The Regulation of California Charities, Post-Enron
The fallout from corporate scandals such as Enron and WorldCom is touching the nonprofit sector. A bill recently introduced in the California legislature would impose on certain charitable organizations some of the same controls imposed on publicly-traded companies by the Sarbanes-Oxley Act of 2002. Also, under the proposed legislation, most California charitable organizations would be subject to new requirements regarding financial disclosure, annual officer compensation review and their relationships with fundraisers.

Financial Accountability
The so-called “Nonprofit Integrity Act of 2004” (Senate Bill 1262, Sher) (“Act”) is sponsored by the California Attorney General, who has oversight responsibility for charities operating in California. Although most California charitable organizations will be impacted by the Act, those with gross revenues of $500,000 or more would be subject to additional financial oversight requirements. The Act would require such charities to have annual financial statements prepared by an independent certified public accountant, who would be limited in the additional services that he could provide to the charity. Also, these charities must create an independent auditing committee, which would be responsible for retaining, setting compensation, overseeing the independent auditor's activities, and reviewing and approving the audit. Members of the audit committee could not also be on the charity's staff or finance committee.
Beyond these requirements, most California charitable organizations, regardless of the amount of their gross revenues, would be required to have their boards of directors review and approve the compensation, including benefits, of the corporation's president or chief executive officer and its treasurer or chief financial officer at least once a year.

The Act would also impose additional disclosure requirements on charitable organizations required to register with the Attorney General (regardless of their gross revenues). If those charities have prepared audited financial statements, they would be required to make those financial statements available to the Attorney General and to members of the public in a timely manner.

There is no guarantee that some or all of the requirements of this Act will become law. However, the Act underscores how increased corporate and accounting responsibility practices resulting from the scandals in publicly held companies are beginning to impact the nonprofit world. For example, the IRS recently announced that it will be issuing a set of similar rules for the governing boards of tax-exempt organizations. Although it is too early to say how such trends will affect the “best practices” of corporate and financial responsibility within the nonprofit community, nonprofits should be cognizant of the trend towards increased regulation and examine their internal practices accordingly.

Fundraising by Charities
The Act also would impose new requirements on charitable organizations in fundraising, in dealing with the proceeds of their fundraising, and in their relationships with their fundraisers. Any agreements between a charitable organization and its commercial fundraiser or fundraising counsel would need to be in writing and contain certain provisions such as the fee arrangement. The agreement would also need to be filed with the Attorney General at least ten days before the fundraiser provides any services. The Act would prohibit a charitable organization from entering into a contract with an unregistered fundraiser; likewise, a charitable organization would be prohibited from contracting to raise funds for any other charitable organization unless that recipient charitable organization is registered with the Attorney General. Detailed disclosures by or on behalf of the charitable organization would also need to be made in any written or oral solicitations for donations. The charitable organization and its fundraisers would have five days after receipt to deposit charitable funds in an account in the name of the charitable organization. Also, the charitable organization's Board would be required to approve any payments made for a celebrity's attendance or endorsement of a charitable event.

Status of the Bill
Senate Bill 1262 was referred to the Senate Committee on Judiciary in late February. All charitable organizations and fundraisers operating in California would be well advised to evaluate how the requirements of this bill would impact their operations and to monitor this bill as appropriate.