| |
|
•
NEWS
|
|
|
What's
New In The Nonprofit Regulatory Arena?
The
following article is an excerpt from an upcoming new book on being a strategic
board member.
Sarbanes-Oxley Act
Nationally, the newest law affecting the nonprofit sector is the Sarbanes-Oxley
Act, a federal law that stems from the Enron scandals of 2002. It was
passed primarily to rebuild public trust in America's corporations, and
primarily targets publicly traded for-profit companies. This act sets
new standards for financial transactions and audit procedures for for-profit
corporations. There are two provisions, in particular, with which nonprofits
must comply:
- Whistle-Blower
Protection. A nonprofit organization should have a written whistle-blower
policy to address complaints (especially complaints of financial wrongdoing).
This policy should protect individuals from retaliation if they have
a reasonable belief that misconduct is taking place and complain about
it.
- Document
Destruction.
"Don't destroy any document with intent to obstruct justice." All nonprofits
should have a written retention and document destruction policy for
all board members (and staff) that covers electronic files and voicemail
messages, as well as paper documents.
- Other
Standards to Follow. While most other requirements of the Sarbanes-Oxley
Act do not apply to nonprofit organizations, they would be well-advised
to follow the lead of this legislation because many states (California
is a prime example--see California Nonprofit Integrity Act below) are
enacting new and mandatory regulations for nonprofit organizations that
mirror the intent of Sarbanes-Oxley (such as independent and competent
audit committee, certified financial statements, and transparency).
For more information on Sarbanes-Oxley and nonprofits see the Independent
Sector.
CALIFORNIA NONPROFIT INTEGRITY ACT OF 2004
SUMMARY OF KEY PROVISIONS
California nonprofits and their consultants must comply with numerous
requirements of this act, particularly regarding audits and fundraising:
-
Register with the Attorney General within 30 days of formation.
- Have
independent audits by a certified accountant if revenue is over $2 million
(Note: there are some exceptions for certain government grants).
- Make
audited financial statements available for inspection by the public.
- Create
an independent Audit Committee, separate from any other financial committee.
This is only necessary for those groups that are required to have an
audit, but it is advisable for most nonprofits.
- Be
sure that the Audit Committee does not include any staff as members,
including the president or chief executive officer, the treasurer or
chief financial officer of the organization. It can include persons
who are not members of the board. Note: The Audit Committee makes recommendations
to the board of directors on hiring and firing the auditor, and can
negotiate the auditor's fee.
- Have
the board review and approve the compensation package of the Executive
Director or CEO and Chief Financial Officer (CFO) or treasurer, to ensure
that the payment is "just and reasonable" (see below for just and reasonable
compensation**). Note: this is required of all California nonprofits
not just those who need to do audits.
- Exercise
control over fundraising activities (i.e. do not let a consultant or
firm make fundraising decisions without agency knowledge or oversight).
- Have
written contracts with fundraising consultants and firms, and the consultant/firm
needs to be registered with the State of California.
- The
contracts must contain:
- The
charitable purpose for which the solicitation campaign or event
is being conducted.
- The
respective obligations of the fundraising counsel and organization.
- A
statement that the fundraising counsel will neither solicit, receive
nor control donated funds, assets and property, nor employ any other
person to do so.
- A
statement that the organization exercises control and approval over
the content and frequency of solicitation.
- A
clear statement of the fees and any other forms of compensation
that will be paid to the fundraising counsel.
- The
effective date and termination date of the contract, and the date
the solicitation will start in the state.
- Provisions
specifying the organization's right to cancel the contract without
liability for 10 days following the date the contract is executed;
and right to cancel the contract after the initial period by giving
30 day's notice and payment for services provided by the fundraising
counsel up to the effective date of the notice.
- Each
contract must be signed by an official authorized by the board of directors.
- Ensure
that the consultant/fundraiser notifies the state authorities before
the start of a fundraising campaign.
- Make
sure that all fundraising campaign strategies use fair and honest acts
and claims or promises.
- It
is illegal to engage in fraudulent fundraising conduct, especially by
those collecting on behalf of public safety personnel (i.e. police).
Please Note there are a number of additional requirements for commercial
fundraisers. For more details, please see the California Guide
to the Nonprofit Integrity Act of 2004.
** "Just and Reasonable Compensation" for CEO and CFO
In our many years of working with nonprofits we have yet to encounter
the overcompensated 'fat cat' executive that we read about in the newspapers.
More often we find nonprofits underpay their staff, which can lead to
other problems (low morale, staff turnover, etc) but the law does not
cover this problem. The easiest way to determine what is "reasonable compensation"
for the CEO and CFO is to research what others in similar situations are
receiving for compensation. This could be done by a board member making
a few phone calls to other colleagues in the field, asking what the range
of a CEO's salary is (as opposed to asking him/her exactly what s/he makes).
You can also review an annual compensation salary guide put out by nonprofit
technical assistance/support centers. These can often be found at the
Foundation Center libraries
(see their FAQ list on this subject for resources). If you are really
concerned about compensation, you can hire a compensation consultant to
advise the board on this topic. Board meeting minutes should document
and reflect the fact that you discussed executive compensation and decided
that a certain figure was just and reasonable.
Copyright
2007 Zimmerman Lehman.
This information
is the property of Zimmerman
Lehman. If you would like to reprint this information,
please see our reprint
and copyright policy.
| |
|
