Spitzer Encourages Greater Auditor Involvement in Not-for-Profits
Proposes State Law to Improve Governance of These Entities

By Jay Dismukes

NEW YORK—The role of the CPA to act as the public’s watchdog is even more vital to not-for-profit organizations than to the for-profit sector, New York State Attorney General Eliot Spitzer said last month.

Corporate scandals among for-profit organizations that rely on boards of directors, auditors, institutional investors, investment bankers and lawyers for sound decision making exposed the vulnerability of not-for-profit entities that have fewer checks and balances. Because of this, it is even more imperative that CPAs become actively involved within the not-for-profit sector, Spitzer said during the Jan. 23 Foundation for Accounting Education 25th Annual Nonprofit Conference in Manhattan. Given its annual popularity, the conference also was held on Jan. 16 in Rochester, featuring keynote speaker Robert Colson, editor-in-chief of The CPA Journal.

“We need to ensure the integrity of this sector or else people’s contributions will decline,” said Spitzer, who pointed to the lack of decision makers in not-for-profits as well as governance issues that extend to all institutions as cause for CPAs to “ratchet up” their relationships with nonprofit boards of directors.

The “inadequate participation” by these boards of directors, which often are made up of donors who are uncertain of their responsibilities as members, currently presents the single biggest problem for the not-for-profit community. This problem, Spitzer said, is compounded by the fact that auditors too often put their obligations to their for-profit clients above those to not-for-profit organizations, of which there are 40,000 registered in New York state.

To further help ensure that assets are not wasted or misused, the attorney general’s office plans to put forth a legislative proposal that applies principles of the Sarbanes-Oxley Act to the not-for-profit sector, Spitzer informed the packed audience of CPAs and not-for-profit financial officers. Specifically, the proposal calls for the CEOs of nonprofit organizations with total revenues over $250,000—the filing requirements of Form 497—to certify the accuracy of the financial reports and statements as well as the adequacy of the internal controls. The proposal further mandates the establishment of an independent audit committee that lacks any business ties to the organization, he said.

“We need to try to impose on this vast asset base the same principles that are required of the for-profit sector,” said Spitzer. He added that his concerns about the financial integrity of these organizations were partially born from the large-scale and often criticized Sept. 11 charity drives.

“I think he (Spitzer) is very sincere in his goal to have the not-for-profit sector be a model for everything else as far as being aboveboard. I think a lot of that message I agreed with and I liked,” said sponsoring New York State Society of CPAs’ Not-for-Profit Organizations Committee Chair David C. Ashenfarb. “The controversial thing is, if he does want to apply some of these Sarbanes-Oxley provisions to the not-for-profit sector, the question that seems to be raised most often is, ‘At what dollar level do you do this?’”

Several audience members said Spitzer’s proposal would subject many not-for-profits that meet the $250,000 requirement, but that have only the barest of staffs and limited budgets, to unrealistic expectations.

“I got the impression that many people feel the idea is good, but the threshold is low. I suspect that may be the case,” said conference attendee and Society member James Schiller, who performs pro bono services for several nonprofit organizations. Schiller questioned how one of these not-for-profits, a summer camp that lacks a financial director but has revenues over $250,000, would be able to certify its financial statements, as proposed by Spitzer.

While he acknowledged that the figure may need to be raised, the attorney general said the magnitude of assets of not-for-profit organizations at some point necessitates imposing some sort of controls.

Though Spitzer’s plan may need to be retooled, Ashenfarb said the proposal, in other ways, was encouraging.

“This announcement seemed to have been new news,” Ashenfarb, a partner with Schall & Ashenfarb CPAs LLC, said. “…The positive that came out of the conference was that he (Spitzer) made the announcement to our group, and that, I think, signals openness on his end to want to work with us (the Society) in trying to form a common goal of having a not-for-profit environment that is strong.”

Unlike the composition of for-profit organizations, the decision makers whom not-for-profit organization rely on include an executive, the board of directors and an accountant. According to Spitzer, however, the mere presence of a greater number of decision makers does not necessarily preclude for-profit companies from experiencing corporate fraud as occurred in WorldCom, Enron and other instances of financial deception.

The past decade witnessed the rise of the “imperial CEO” in the for-profit world because some decision makers failed to live up to their responsibilities, the attorney general said. Boards of directors became complacent and stopped asking hard questions, while the audit function may have failed to pick up what it needed to because of the close relationship between the auditors and management, he added.

In many instances, investment banks willingly disseminated inaccurate or incomplete stock research in the hopes of luring more banking clients, thereby contributing to a public enthusiasm for stocks that had no real value. Meanwhile, institutional investors simply withdrew, Spitzer said.

“At the end of the day, those who have equity, have a responsibility. Those who have equity must participate,” Spitzer said of institutional investors, who he believes must put more pressure on management to compel them to change inadequate practices.

These problems, Spitzer said, have been allowed to perpetuate because of the overriding premise that the market would straighten itself and the hesitation by government over the last 15 years to exercise an oversight function. This hands-off approach by Washington, however, resulted in a misallocation of capital that imposed huge costs on the marketplace and the economy, and also compelled the State Attorney General’s Office to become more involved in corporate governance and the capital markets.

“Their (the government’s) notion that the market can independently solve all issues is wrong,” Spitzer said. “We need to be there to define the rules of the road. We have gone too far in opposing government intervention to establish fundamental rules of the marketplace.”

True to his word, Spitzer later the same day proposed a series of reforms to strengthen New York’s corporate accountability laws. Citing state laws that are “outdated and contain major loopholes,” he said the reforms are intended to better protect investors and donors and will enable the attorney general’s office to “respond effectively to future frauds.”

The proposals cover six areas, including improving oversight of the accounting profession. To read the entire press release, go to www.oag.state.ny.us/press/2003/jan/jan23a_03.html.