At the end of 2013, the state of New York enacted substantial
revisions to the New York not-for-profit statute, resulting in a
major overhaul of New York laws applicable to nonprofit
organizations.
One particular section of the new New York nonprofit statute,
relating to audit committees and required functions of audit
committees, has broader coverage than simply regulating nonprofit
organizations "incorporated" or "based" in New
York. Under the new law, which is now in effect, out-of-state
nonprofit organizations that are required to file independent
accountant's audit reports with the New York attorney general
-- which includes out-of-state nonprofit organizations that (i) are
registered in New York to engage in charitable solicitations and
(ii) have annual gross revenues in excess of specified
"threshold" amounts -- are required to meet significant
new audit oversight requirements.
For example, those out-of-state nonprofit organizations which are
covered by the new New York statute must meet the following new
audit committee requirements:
- Either the full board of trustees (acting solely through "independent" trustees on the board) or an appointed "audit committee" comprised entirely of independent trustees is required to oversee the audit and financial reporting function of the nonprofit organization.
- The required independent audit committee (or independent board trustees performing these functions) also is responsible for reviewing with the outside auditor the plan and scope of the audit before audit commencement, reviewing with the outside auditor any material risks or weaknesses in internal control which have been identified by the outside auditor, reviewing any restrictions on the scope of the outside auditor's work as well as any significant disagreements between management and the outside auditor, and annually reviewing the performance and independence of the outside auditor.
- The term "independent" trustee is defined in the statute and includes, among other requirements, that such person not be an employee of or have a substantial financial interest in, and not have a relative who is an officer of or has a substantial financial interest in, an entity that has made payments to or received payments from the nonprofit organization or an affiliate in an amount that, in any of the past three fiscal years, exceeds the lesser of $25,000 or 2 percent of such other entity's consolidated gross revenues.
The definition of "independent" trustee can be
problematic for many nonprofit organizations, particularly those
that provide opportunities for companies with which their trustees
are associated to host events at the nonprofit's facilities or
that otherwise provide similar business opportunities, for fees and
other payments, to take advantage of the services, facilities or
products of that nonprofit organization. Although it would appear
that normal charitable contributions are not intended to be
included within the calculation of the $25,000/2 percent of gross
revenues standard, many nonprofits provide business opportunities
to outside entities with which trustees are officers or are
otherwise employed (or have a family member in an officer
position). Ensuring that the required audit functions outlined in
the New York statute are performed only by trustees meeting the
independent standards may require planning, such as the use of
subcommittees for particular audit committee functions.
Further, it will be important for nonprofit organizations which are
based or incorporated outside of New York to determine whether they
are subject to this new statute. If an organization is subject to
this new New York law, the organization should undertake
immediately to satisfy its audit and audit governance requirements.
It can be expected that New York state, one way or the other, will
ensure that out-of-state organizations soliciting charitable
contributions within New York State are in full compliance with
these requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.