Charities Come Under Increased Scrutiny

How are churches affected?

Church Law and Tax 2005-09-01

Charities Come Under Increased Scrutiny

How are churches affected?

Article summary. In recent years charities have come under increasing scrutiny by Congress, state regulators, and the IRS because of a number of factors, including (1) concern that financial statement irregularities involving such celebrated companies as Enron and Global Crossings may also be occurring in nonprofit accounting; (2) concern over the role and oversight function of corporate boards; (3) excessive compensation paid to officers; (4) inflated valuations of donated property; and (5) conflicts of interest. These and other concerns have led to various legislative and administrative changes, as well as numerous proposals for change. The number of these changes and proposals is bewildering and has caused much confusion. Most importantly, which of them apply to churches? This article will navigate readers through the maze of changes and proposals and explains which ones apply to churches and other religious organizations.

Financial scandals involving several prominent companies have rocked the public in recent years. Congress and state regulators responded swiftly with comprehensive changes. At the same time, questions have been raised about the operation of charitable organizations, and this has resulted in many calls for change. Many church leaders have heard of some of these developments, and are unsure of their application to churches. This article will review the major changes, and proposals for change, and assess their application to religious organizations. The following changes and proposals will be addressed:

  • the Sarbanes-Oxley Act
  • state charitable accountability legislation
  • recommendations of the Panel on the Nonprofit Sector

The Sarbanes-Oxley Act

A few years ago the public was stunned by the sudden financial collapse of several major companies, including Enron Corporation, Global Crossings, and Tycho. Several concerns were immediately raised by investors, regulators, and legislators, including the following:

(1) Financial reporting. Federal securities laws are designed to ensure that “publicly-traded” companies (those that sell their stock to the public) provide investors with full and accurate disclosure of their financial condition. Following the bankruptcies of Enron Corporation and Global Crossing, and restatements of earnings by several other major companies, investors and others expressed concern about the adequacy of the financial reporting currently provided by publicly-traded companies.

(2) Auditor independence. Concerns were expressed about the role of auditors in approving corporate financial statements. Questions regarding the independence of auditors of public companies led to calls for greater supervision of the profession.

(3) Employee retirement accounts. The bankruptcy of Enron Corporation raised concerns relating to the security of employee retirement accounts. When allegations arose that some Enron insiders were able to sell their company stock even as Enron employees were prohibited from doing so because of a lockdown of the company’s retirement plan, new calls arose for protecting the access of employees to their accounts to the same degree as insiders.

(4) Independence of securities analysts. Increased public participation in the securities markets raised the profile of securities analysts who provide recommendations regarding securities. Concerns were raised regarding the objectivity of investment recommendations made by analysts.

These, and other, concerns were addressed in the Corporate and Auditing Accountability, Responsibility and Transparency Act of 2002, which is more commonly known as the “Sarbanes-Oxley Act.” The Act was designed to restore investor confidence in the financial markets by holding companies issuing stock to much higher standards.

A committee report accompanying the Act contains the following observations regarding the need for reform:

The collapse of the Enron Corporation provided irrefutable evidence of serious, systemic problems in our financial reporting system and our capital markets. Far from being an isolated instance, Enron was only the most spectacular example of what has become a common phenomenon—earnings manipulation and deceptive accounting by our largest companies. Before Enron, company after company-Waste Management, Sunbeam, Cendant, W.R. Grace, and many others-were found to have manipulated their accounting to present a picture to investors that did not match reality. As evidenced by the record number of investigations opened by the SEC thus far this year, the problem has only become more acute.

The safeguards that should protect investors from such practices have failed at every level in company after company, overwhelmed by the temptation for companies to cheat, overstate, or obscure their financial disclosure to improve short-term results and meet analyst or investor expectations. The stock prices of many companies have been whipsawed by any suggestion of possible accounting problems, indicating a clear decline in confidence in our financial reporting system. While this system has long been viewed as the best in the world, its reputation has suffered from a string of record financial restatements and prosecutions of some of our largest companies.

