Proposed Nonprofit Reforms:
Greater Financial Disclosures
By
Gary
P. Poon
On June 22, 2004, the U.S. Senate Finance Committee began hearings to consider
possible reforms in the regulation of nonprofit organizations. Among the proposals
discussed are efforts to enhance the scope of financial information to be disclosed in the annual Form 990.
This paper provides a brief summary of the enhanced disclosure requirements
that are being considered.
Background
Congress has previously considered legislation to reform the practices of
nonprofit organizations. For example, in April 2003, the House passed the “Charitable
Giving Act of 2003” (H.R. 7), while the Senate passed the “CARE Act of 2003” (S. 476) in September 2003. In particular, S. 476 provided, among other things, for the enhanced oversight of
nonprofit organizations through various disclosure requirements and penalty provisions so as to make private foundations and
nonprofit organizations more “transparent.” However, reconciliation
of these two bills was stalled in the Conference Committee at the end of the last legislative session.
Beginning in October 2003, The Boston Globe published a series of
articles exposing a number of alleged financial abuses at a handful of private foundations.
These alleged abuses included excessive compensation for foundation directors and executives, self-dealing, conflicts
of interest, and, in some cases, what appeared to be outright fraud. While the
vast majority of nonprofit organizations are run by honest and dedicated individuals, the unfortunate reality is that these
alleged abuses have given rise to a climate of growing concern on the Hill. Earlier
this year, Senator Charles E. Grassley (R-Iowa), Chairman of the Senate Finance Committee, vowed to enact more stringent rules
that would apply not only to private foundations, but also to nonprofit organizations generally.
The call for reforms in the nonprofit arena must be viewed against the backdrop
of the government’s attempts to address the many corporate scandals that have dominated the business pages. Among these efforts was the passage in 2002 of the Sarbanes-Oxley Act.
Generally, the Sarbanes-Oxley Act pertains to publicly-traded companies, although there are a few provisions that have
general applicability to nonprofit organizations. Nevertheless, legal commentators,
trade associations, and practicing lawyers have advised that nonprofits consider voluntarily adopting many of the provisions
of the Sarbanes-Oxley Act, particularly those that seek to ensure auditor independence, promote corporate responsibility,
and enhance financial disclosures.
Proposed Greater Financial Disclosures
Generally, the Sarbanes-Oxley Act gives the applicable federal and state
regulators, such as the Securities and Exchange Commission (“SEC”), even greater enforcement powers and responsibilities
than it already has “for the protection of investors.” Likewise,
the Discussion Draft proposes to give more powers to the Internal Revenue Service (“IRS”) to oversee and scrutinize
the tax-exempt status of nonprofit organizations.
Under the Discussion Draft, a nonprofit organization would be required to
file with the IRS every five years “such information as would enable the IRS to determine whether the organization continues
to be organized and operated exclusively for an exempt purpose.” The IRS
would not be required to issue a new tax-exempt determination letter, but could revoke an organization’s tax-exempt
status if the IRS determined that the organization no longer was entitled to exemption.
Failure to file the requisite documents for the five-year review would result in a loss of the organization’s
tax-exempt status.
Further, the Discussion Draft is proposing the following “enhanced
disclosures:”
-
Declaration by the Chief Executive Officer (or an equivalent officer),
under penalties of perjury, that the organization’s Form 990 is accurate and complete.
-
Affiliations chart showing relationships with affiliated exempt and non-exempt
organizations.
-
Enhanced disclosures of formation of taxable subsidiaries and transactions
with such subsidiaries.
-
Schedule of partnership interests and the organization’s role in
such partnerships.
-
Enhanced reporting of insider deals and ancillary joint ventures.
-
Inclusion of all tax opinions involving agreements with insiders and conflicts-of-interest
opinions.
-
Required disclosures of material changes in activities, operations, or
structure.
-
More detailed information pertaining to the organization’s investments,
which are to be made publicly available, upon request.
-
For nonprofits with over $250,000 in gross receipts, detailed descriptions
of annual performance goals and measures for meeting those goals.
In addition, the Discussion Draft would require the IRS to promulgate standards
for filing Form 990.
Finally, the Discussion Draft would require that the organization’s
Form 990 be subject to review by an independent auditor and a copy of the auditor’s report attached to the Form 990. For nonprofits with over $250,000 in gross receipts, an independent audit of the organization’s
financial statements would be required. This would also include an auditor’s
certification regarding the organization’s exposure to unrelated business income tax.
Mirroring provisions of the Sarbanes-Oxley Act, the Discussion Draft would require that a new auditor be used at least
every five years. For nonprofits with gross receipts between $100,000 and $250,000,
the organization’s financial statements would need to be reviewed by a certified public accountant.
Conclusion
It is likely that Congress will likely enact some type of reform legislation
governing nonprofit organizations and that such reforms will probably include enhance financial disclosure requirements. Nonprofit organizations are therefore well-advised to ensure that internal compliance
procedures are in place, so that they will be prepared to meet any new financial disclosure requirements enacted by Congress.
