The California Law: Key Requirements

Following are major elements of a California law that will change the way many nonprofit organizations manage

their finances and seek contributions within the state. The law takes effect on January 1, 2005, and applies to nonprofit organizations that must register with the attorney general’s Registry of Charitable Trusts. It will not affect groups that are exempt from registration, such as schools, colleges, universities, hospitals, and some others.

Audit committees

• Charities with annual gross revenue of $2-million or more must have audit committees appointed by their boards of directors. If charities have finance committees, they are required to have separate audit committees.
• Audit committees can include people who are not board members. But audit committees cannot include any staff members of the charity, including the president or chief executive officer and the treasurer or chief financial officer. Committee members also cannot have a “material financial interest” in any entity doing business with the charity.
• Subject to the supervision of boards of directors, audit committees are responsible for recommending the hiring and firing of auditors and negotiating the compensation of auditors.
• Audit committees must review audits and decide whether to accept them, and approve the performance of any non-audit services by auditors.

Charity registration

• Charities must register with the state within 30 days of acquiring their first assets. (Under the old law, charities had six months to register.)

Compensation review

• The boards of directors of charities of all sizes are required to review and approve the compensation, including benefits, of each charity’s president or chief executive officer and its treasurer or chief financial officer to assure that the compensation is “just and reasonable.”

Financial statements

• Charities with annual gross revenue of $2-million or more are required each year to prepare financial statements audited by independent certified public accountants.
• Charities must make these financial statements available for inspection by the state attorney general and the public no later than nine months after the end of the fiscal year to which the statements apply. The financial statements are subject to the same public-disclosure requirements that govern federal informational tax returns, called Forms 990.
• Accounting firms that perform consulting or other non-audit services for charities are required to meet existing federal standards for auditor independence or new standards that the state attorney general may write.

Fund raising

• Commercial fund raisers must turn over control of donated money to charities within five working days of receiving it. They must also file notices of solicitation with the state attorney general at least 10 working days before the start of each campaign or event. (An exception is made for appeals to help “victims of emergency hardship or disasters.” Notices of such solicitations have to be filed no later than the start of the appeals.)
• Charities and their commercial fund raisers are prohibited from “using any name, symbol, emblem, statement, or other material stating, suggesting, or implying to a reasonable person that the contribution is to, or for, the benefit of a particular charitable organization when that is not the fact.”
• If commercial fund raisers are to be paid fixed fees by charities for soliciting donations, the fees and good-faith estimates of what percentage the fees will constitute of the total contributions received must be written into fund-raising contracts, along with the assumptions upon which the estimates are based. If fund raisers are paid based on a percentage fee, the contracts must state the percentage of total contributions received that will be retained by the charities.
• Commercial fund raisers who propose to pay, with money or goods, to secure a person’s attendance at, or endorsement of, a charity fund-raising event (including a party, banquet, or concert), must disclose in their contracts the maximum dollar amount of the payment.
• If asked by a person solicited by telephone or mail, commercial fund raisers must disclose what share of money raised the fund raisers’ expenses represent.
• Commercial fund raisers are required to keep records from solicitation campaigns (including the date and amount of each contribution received) for at least 10 years.
• Charities are permitted to cancel a contract with a commercial fund raiser within 10 days of signing the agreement without cost, penalty, or liability.