Virtually all of the witnesses heard by the Committee spoke of the need for auditors to be willing to stand up to management and for audit committees to take real responsibility for audits and auditors. To do this, we must significantly alter the relationship of the auditor to its client, strengthen the functioning of audit committees, and provide meaningful ongoing oversight of the auditing profession. We should use this opportunity to restore the vitality of critical investor safeguards by ensuring that auditors and audit committees can once again act as the first line of defense in protecting investors. The market alone cannot provide an effective or lasting solution to these problems.

The main provisions of the Sarbanes-Oxley Act, and their application to churches, are summarized in a table in this article.

Application of Sarbanes-Oxley to Churches:

A Summary of Selected Provisions

Note: This table summarizes the main provisions in the Sarbanes-Oxley Act, and assesses their direct or indirect application to churches. Note that the Act applies to “public companies” (or “publicly-traded companies”) that issue securities that are sold to public investors, and so the impact on churches will be minimal, with two exceptions. First, two of the Act’s requirements do apply to churches that are engaged in commerce (pertaining to destruction of records, and whistleblowers). Second, churches that issue securities that are sold to public investors should assume that all of the provisions of the Act apply to them.

Title 1: Public Company Accounting Oversight Board

Major provisionsApplication to churchesComments

Title II: Auditor Independence

Major provisionsApplication to churchesComments

Title III: Corporate Responsibility

Major provisionsApplication to churchesComments

Title IV: Enhanced Financial Disclosures

Major provisionsApplication to churchesComments

Title V: Analyst Conflicts of Interest Pertains to conflicts of interests by securities analysts. No provisions of direct or indirect relevance to churches. Title VI: Commission Resources and Authority Pertains to certain additional funding and authority for the SEC. No provisions of direct or indirect relevance to churches. Title VII: Studies and Reports Pertains to certain additional funding and authority for the SEC. No provisions of direct or indirect relevance to churches. Title VIII: Corporate and Criminal Fraud Accountability

Major provisionsApplication to churchesComments

Title IX: White Collar Crime Penalty Enhancements

Major provisionsApplication to churchesComments

Title X: Corporate Tax Returns Expresses the sense of the Senate that the federal income tax return of a corporation should be signed by its CEO. No provisions of direct or indirect relevance to churches. Title XI: Corporate Fraud Accountability

Major provisionsApplication to churchesComments

Amends federal criminal law to include the following crime: “Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.”yesMost of the provisions of the Act are in the form of amendments to federal securities laws (the Securities Act of 1933 and the Securities and Exchange Act of 1934). Since religious organizations are exempt from these laws (except for fraudulent acts) they are not covered by the Act’s provisions. However, this section, which penalizes retaliation against “whistleblowers” (employees who report possible federal crimes to law enforcement officers) is an amendment to federal criminal law. Since federal criminal law contains no blanket exemption for religious organizations, such organizations are subject to this provision.

Application to churches. A table summarizes application of the Sarbanes-Oxley Act to churches. Note the following:

  1. Most of the provisions of the Act are amendments to the two main federal securities laws, the Securities Act of 1933 and the Securities Exchange Act of 1934. Churches are specifically exempted from these laws, except for the “anti-fraud” provisions, and therefore churches generally are not subject to most of the provisions of the Sarbanes-Oxley Act.
  2. Three provisions of the Act (summarized above) are not amendments to federal securities law, but instead are amendments to federal criminal law. Since there is no blanket exemption of churches under federal criminal law, it is clear that churches are subject to these provisions, which include the following:
  3. #1—destruction or falsification of records
  4. The Act amends federal criminal law to include the following new crime: “Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”
  5. There are a number of requirements that must be met in order to trigger liability for destruction or falsification of documents: (1) There must be an alteration, destruction, mutilation, or falsification of a record or document. (2) The alteration, destruction, mutilation, or falsification must be “knowing” (i.e., intentional). (3) The act must be done with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States “or in relation to or contemplation of any such matter.”
  6. Just what is the “proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter”? The Act does not define this language, but there have been numerous federal court rulings that have interpreted this same language in other contexts. These decisions clarify that this terminology:
  7. “must be given a broad, nontechnical meaning”
  8. pertains generally to “all matters within the authority of a government agency”
  9. is not limited to submissions of written documents to governmental agencies
  10. Key point. Persons who falsify records or documents may be liable on other grounds as well. For example, the intentional falsification of tax forms may result in liability for civil or criminal fraud.

