Eyeing nonprofits: the Charity Integrity Act & other pending governance, accountability rules.

• Author: Ljung, David
• Position: NONPROFIT REGULATIONS

You could see it coming--more transparent financial reporting, the restructuring of corporate governance--if it was good for public companies, it wouldn't be long until someone decided it also would be good for private companies and nonprofits.

What has come to be known as the trickle-down effect of Sarbanes-Oxley, along with California's own scandals involving nonprofit organizations, led to the Charity Integrity Act (SB 1262).

The act, sponsored by California's attorney general, took effect Jan. 1, 2005, and seeks to restore some of the lost confidence in nonprofits by creating certain standards for nonprofit governance.

The perceived need to strengthen nonprofit corporate governance has become so pervasive that even SEC Chairman William Donaldson--whose office has no jurisdiction over charitable organizations--recently stated that nonprofits were "behind the times" in this era of increasing expectations for corporate transparency. And, not surprisingly, proposed new federal standards loom in Congress.

However, as nonprofit organizations implement these new accountability standards--with help from their CPAs--they can create transparency and regain the confidence of their constituents, donors and the public.

APPLICABILITY

Under SB 1262, any nonprofit required to register and file an annual report with the attorney general must comply with the Charity Integrity Act. Most nonprofits that are exempt under IRS Sec. 501(c)(3) meet this requirement.

Some of the act's key features involving CPAs apply when the nonprofit's annual revenue exceeds $2 million. Government grants are excluded from the nonprofit's determination of gross revenue--so long as the governmental entity requires an accounting of those funds.

The attorney general initially sought a $500,000 threshold, which is comparable to other states with such regulations, but California nonprofits were successful in negotiating a more reasonable level.

AUDITS AND AUDIT COMMITTEES

For nonprofits that meet the $2 million threshold, SB 1262 requires an annual audit, as well as the adoption of an audit committee. This is where implementation of the act becomes challenging for some nonprofits that struggle to find qualified, financially literate volunteers.

The audit committee is required to be independent--even from the organization's own finance committee. While as few as one person may comprise the audit committee, the act requires that less than 50 percent of the audit committee members...