Constructive Dialogue for the Public Good

A bill that New York State Attorney General Eliot Spitzer submitted to the State Legislature in January focuses on preventing fraud in nonprofit organizations and therefore will affect the clients of many NYSSCPA members as well as nonprofit organizations that they serve in a volunteer capacity. This bill also potentially affects every New Yorker, because we all benefit from the work of the state’s thousands of nonprofits in the areas of education, health, welfare, and public service.

The Attorney General’s Charities Bureau is responsible for supervising charitable organizations and for protecting donors and beneficiaries from unscrupulous practices in the solicitation and management of charitable assets. The bureau also supervises the activities of foundations and other charities to ensure they use their funds and other property properly, and it monitors the registration of charitable organizations as mandated by law.

Spitzer’s philosophy, as expressed at the NYSSCPA Nonprofit Conference in January, is that government should get more heavily involved when it becomes apparent that the existing checks and balances are no longer enough. The NYSSCPA shares Spitzer’s and the Charities Bureau’s desire for improvement, but we also recognize and feel strongly that any new legislation should consider all of its potential results. This is not the same as preserving the status quo. The Society endorses and supports many aspects of the nonprofit fraud proposal.

Twice in the weeks following Spitzer’s introduction of this proposed legislation, members of the NYSSCPA’s Not-for-Profit Organizations Committee met with Charities Bureau representatives to discuss various aspects of the bill and to provide input. The Society drafted a detailed comment letter, which offered specific language in many areas. When the Attorney General’s office issued a revised proposal in May, we could see where our input had made a positive difference.

One point of Spitzer’s original proposal that concerned the NYSSCPA is that it would apply strict financial reporting standards to nonprofits with annual gross revenues of $250,000 or more. We recommended that the size at which having executive employees manage the organization’s affairs and formal internal controls makes sense would be $5 million in revenues or more. Internal control is just as important in smaller organizations, but inevitably it depends more on board members’ personal involvement and less on formal systems. A $250,000 threshold was simply too low, and the revised threshold of $1 million indicates that the bill’s drafters recognized the merits of our analysis. For similar reasons, we also recommended raising the threshold requirement for the establishment of an executive committee and audit committee from the proposed $250,000 to $5 million, our stance being that because some nonprofits do not solicit public contributions and therefore are not audited, this requirement should apply only to nonprofits required to have an audit.

Spitzer’s original proposal attempted to strengthen governance oversight by expanding the activities of nonprofit organizations’ boards of directors, an intention the NYSSCPA endorses and supports. But the Society was concerned that existing state statutes relating to nonprofits’ governance and public accountability inadequately distinguish between the exercise of executive authority and the appropriate governance oversight required for public confidence. For example, in many nonprofits, especially smaller ones, the same individuals on the board of directors hold both executive and oversight authority. In many large nonprofits, on the other hand, the board of directors often doesn’t exercise adequate governance oversight. The original proposal confused governance oversight and executive powers by placing both in the same individuals in all nonprofits as a matter of law. The Society’s position is that the same individuals should not in general have both executive and oversight powers for internal control purposes. The only exceptions should occur in small organizations where the public interest demands that their limited funding be dedicated to programs rather than executive salaries. Again, the revised bill significantly reflects the NYSSCPA’s input.

In another key area of the original proposal, although the state’s current Nonprofit Corporation Law (NPCL) requires the president and treasurer to present a report at the annual meeting, the proposed amendment would require them to sign it. This would be inconsistent with the Sarbanes-Oxley Act, after which parts of Spitzer’s proposal is modeled.

The original proposal had an effective date of 90 days after enactment, which the Society recommended be increased to 180 days to accommodate the significant changes in governance structure some nonprofits will be required to make. The current revised draft recognizes this and extends the effective date to January 1, 2004.

Just as important as its proposed revisions, the drafting of the bill shows that people with a common purpose can make a significant difference in furthering the public good. The full proposal and our comments letter are both online at www.nysscpa.org for everyone to read and consider. Whether or not you support the Society’s recommendations, I hope you’ll contact your state legislators to express your own opinions. If you don’t know your current state senators and assemblymen, log on to the Membership Data Center at www.nysscpa.org for their contact information.

I also encourage you to share your opinion with me, because the kind of dialogue that helps the Society have a positive impact on legislation is also important to improving the Society, and I always welcome your comments.

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