  11. Key point. Churches should periodically apprise board members, and staff members, of this provision in the Sarbanes-Oxley Act.

  12. #2—statute of limitations for securities law violations
  13. The Act amends federal law to permit private lawsuits for securities fraud violations to be brought not later than 2 years after its discovery, or 5 years after the date of the violation, whichever is earlier.
  14. #3—whistleblower protection
  15. The Act amends federal criminal law to include the following crime: “Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.”
  16. Key point. Churches should periodically apprise board members, and staff members, of this provision in the Sarbanes-Oxley Act.

  17. 3. Churches that issue or sell securities to the public may be subject to many if not most if the Act’s provisions. It is imperative for any church that issues or sells securities to retain a securities attorney to provide a legal opinion regarding the application of Sarbanes-Oxley, and to assist the church with compliance.

  18. 4. Churches are subject to varying degrees of regulation under state securities law. For example, in some states churches are required to register securities that they issue, and in others persons who offer or sell the securities must be registered with the state securities commission (a process that in many states requires passing a securities law exam). Also, note that churches are subject to the anti-fraud provisions of the securities laws of all 50 states.

  19. Key point. The fact that churches are exempt from most of the provisions of the Sarbanes-Oxley Act does not mean that they can operate with impunity. Voluntary compliance with some of the provisions of the Act should be considered for several reasons including the following: (1) Congress, several state legislatures, and the public are demanding accountability for public companies. Therefore churches, even though exempt from most of the Act’s provisions, should seriously consider voluntary compliance at least with some of the requirements. (2) Some church board members have been exposed to the Act’s requirements where they work, and may see no reason why churches should not comply even if not legally required to do so. (3) Members and donors increasingly will be informed about the protections of Sarbanes-Oxley, and may expect churches to comply. (4) Churches that have their financial statements audited by a CPA firm may find that the CPA will apply some of the Act’s provisions though not technically required. (5) The Act sets forth a series of “best practices” that many church leaders will want to implement. (6) As noted in this article, a few of the Act’s provisions do apply to churches.

  20. Examples. The possible application of the Sarbanes-Oxley Act to churches is illustrated by the following examples.

  21. Example 1. A church has an annual audit by a local CPA firm. A CPA informs the pastor that the Sarbanes-Oxley Act now requires that an audit include (1) an evaluation of whether internal control structure and procedures include records that accurately reflect transactions and dispositions of assets; (2) assurance that transactions are recorded to permit preparation of financial statements in accordance with generally accepted accounting principles (GAAP), and that receipts and expenditures are made only with authorization of senior management and directors; and (3) a description of both material weaknesses in internal controls and of material noncompliance. Is the CPA correct? The answer is no. This provision only applies to audits of publicly-traded companies (companies whose stock is sold to the general public on a stock exchange, and who are governed by federal securities laws). However, if the accounting firm performs audits for publicly-traded companies, it will be familiar with the requirements of the Sarbanes-Oxley Act, and it is possible that it will apply them in the audit of a church even though not required. Some church leaders will agree that compliance with the Act’s provisions, while not required in most cases, may be prudent because the provisions establish a series of “best practices” for corporate governance and for this reason they should be followed even when not required, especially if doing so imposes no undue financial or administrative burden on the church.

