Attention not-for-profits: expect to be subject to new regulations regarding governance and oversight — especially if you are based in or raise funds in New York State. New York Governor Andrew M. Cuomo recently signed into law Attorney General Eric T. Schneiderman's Nonprofit Revitalization Act of 2013 (the "Act"), the first major overhaul of the laws governing New York's not-for-profit sector in more than 40 years.

The sweeping reform legislation is intended to "improve governance and oversight while cutting red tape," according to proponents. They say the Act "will make New York competitive with other states in continuing to attract and nurture the most vibrant nonprofits in the world, and it will make New York a model for nonprofit governance and oversight." According to the governor, not-for-profit organizations operating in New York "generate hundreds of billions of dollars in annual revenue — more than any other state in the nation — and are responsible for one in seven jobs in New York State."

According to the Act's author, "outdated laws have burdened the sector in some areas, while providing too little oversight in others." Schneiderman said the new Act will "transform our antiquated charities laws into a model for the nation."

Other States Have Taken Notice

Florida

In January, Florida Agriculture Commissioner Adam Putnam proposed a massive overhaul of the state's charity laws as a way to improve oversight and transparency among not-for-profits. Proponents say the proposed reform would enhance Florida's ability to regulate not-for-profits and professional fundraisers and help protect citizens from being scammed by "deceptive charities."

Currently, charities must register with the state but face few other requirements. That would change markedly under the proposed legislation. For instance, all charities would need to provide extensive additional information, including the names of their leaders, contact information and financial reports. Charities that raise more than $1 million annually would be required to provide audited financial reports, while not-for-profits that receive more than $1 million but spend less than 25 percent of their total expenses on program services would have more stringent disclosure requirements, including reporting employee salaries, fundraising expenses, and details of family relationships with any business partners.

Not-for-profits that raise less than $25,000 a year, or have religious, education, or government exemptions, would have fewer requirements, and organizations that are established in response to a natural disaster or tragedy and raise more than $100,000 would have to submit quarterly financial statements. Additionally, professional fundraisers would be subject to the same requirements as telemarketers, including submitting a licensing fee and fingerprints for background checks. Anyone convicted of theft or fraud would be prohibited from working as professional solicitors.

New York

Back in New York, the Act includes key reforms long requested by the charitable sector. Among the changes: not-for-profit organizations may now "incorporate, dissolve and merge more easily; communicate and hold meetings using modern technology like Skype and video-conference; and enter transactions without having to go to court."

Oversight and governance reforms include adoption of "more robust financial oversight requirements, conflict-of-interest policies, and whistleblower policies to protect nonprofit employees from retaliation when they identify wrongdoing."

Specifically, the Act:

• Ensures "sound financial management" by requiring that charities' boards perform active oversight over financial audits. Boards are responsible for retaining independent auditors and reviewing results of the audit. At larger charities (over $1 million in annual revenue), the board or audit committee must adhere to additional oversight procedures.
• Prevents conflicts of interest by requiring that transactions between a not-for-profit and "insiders who stand to benefit" be fully disclosed and that not-for-profit boards determine they are "fair, reasonable, and in organizations' best interests." If a not-for-profit conducts a substantial transaction with an insider, the board must first consider alternatives and then document reasons for choosing the insider transaction.
• Strengthens the Attorney General's power to police fraud and abuse.
• Ensures board independence by prohibiting any employee of a not-for-profit from also serving as chair of its board.
• Promotes good governance by requiring not-for-profits to adopt conflict of interest policies. Charities with more than $1 million in annual revenue and 20 or more employees also must adopt whistleblower policies.

Massachusetts

The New York Act has an impact well beyond its own borders. The new law — which revises the laws on annual financial auditing requirements, corporate governance, related-party transactions, and governmental oversight for not-for-profits — applies to all not-for-profits that solicit funds in New York even if they are incorporated in other states.

In Massachusetts, affected not-for-profits must adhere to new financial oversight requirements that take effect July 1, 2014. Not-for-profits with less than $250,000 of gross revenue will need to file an unaudited financial report while not-for-profits with $250,000 to $500,000 of gross revenue will be required to file an independent CPA review. For not-for-profits with more than $500,000 of revenue, the board/audit committee will be required to oversee the accounting and financial-reporting processes, retain an independent auditor annually, review results of the audit with the auditor, and file an independent CPA audit.

In addition to the above requirements, for not-for-profits exceeding $1 million in revenue, the board/audit committee will be required to discuss myriad topics with their auditors, including the scope of the audit (before the audit begins); any material risks and weaknesses in internal controls identified by the auditor; any restrictions on the scope of the auditor's activities or access to information; any significant disagreements between the auditor and management; and the adequacy of the nonprofit's accounting and financial reporting process.

Nevada

Looking west, even Nevada has jumped on the reform bandwagon. In an effort to prevent fraud and protect donors, Nevada now requires not-for-profits that solicit in the state to register with the secretary of state. This was done partially in response to some fraudulent schemes in Nevada following Hurricane Katrina where groups were falsely claiming to be legitimate charities collecting donations for victims.

Next Steps

Look for this trend toward stricter oversight to expand as not-for-profit reform gains momentum from coast to coast. If you have questions regarding regulations in your state, please contact your CBIZ MHM advisor.

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