NP Times / N.Y.’s Attorney General Seeking To Apply Sarbanes-Oxley Act

By Jeff Jones

Eliot Spitzer, New York State’s top cop and unofficial policeman of Wall Street, is fixing his eyes on the financial accountability of nonprofits.

The New York State Attorney General said he will propose legislation that calls for nonprofit chief executive officers to certify financial reports and the adequacy of internal controls at the organization. The nonprofits also would be required to demonstrate the independence of audit committees that certify financial statements and be free of contracting relationships with the nonprofit.

The proposed legislation would affect New York State registered nonprofits with annual revenue of at least $250,000, but could have repercussions across the nation. Spitzer’s proposal borrows heavily form the principles of the federal Sarbanes-Oxley Act, which was passed to combat accounting issues in the for-profit world.

The attorney general made the comments before a crowd of accountants in New York City at a nonprofit conference sponsored by the New York State Society of Certified Public Accountants.

Spitzer also demanded auditors take more aggressive oversight of nonprofits’ books because, he alleged, nonprofits lack the layers of decision-makers found in the for-profit world. “We collectively need to ratchet up the intensity of our participation and examination of these organizations, or else we won’t be in the position to restore the confidence of the American public,” Spitzer said. “We need to ensure the integrity of this sector or else people’s contributions will decline.”

Some 40,000 nonprofits register with the state of New York each year, and the state must be able to rely on that CPAs have been examining the financials, ensuring credibility and correct money handling, Spitzer said.

One person in the audience questioned if the $250,000 revenue threshold was too low, because most nonprofits with such revenue probably only have one bookkeeper handling most financial transactions. The man asked how a CEO in that situation could certify, in good conscience, that adequate internal controls existed. “I don’t think you can compare a $250,000 not-for-profit to someone in the SEC world,” the CPA said.

Spitzer countered, “We think $250,000 is appropriate,” adding that some discussion may happen to raise the threshold.

History has shown that initial government thresholds usually increase after time, said Julie Floch, a partner and director of Not-for-Profit Services at Eisner LLP in New York City. For example, New York State’s previous requirement for a nonprofit financial audit was $150,000 and increased to $250,000 in August 2002.

Conference Co-Chair Jeffrey Green, a CPA based in New City, N.Y., said Spitzer’s plan will hurt small nonprofits. “Even $500,000 is low. No SEC client has to do that,” he said, continuing that for-profits don’t need to attest to such financials until $500,000.

Fees for such audits would range from $7,000 to $10,000, Green said. That’s between 2.8 percent and 4 percent of income for an organization with $250,000 in revenue.

Many New York state nonprofits receive a few hundred thousand dollars in revenues, but have relatively small, unsophisticated, often part-time accounting functions, said D. Edward Martin, partner-in-charge of the Not-for-Profit Industry Group at Eisner LLP.

“To expect a high level of internal control in those small organizations -- and for their CEOs to be able to certify as to its effectiveness in producing reliable financial information -- seems unrealistic,” said Martin.

Beside concerns about the low threshold, Spitzer isn’t off base in what he’s asking of the nonprofit sector, Floch said.

During his speech, the attorney general also directed pointed comments at board members, identifying what he believes is a lack of board member participation as the largest problem within the nonprofit community.

“The reason many people sit on the boards of not-for-profits is because they’ve been donors. They believe in the mission,” Spitzer said. But, too often after being appointed to the board, people don’t appreciate their responsibility, he charged.

J. Cynthia Weber, a development consultant with Girl Scouts of the USA in New York City, was impressed by Spitzer’s comments. She said it has been assumed for too long that the moral goodness of mission equates to pureness of execution, which isn’t always the case.

Spitzer’s comments reflect a growing public concern about charitable accountability, said Bennett Weiner, chief operating officer of BBB Wise Giving Alliance, a watchdog group in Arlington, Va.

Child Find of America’s (CFA), $308,058 total revenue during the fiscal year ending May 31, 2002, places it just above the attorney general’s proposed threshold. Donna Linder, executive director of New Paltz, N.Y.-based CFA, supports Spitzer’s call for more rigorous accounting procedures.

“Nonprofits and their boards should make their operations as transparent as possible to their donors, potential donors, as well as to their consumers of services,” Linder said in an email statement.

It’s difficult to know whether other state regulators would follow Spitzer’s lead, but they’re no doubt watching how the proposals play out.

“It does also demonstrate that New York State is seeking to be a leader in proposing new initiatives on charity activities within the state,” Weiner said. He added there’s a role for both government and organizations such as the BBB WGA to address accountability issues. “Not everything necessarily needs to be legislated for change to occur.”

The proposals will have to pass the state legislature for approval.

Nearly a week after Spitzer’s announcement a spokeswoman for Sheldon Silver (D), state Speaker of the Assembly, said she’s waiting to see specifics of the package before commenting. A spokesman for state Senate Majority Leader Joseph Bruno, (R), said the legislative proposals would be reviewed but declined further comment.