York State Attorney General’s Office believes directors and executives, paid or volunteer, of not-for-profit organizations need to do a better job of living up to their fiduciary responsibilities, and issue filings that are complete and accurate.

The attorney general’s office, which in February issued a not-for-profit draft bill that adopts aspects of the Sarbanes-Oxley Act, made its feelings known during a March 18 joint meeting with more than 100 experts in the nonprofit sector. Coordinated by New York State Society of CPAs’ Not-for-Profit Organizations Committee member Julie Floch, the event included representatives from the New York State Charities Bureau of the attorney general’s office who were on hand at the Society’s offices to discuss Attorney General Eliot Spitzer’s proposed legislation that would, among other things, require the president and treasurer of not-for-profit organizations with annual gross revenues over $250,000 to certify to the accuracy of the annual report and financial statements and the sufficiency of the corporation’s internal controls. Boards of nonprofits that meet this revenue threshold also would have to designate an executive committee and an independent audit committee consisting of three or more board members.

“The IRS (Internal Revenue Service) tells us that 63 percent of 990s are filed incomplete or false on their face,” said Deputy Attorney General William Josephson, head of the Charities Bureau. “I know from my own experience that that must be true.”

The meeting, which also included NYSSCPA Exempt Organizations Committee Chair Martin S. Cantor, NYSS-CPA President Jo Ann Golden, NYSSCPA Executive Director Lou Grumet and NYSSCPA Not-for-Profit Organizations Committee Chair David Ashenfarb, was widely regarded as productive and helpful.

Chief among the many attendees’ concerns and suggestions was whether the $250,000 revenue threshold should be raised, given that understaffed and limited budget not-for-profits could have difficulty meeting the requirements in the proposal.

“We chose $250,000 because that is the existing statutory requirement,” said Josephson, who reiterated this point several times throughout the meeting. “I think it’s about time that filings are complete and accurate.”

State law currently requires that nonprofit organizations with revenues over $250,000 must file audited financial statements, while those with lower amounts of revenue can file reviewed or compiled financial statements.

Attendees also wanted to know whether the references to certifications by the president and treasurer refer to volunteer positions or paid staff positions.

“If you have the president or treasurer title, we expect you to stand up to the plate and take a swing, whether you are paid or not,” said Josephson, emphasizing that the statute focuses on the statutory title and its responsibilities. “There is no question that if these provisions are enacted, volunteer board members are going to have to learn some new skills.”

This point then raised the issue of “ensuring” the organization’s internal controls, prompting several people in attendance to express concern over whether it was reasonable to expect a board president and treasurer to have the skills necessary to certify internal control deficiencies.

Counsel to the Attorney General David Nocenti responded by clarifying the provision’s language, which he said does not require the officer to ensure anything, but requires that a system be designed that is intended to ensure the internal controls.

Not-for-Profit Organizations Committee member Ian Benjamin noted that the attorney general’s office has added to the certifications an evaluation regarding the internal controls, which could necessitate boards hiring someone to do this on their behalf, thus creating an adverse effect because of the additional cost. He inquired whether the attorney general’s office would provide checklists so the president or treasurer could determine that they are meeting that burden to the office’s satisfaction. Josephson responded that he prefers to “leave that to your good faith and professionalism,” adding that he believes it is reasonable for an accountant and board to do this. He also cited a section of the Not-for-Profit Corporation Law stating that the president and treasurer could reasonably rely on consultants, CPAs, attorneys and other paid staff to gain the assurances required.

Ashenfarb later inquired about the requirement that the president and treasurer certify that they have shared with the auditors all significant deficiencies in the design of operations of internal controls. He pointed out that if the president and treasurer have to rely on the CPA for some of these certifications, they would not be able to rely on the CPA for this one, because this certification would be required before the audit is completed. Josephson responded that the president and treasurer would then have to find other means to satisfy themselves.

