Corinne Gartner, Associate, Downey Brand LLP

No Rest for the Weary: For Nonprofits, 2007 Offers Reprieve from Legislative Reform But Continued Focus on Accountability and Transparency

Unlike previous years, which saw the enactment of the California Nonprofit Integrity Act (2004) and the federal Pension Protection Act (2006), the year 2007 has been a relatively quiet one for new laws affecting nonprofit and tax-exempt organizations. But scrutiny of the internal operations of charities and other exempt organizations is still at an all-time high. As regulatory agencies and stakeholders continue to clamor for accountability and transparency in the nonprofit sector, many nonprofits have used this year's legislative reprieve as an opportunity to focus inward and reconsider whether their policies and procedures are up to snuff. Read on for a roundup of a few developments that may help rally your organization to action

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The Good Governance Bandwagon Gathers Steam

Early this year, the IRS released a draft document entitled “Good Governance Practices for 501(c)(3) Organizations.” Described by the IRS as a “discussion draft of possible good governance practices for charitable organizations,” the document discusses nine practices the adoption of which, in the view of the IRS, would likely lead charities to greater success in earning public support and pursuing their exempt purposes. While the document is specifically targeted toward charities, observers in the tax-exempt community have noted that other exempt organizations (such as trade associations) could benefit by adoption of some of the recommended practices, which include:

It is worth noting that, as the IRS itself points out, adopting a particular practice is not a requirement for tax exemption. (In this connection, the IRS has come under fire from commentators who have observed that by disseminating guidance on governance best practices, the IRS has exceeded its jurisdiction and ventured into an area over which it has no authority.)

Moreover, certain of the proposed practices in fact constitute little more than restatements of existing law (such as the recommendations that directors exercise due diligence, that organizations make the Form 990 available to the public upon request, and that organizations pay no more than reasonable compensation).

While it may not make sense for every nonprofit to adopt and implement every recommended practice, or to adopt them in the exact manner proposed by the IRS, the IRS document can doubtless serve as a starting point for discussion of governance practices for the board of your nonprofit. To read the full discussion draft, go to http://www.irs.gov/pub/irs-tege/good_governance_practices.pdf

Not to be outdone, the Panel on the Nonprofit Sector just this month released its Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations, a compendium of 33 best practices in the areas of ethical conduct, accountability, and transparency. While this report, like the IRS Good Governance Practices, is intended for charitable organizations, certain of the principles (such as #9, specifying that the board of the organization should meet regularly enough to conduct its business and fulfill its duties) are applicable to other types of nonprofits. The full report is available at http://www.nonprofitpanel.org/selfreg/Principles_Guide.pdf

SAS 112: New Auditing Standard Zeroes In On Internal Controls

Does your nonprofit undergo an annual audit? If so, you should be aware of Statement on Auditing Standards 112, “Communicating Internal Control Related Matters Identified in an Audit” (SAS 112). SAS 112 is one of a series of new auditing standards issued in 2006 by the American Institute of Certified Public Accountants. Effective for fiscal years ending on or after December 15, 2006, this rule requires auditors to communicate to the organization the internal control weaknesses and deficiencies that they identify while conducting the audit. Assessing internal controls has always been an issue auditors pay attention to. With the arrival of SAS 112, though, the bar has been lowered – meaning that things that may not have been considered problems in the past may now be considered problems. SAS 112 also requires that auditors, as part of the audit, communicate these problems to management and the board in writing. This includes noting problems identified in previous years that have not yet been addressed, as well as problems that management already knows about and has made a conscious decision to accept due to cost or other considerations.

So what do nonprofits who have faced their first audits under the new standards advise? Don't be scared, be prepared: take the time to review your organization's internal controls now to see where you may have exposure, and take steps to put the proper controls in place. Good advice even if your nonprofit is not required by law to have an audit every year.

Other Recent Developments Of Interest to Nonprofits

Is your nonprofit due for a tune-up? We would be happy to discuss any specific questions or concerns your organization may have.

© 2007 All rights reserved. Please note that the information contained herein is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.