States Propose New Accountability Regulations for Nonprofit Groups

Several states have proposed new requirements for nonprofit groups aimed at ensuring greater financial

accountability. Many of the provisions in the state plans mirror those in the federal Sarbanes-Oxley law, which governs publicly traded companies.

State proposals include:

California. The California Senate in May passed a bill that would require most charities with annual gross revenue of $2-million or more to file annual financial statements prepared by independent certified public accountants. Nonprofit leaders have been working to try to soften some of the requirements as the measure moves though the State Assembly.

The bill passed by the Senate would require charities to maintain independent audit committees responsible for retaining an outside auditor, conferring with the auditor, and approving any non-auditing services performed by the auditing firm.

Such charities also would be required to make annual audited financial statements available to the public.

Their boards of directors would have to review and approve the compensation and benefits of their chief executive and chief financial officers to make sure that the pay packages were “just and reasonable,” according to the bill.

The legislation was introduced at the request of Bill Lockyer, the state’s attorney general. “By providing more accurate, detailed, and useful information about nonprofits’ finances, independent audits will enhance the ability of governing boards and the attorney general’s office to assess charities’ operations and flag potential problems,” Mr. Lockyer said in a statement earlier this year.

Previous versions of the bill had tougher provisions, but nonprofit groups requested and obtained changes.

For example, the measure’s auditing provisions initially applied to smaller organizations — those with annual gross revenue of $500,000 or more.

In addition, the bill originally required charities to “maintain records, including any electronic records, regarding their activities for at least 10 years after the end of the registration period to which the records relate.”

The California Assembly is now reviewing the measure. To read the bill, S.B. 1262, and obtain more information about it, go to the Legislative Counsel of California’s Web site at http://www.leginfo.ca.gov.

New York. A bill promoted by New York Attorney General Eliot Spitzer has so far failed to pass either house of the state legislature.

The bill, which was originally filed last year, encourages charities to set up audit and executive committees.

The measure also requires that executives (or officials) of most charities with annual gross revenue of less than $1-million and with assets of less than $3-million sign their organizations’ annual reports to verify that they have reviewed them and that the reports present fairly their organizations’ financial condition.

Leaders of larger organizations would also have to verify that they have reviewed the effectiveness of their groups’ internal financial controls.

Massachusetts. Massachusetts Attorney General Thomas F. Reilly has drafted a plan — which has not been introduced in the state’s legislature — that would apply many of the concepts of the Sarbanes-Oxley law to charities. Among them is a requirement that charities with annual revenue of $750,000 or more establish audit committees that would oversee outside auditors and establish procedures to accept whistle-blower complaints from anonymous sources.

A copy of the draft legislation and a summary of it can be found at the Massachusetts Council of Human Services Providers’ Web site: http://www.providers.org.