“The profession and the client are going to have to sit down a lot more, and I think that is a good thing,” Josephson said with respect to internal control weaknesses. “Officers and directors are going to have to learn more about the profession, and that is a good thing.”

Other Points for Consideration

“We can’t miss the bottom-line concept that is behind all of this…These sorts of problems are not limited to Fortune 500s (public companies). They are all over the place,” Nocenti said at one point in the meeting. “I don’t think it’s too much to ask…to make sure that public money is spent wisely.”

While no one in the meeting objected to this goal, the attendees made every effort to express their perspective and help the attorney general’s office sufficiently appreciate the burdens that the proposed legislation could place on the nonprofit sector.

Among their additional concerns, attendees inquired about the potential negative effect on board volunteerism. Citing other states, including California, which he noted has tougher laws, Josephson said the attorney general’s office has not seen any evidence, beyond anecdotal, of a decline in board and office volunteers. Though sensitive to the possibility, he said, the attorney general’s office must be “persuaded that that is really a problem.”

The volunteerism discussion also sparked one about the potential for charitable contributions to decline if directors are disinclined to serve on boards. Bureau representative Karin Goldman said there may be other ways to foster philanthropy without jeopardizing the boards’ fiduciary responsibilities, such as putting significant donors on advisory boards rather than boards of directors.

The Bureau representatives also were asked to explain the need for an executive committee for a nonprofit that has a board of only six members. Josephson responded by saying, “The statute is trying to create tension between the audit committee and management.” He added that it would be difficult to draft a statute with different triggers for the executive and audit committees.

Reactions

Both Cantor and Floch said they were pleased with the exchange between the nonprofit sector and the attorney general’s office on the proposed legislation. Cantor said the Not-for-Profit Organizations Committee and the Exempt Organizations
Committee have organized a joint subcommittee to draft a response to Spitzer’s legislative proposals that will be presented to the NYSSCPA Executive Committee. Floch added that the meeting opened up the lines of communication with the attorney general’s office and led to a much smaller follow-up meeting with the office, which, as of this writing, was scheduled for early April.

When asked about the proposed legislation, which Spitzer first announced at the Society’s Nonprofit Conference in January and said was predicated on the magnitude of assets in the state’s nonprofit sector, Cantor said he believed there appears to be some inconsistency behind the need for the new provisions.

“I understand many (nonprofit) organizations have large amounts of assets. Yes, the state has an interest in the charitable use of these assets. No question about that,” Cantor said. “…(But) if you have a payroll of 10 people making $20,000 each, plus rent and other expenses, your support has to be well over $250,000. That organization typically isn’t going to have a lot of assets. So if he (Spitzer) is concerned about the stewardship of large amounts of assets, then $250,000 is not a good cutoff.”

When also asked about the legislation, Floch said there needs to be more clarification and dialogue before the bill moves forward to ensure that the objectives that the attorney general’s office seeks are met.

“I think that all of the groups that were in that meeting would agree that the idea of good governance is sound…We agree that those are very important things,” Floch said of the legislation’s intent. “Whether they really need to be in the form of a legislative bill, that is a debatable question. Or whether it needs to be in the form of better education, that these nonprofits and their boards need to be educated better, I think is really sort of a stronger issue…

“What’s much more important is for the state or various industry segment groups to be reaching out to all these people and saying, ‘Hey, you should be learning about what your responsibilities are.’ That’s the critical thing,” Floch said.

Final Details

The attorney general’s office said there are approximately 46,000 registered charities in New York state, which it estimates is about half of what it should be. Goldman estimated that there about 15,000 Article 7A registrations.

Josephson said that, in general, board- and volunteer-driven nonprofits cause fewer problems than staff-driven nonprofits, which often allow boards to “coast” or “escape from responsibilities.”

Representatives from the Nonprofit Organizations Committee of the Association of the Bar of the City of New York and the New York Nonprofit Coordinating Committee also attended the meeting.