Answers about the state’s Nonprofit Revitalization Act

For the last eight months, I have been responding to numerous questions from nonprofit organization board and management members related to the Nonprofit Revitalization Act of 2013, signed into law by Gov. Andrew Cuomo last December.

My recent column (entitled, “Complying with the Nonprofit Revitalization Act’s rules” and appearing in the April 4, 2014 issue of The Central New York Business Journal) addressed the key requirements of this 70-page piece of legislation.

As a follow-up, the 10 frequently asked questions and answers below seek to clarify the confusion that abounds in the nonprofit sector regarding this key legislation. The confusion is to be expected, since lawmakers passed the law without requiring that interpretive guidance and regulations be issued prior to its effective date.

Q1: The effective date of the legislation was July 1, 2014. Without regulations or interpretive guidance, what fines or penalties may we be subject to for not being fully compliant as of July 1?

A1: Not to worry. Both the attorney general and the director of the New York State Charities Bureau have acknowledged that hundreds of questions remain to be answered based on interpretive guidance and regulations yet to be issued. This does not mean that you can ignore the provisions of the legislation. Adopting policy changes consistent with the spirit of the legislation, together with addressing its procedural requirements, will be sufficient, at least until the end of this calendar year. Hopefully, at that point, we will have clarifying guidance that will allow attorneys, accountants, board, and management team members to be in full compliance. No penalties or fines are anticipated during the implementation phase of the Act.

Q2: Should I be concerned enough about the increased board-governance responsibilities mandated by the law that I resign my board seat due to increased personal-liability risk?

A2: Absolutely not. New York laws governing volunteer efforts, as well as directors and officers’ (D&O) liability insurance, provide sufficient protection for members to continue their volunteer efforts. In fact, the risk of personal liability is limited to instances of gross negligence, which should be an extremely rare occurrence. And getting D&O liability coverage should be a standard practice just in case an issue does occur.

Q3: What does the legislation require regarding the fact that only “independent directors” can participate on an organization’s audit committee?

A3: Interpretive guidance is forthcoming in this area. There are dozens of situations that represent “gray areas” in this regard. For example, as a board member, if a family member receives services from the organization, does that make the board member non-independent? Interpretive guidance to be issued by state regulatory authorities is forthcoming. However, in the interim, apply a practical approach to your assessment of whether a director is independent or not. My general rule in this area is that real or perceived conflicts of interest should lead to a director being viewed as non-independent.

Q4: If a board member is determined to be non-independent, can he or she sit on the audit committee?

A4: Only independent directors are allowed to meet with the independent auditors in executive session. Non-independent directors can continue as board members and members of all other board committees.

Q5: How many meetings does the audit committee need to have with our independent auditors?

A5: This is an area that is fairly clear in the legislation. In addition to an annual executive session between independent directors and the auditors, pre-audit and post-audit meetings between the auditor and the audit committee are now required.

Q6: Our nonprofit does not receive any government funding. Are we required to have a whistleblower policy and procedure?

A6: The law requires any nonprofit organization with more than 20 employees to implement a whistleblower policy, regardless of funding sources. Remember that the basic objectives of the legislation seek to increase the levels of transparency, accountability, and clarity between and among board, management, and audit representatives. A whistleblower policy, properly implemented, enhances the potential for proper reporting in each of these areas.

Q7: What are the most common procedural changes that result from the increased requirements related to conflicts of interest?

A7: First of all, we recommend that every board and committee agenda include an item that requires attendees to disclose conflicts of interest at the beginning of each meeting. In addition, to the extent that certain attendees have a disclosed conflict, the individual needs to be excused from the deliberations, discussions, and votes on that particular agenda item. The minutes of the meeting must reflect the time at which the individual with the conflict both left and returned to the meeting.

Q8: What additional responsibilities are assigned to the audit committee in fulfilling its responsibilities?

A8: In addition to the executive session and pre- and post-audit meetings described above, the audit committee must now review and document the performance and independence of the auditors on an annual basis. This has not been a routine procedure for many organizations but should include a policy regarding periodic assessment of the quality, cost, and value derived from your independent audit relationship. Your audit firm should be providing you with guidance regarding compliance in this area. If you would like our client guidance in this regard, please email me.

Q9: What is the most common board responsibility in which compliance failures occur?

A9: Without question, a disciplined annual process that requires documentation of a comprehensive performance evaluation and compensation assessment of the CEO. Documentation requirements in this area are clearly stated in Section 4958 of the Internal Revenue Code. In addition, your annual Form 990 requires an affirmative statement that this process has been completed and documented.

Q10: Since the effective date of the act has passed, what should be our target date for achieving full compliance?

A10: Ideally, assuming timely issuance of interpretive guidance and regulations from the attorney general and the Charities Bureau, all organizations should target Dec. 31, 2014, as their objective for full compliance with the policies, procedures, and practices required by this legislation.

Once interpretive guidance is issued, we fully expect to be able to provide updated policy and procedure templates that are in compliance with the requirements of the Nonprofit Revitalization Act. Our firm will broadly distribute them between now and the end of the year.

Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at The Bonadio Group. Contact him at (585) 381-1000, or via email at garchibald@bonadio.com