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SB 1262 — California’s Nonprofit
Integrity Bill Imposes Financial Statement, Audit Committee
and Other Potentially Onerous Requirements on Hospital Affiliates
Effective January 1, 2005
By Rachel
Glitz and Gerry
Hinkley
[January 2005]
SB 1262, effective Jan. 1, 2005, has been analogized
to using nuclear weapons to kill gnats. While nonprofit hospitals
are exempt from its requirements, nonprofit organizations affiliated
with hospitals, such as development foundations, will begin
feeling its impact this year. Most significantly, affected organizations
will be required to obtain and disclose audited financial statements
and to maintain an audit committee.
Who Must Comply? A nonprofit
organization that is organized for charitable purposes and doing
business or holding property in California for such purposes
must comply (whether or not it is organized under the laws of
California) unless it is exempt from the Attorney General’s
filing, registration and disclosure requirements. Hospitals
and Knox-Keene-licensed health care service plans are exempt
(as are certain other types of nonprofit organizations specifically
exempted from the Attorney General’s supervision).1
However, unless a nonprofit qualifies under an exempt category,
it is subject to the Attorney General’s supervision and
the new requirements.
What Requirements Does the New Law Impose?
- Audited Financial Statements.
All charitable organizations that are required to register
with the Attorney General and that receive or accrue $2 million
or more in gross revenue in the fiscal year (beginning with
fiscal years ending after June 30, 2005) must obtain an annual
independent financial audit for that year, must file annual,
audited financial statements for the year with the Attorney
General and must make them available to the public. Even if
the entity takes in less than $2 million, disclosure to the
Attorney General and the general public is required if the
entity chooses to have its financial statements audited.
The Act provides that if a nonprofit organization subject
to the Act is "under the control of another organization,
the controlling organization may prepare a consolidated
financial statement." This would allow a foundation
with financial statements consolidated with a controlling
parent entity to file and make available the parent's financial
statements in satisfaction of the Act. However, because
the Act does not specify the meaning of "control,"
it is unclear whether and when consolidated statements are
a permissible substitute for a nonprofit entity's separate
financial statements.
-
Audit Committee. Charitable corporations
subject to the audit requirement must appoint an audit committee,
which is responsible for recommending to the board of directors
an independent, certified public accountant to perform the
audit, reviewing the accountant’s findings and determining
whether to accept the audit.
- Audit Committee Members. No
audit committee member may have a material financial interest
in any entity doing business with the nonprofit. However,
the new law does not require a minimum size for the audit
committee, which may be as small as just one member. In
addition, members of the committee need not be members of
the board of directors (provided they do not serve on the
organization’s staff or as its president or CEO, treasurer
or CFO) And, although the audit committee must be separate
from any finance committee, finance committee members may
serve on the audit committee, provided they constitute less
than half of the committee and provided they do not serve
as its chair.
- Audit Committee Compensation.
Although audit committee members may be compensated, they
cannot receive compensation that is greater than the amount
paid (if any) to the board of directors for their service
on the board.
- Timing of Registration. The new
law shortens the time period for registering with the Attorney
General from within six months after receiving any property
for charitable purposes to within 30 days of receipt.
- Compensation Review. The compensation
of the charitable organization’s president or chief
executive officer and any treasurer or chief financial officer
must be reviewed and approved by the organization’s
board of directors, or an authorized committee of the board,
to ensure that it is just and reasonable.
- Fundraising Contracts. A charitable
organization must enter into a written contract for each fundraising
campaign or event for which it hires a professional fundraiser.
The contract must contain provisions that are specifically
required by the Attorney General, according to the category
the professional falls within. For example, if the contract
is with a commercial fundraiser, for a fixed fee, it must
identify not only the amount of the fundraiser’s fee,
but also a good faith estimate of the percentage of contributions
that the fee represents and the assumptions upon which that
estimate is based.
All contracts with professional fundraisers must provide
for the charitable organization’s right to cancel,
without penalty, for 10 days following execution. The charitable
organization is also required to notify the Attorney General
of any such cancellation. All contracts must further provide
for the charitable organization’s right to terminate
for cause, at any time, or without cause, with 30 days’
written notice. A charitable organization may also void
its contract for a fundraiser’s failure to satisfy
registration requirements with the Attorney General before
soliciting any funds.
- Solicitations. The new law prohibits
any misrepresentation of a charitable organization’s
purpose, its nature or its beneficiaries. Certain conduct
is specifically prohibited in connection with a solicitation
or charitable promotion. For example, falsely characterizing
goods or services as having the endorsement or sponsorship
of a particular person, without his or her written consent,
or using the mere fact of registration with the Registry of
Charitable Trusts to imply an endorsement of or approval by
the Attorney General, is prohibited.
FOOTNOTES
1
Also exempted are: the United States, any state, territory,
or possession of the United States, the District of Columbia,
the Commonwealth of Puerto Rico, or any of their agencies or
governmental subdivisions; any religious corporation sole or
other religious corporation or organization that holds property
for religious purposes, or to any officer, director, or trustee
thereof who holds property for like purposes; a cemetery corporation;
certain political action committees, charitable corporations
or unincorporated associations organized and operated primarily
as a religious organizations and educational institutions. See
CAL. GOV’T CODE §12583.
For more information, please contact:
Thomas
E. Jeffry, Los Angeles, (213) 633-6882, TomJeffry@dwt.com
This Advisory is a publication
of the Health Law Department of Davis Wright Tremaine LLP. Our
purpose in publishing this Advisory is to inform our clients
and friends of recent developments in health law. It is not
intended, nor should it be used, as a substitute for specific
legal advice as legal counsel may only be given in response
to inquiries regarding particular situations.
Copyright © 2005, Davis Wright
Tremaine LLP.
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