  22. Example 2. A small church does not have a CPA audit its financial statements each year. Does the Sarbanes-Oxley Act apply to it? None of the provisions summarized in the table in this article will apply to such a church, except for the following: (1) It is a crime to knowingly alter, destroy, mutilate, conceal, cover up, falsify, or make a false entry in any document with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any federal department or agency; (2) private lawsuits for securities fraud violations may now be brought no later than 2 years after discovery, or 5 years after the date of the violation, whichever is earlier; (3) makes it a federal crime to retaliate against an employee (or anyone else) for providing truthful information to a law enforcement officer relating to the commission of a federal offense.

  23. Example 3. A church has 50 members and one full-time employee (its pastor). It also has a part-time office secretary, and an independent contractor who performs custodial services. The church does not have a CPA firm audit its financial statements. The pastor discovers in November of this year that the church board failed to designate a housing allowance for him. He creates a housing allowance that he dates “December 31, 2004” which purports to designate a housing allowance for all of 2005. The church is not a public company and therefore is not subject to most of the provisions of the Sarbanes-Oxley Act. However, the Act makes it a crime to knowingly falsify any document with the intent to influence “the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter or case,” and this provision contains no exemption for churches or pastors. It is possible that the pastor’s falsification of the 2005 housing allowance violates this provision in the Sarbanes-Oxley Act, exposing him to a fine or imprisonment of up to 20 years. The Act does not define the “proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter,” but several courts have construed this same language in other contexts and noted that it “must be given a broad, nontechnical meaning,” and pertains generally to “all matters within the authority of a government agency,” and is not limited to submissions of written documents to governmental agencies. These factors raise the possibility that the pastor’s actions violate Sarbanes-Oxley. But even if they do not, the pastor’s actions may expose him to civil or criminal penalties under the tax code.

  24. Example 4.A church bookkeeper falsifies an application for property tax exemption for a building owned by the church in order to avoid the church having to pay property taxes. The Sarbanes-Oxley Act makes it a crime to knowingly falsify any document with the intent to influence “the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter or case,” and this provision contains no exemption for churches or church employees. In this case, however, the falsified record pertained to a local law and not a federal law, and so the Act does not apply. The bookkeeper’s actions may expose her to civil or criminal penalties under other state or federal laws.

  25. Example 5.A church staff member realizes that the church failed to complete a Form I-9 (immigration form) for each new worker for the past several years. In order to avoid any penalties for noncompliance, the staff member completes a Form I-9 for each employee hired over the past 3 years, and backdates each form to the date of hire. The church is not a public company and therefore is not subject to most of the provisions of the Sarbanes-Oxley Act. However, the Act makes it a crime to knowingly falsify any document with the intent to influence “the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter or case,” and this provision contains no exemption for churches or pastors. It is possible that the staff member’s falsification of the I-9 forms violates this provision in the Sarbanes-Oxley Act, exposing him to a fine or imprisonment of up to 20 years. The Act does not define the “proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter,” but several courts have construed this same language in other contexts and noted that it “must be given a broad, nontechnical meaning,” and pertains generally to “all matters within the authority of a government agency,” and is not limited to submissions of written documents to governmental agencies. These factors raise the possibility that the staff member’s actions violate Sarbanes-Oxley. But even if they do not, the actions may expose the staff member to civil or criminal penalties under other federal or state laws..

  26. Example 6. A church dismisses a 70-year-old custodian. The custodian later sues the church for violating a federal law prohibiting discrimination in employment on account of age. While the lawsuit is pending, church leaders destroy certain records that are damaging to the church’s case. The church is not a public company and therefore is not subject to most of the provisions of the Sarbanes-Oxley Act. However, the Act makes it a crime to knowingly falsify any document with the intent to influence “the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter or case,” and this provision contains no exemption for churches or church leaders. It is possible that the church leaders’ destruction of church records violates this provision in the Sarbanes-Oxley Act, which exposes them to a fine or imprisonment of up to 20 years. The Act does not define the “proper administration of any matter within the jurisdiction of any department or agency of the United States … or in relation to or contemplation of any such matter,” but several courts have construed this same language in other contexts and noted that it “must be given a broad, nontechnical meaning,” and pertains generally to “all matters within the authority of a government agency,” and is not limited to submissions of written documents to governmental agencies. These factors raise the possibility that the church leaders’ actions violate Sarbanes-Oxley. But even if they do not, the actions may expose them to civil or criminal penalties under other federal or state laws.

