2006 Texas Regulatory Activity

FEDERAL & STATE GOVERNMENT PRESSURES ON NONPROFIT ENTITIES: Accountability, Transparency and Improved Corporate Governance

Power Point Presentation, 2006
Prepared by Richard W. Meyer, Attorney at Law

IS REFORM NEEDED in the nonprofit sector?

Where is the scandal? Sarbanes-Oxley Act

• Congressional hearings and H.B. 7, 2003-05
• Increased IRS audit and scrutiny of nonprofits
• State law proposals and controversies
• Best practices and stakeholder involvement in reforms.
• Report of The Nonprofit Panel

Why should nonprofits worry about this?

• Government regulators promise more enforcement
• New civil and criminal liability for noncompliance
• Federal pre-emption of state nonprofit laws is possible
• State governments getting into the act
• Donors and grant makers expect strict compliance
• Liability insurance/bonding underwriters may look closer
• Auditing and other standards may be tightened
• Board members expect management compliance
• Silence from the nonprofit sector re reform issues

U.S. SENATE COMMITTEE / Sen. Grassley–H. R. 7(2004)

The long shadow of Sarbanes-Oxley and a pledge to “fix”
alleged scandals in the nonprofit sector.   Proposals:

• Recurring renewal of 501(c)(3) tax-exempt status
• Expand Sarbanes-Oxley financial reporting and liability
• “Accreditation” of larger nonprofits
• Increased fees for all IRS filings by nonprofits
• Performance-based reviews as part of IRS 990 reporting
• Disclosure of nonprofit’s audit with 990 filing
• Establish federal standards for boards and ethics issues


• Increased IRS scrutiny and audits of nonprofits
• “Light” IRS inquiries and visits to nonprofits
• Executive compensation procedures established
• Increased reporting of operating details on Form 990
• Non-cash donation restrictions
• Affiliated 501(c)(3) and (c)(4) nonprofits
• Lobbying, advocacy, PAC and “527” activities

What to make of all this?

• No good deed goes unpunished
• Self-regulation is better than government regulation
• Life will not be simpler in the future
• Every compliance dollar is one less dollar for mission
• Nonprofits have a right to object to overreaching proposals and   “death by bureaucracy”
• Self-sufficient, innovative entrepreneurial nonprofits deserve an environment in which to serve and prosper
• That Christmas card or gift basket from your attorney
• The nonprofit sector is at a crossroads
• The pain may become real …


Degrees of pain:

• Non-observance of nonprofit’s charter/mission, bylaws, board directives, and internal policies
• Non-observance of accepted “best practices”
• Violation of a governmental regulation or directive
• Violation of civil statutes and consequences
• Violation of fiduciary, trust and common law obligations and consequences
• Violation of criminal laws and consequences


“Nothin’ needs reforming as much as the other person’s habits…”
Effects of an overdose of “reform”:

• Discourages start-up and small nonprofits
• Mid-size, struggling nonprofits: the tipping point?
• Large, mature nonprofits: increased compliance costs
• Self-sufficient, innovative entrepreneurial nonprofits may find choppy waters ahead
• Conflicting federal and state laws and regulations
• “Federalizing” state nonprofit governance laws
• Recruiting board members & volunteers becomes harder
• Possible loss of the “reasonable” business standard


Does it speak for you? Its work history to date:

• Established in Sept. 2004 by the Independent Sector at Sen. Grassley’s request to solicit stakeholder input
• Panel is a “Who’s Who” of large national charity execs
• Hearings by the Panel around the U.S.
• Draft recommendations by Panel, May 2005
• Final Panel Report to Congress and sector, June 2005
• For current status: www.nonprofitpanel.org

Issues identified:

• Compensation of executives and travel expenses
• Board structure, size and independence
• Tax abuses, donor-advised funds, tax-sheltered donations and non-cash contributions
• Expiration and periodic renewal of 501(c)(3) status
• More disclosure on Form 990
• Mandatory audits and reviews of finances

Recommendations to Congress:

• No periodic expiration of 501(c)(3) status
• IRS 990 reporting: more data; certification by CEO
• Mandatory annual CPA audits or reviews
• More disclosure re executive compensation and   penalties for those approving it improperly
• Board: 1/3 must be independent; some excluded
• Restrict abusive contribution practices
• Special qualifications for board audit committee and those enforcing corporate ethics rules


Express your opinion now on nonprofit reforms:

• To the U.S. Senate Finance Committee members and your U.S. Senator
• To your U. S. Representative
• Through your state association of nonprofits
• Through other nonprofit networks (United Way, Goodwill)
• Watch for proposals from state and local governments
• National Council of Nonprofit Organizations, www.ncna.org

SPEAKING UP: Choppy waters and sharks

• Wear your white hat proudly and visibly
• Question new compliance costs as a drag on mission
• Distinguish your interests from the mega-nonprofits and their recent misbehavior

Where’s the scandal? (not in our community)

• Disagreements within the nonprofit sector
• Not allies: NFIB; taxpayer watchdogs; health systems
• Observe lobbying and advocacy limits on nonprofits
• Watch for reform proposals in your state legislature
• Proposals rejected now will return in future years


• Expect and demand benefits and a “safe harbor” from proposed reforms and compliance with them
• What does transparency and accountability get you?
• Current controversies will bring improvements
• Outside scrutiny will become less perilous
• New compliance rules should be proportional to the scale of the nonprofit’s operations and revenue
• Strong medicine has unexpected side effects
• Corporate integrity preserves your special place in the community

© 2006, Richard W. Meyer, All Rights Reserved.