  27. Example 7. To raise funds for a new building, a church sells bonds through its minister and board to church members. The church board assumes that the church is exempt from any legal restrictions, and so does not comply with the provisions of the state securities law. No “offering circular” (prospectus) is provided to prospective investors describing the securities and various risks, no one who sells the securities complies with agent registration requirements mandated by state law, and the church fails to create a “sinking fund” with a portion of the proceeds received from the sale of the securities. Within one year the church sells $400,000 of its promissory notes, but eventually defaults on all of them. Four years after the notes were sold, several investors sued the church in federal court alleging various counts of securities fraud under federal law. The church is not a public company and therefore is not subject to most of the provisions of the Sarbanes-Oxley Act. However, the Act extends the statute of limitations for securities fraud claims under federal law to not later than 2 years after discovering the fraud, or 5 years after the date of the violation, whichever is earlier. This extended statute of limitations for federal securities fraud claim applies to lawsuits brought against churches.

  28. Example 8. A church issues $1,000,000 in promissory notes for the construction new educational facility. It prepares a prospectus describing the securities, the history of the church, and the church’s financial condition. However, the prospectus fails to mention that the church has run budget deficits for each of the past 3 years, and that attendance has declined by 25% over that same period. The church board decided that this information was too negative to be put in the prospectus and would make the church’s notes too unattractive to investors. Several years later, the church defaults on the notes, and some investors sue the church for securities fraud under federal law on the basis of the church’s decision to omit information in the prospectus regarding deficits and attendance declines. The church is not a public company and therefore is not subject to most of the provisions of the Sarbanes-Oxley Act. However, the Act extends the statute of limitations for securities fraud claims under federal law to not later than 2 years after discovering the fraud, or 5 years after the date of the violation, whichever is earlier. This extended statute of limitations for federal securities fraud claim applies to lawsuits brought against churches.

  29. Example 9. A church has an annual audit by a local CPA firm. A CPA informs the pastor that the Sarbanes-Oxley Act now requires that the chief executive officer and chief financial officer certify that the church’s financial statements do not contain untrue statements or material omissions, and fairly present, in all material respects, the financial condition of the church. Is the CPA correct? The answer is no. This provision only applies to audits of publicly-traded companies (companies whose stock is sold to the general public on a stock exchange, and who are governed by federal securities laws). However, if the accounting firm performs audits for publicly-traded companies, it will be familiar with the requirements of the Sarbanes-Oxley Act, and it is possible that it will apply them in the audit of a church even though not required. Some church leaders will agree that compliance with the Act’s provisions, while not required in most cases, may be prudent because the provisions establish a series of “best practices” for corporate governance and for this reason they should be followed even when not required, especially if doing so imposes no undue financial or administrative burden on the church.

  30. Example 10. A church board is considering whether to make a no-interest loan to the pastor in order to enable him to make a down payment on a new home. A board member who works for a large company claims that such a loan is prohibited by the Sarbanes-Oxley Act. Is he correct? The answer is no. It is true that the Act prohibits personal loans extended by a corporation to its executives and directors (with some exceptions), but this provision only applies to publicly-traded companies (companies whose stock is sold to the general public on a stock exchange, and who are governed by federal securities laws). However, note that the nonprofit corporation laws of most states do prohibit loans to officers or directors, and this is so even if a “market rate” of interest is charged. Also, note that below-market interest loans can result in taxable income to the recipient in the form of imputed interest (but only if the loan is for $10,000 or more).

  31. Example 11. A church employee learns that a child was molested at an overnight church activity. The employee informs the pastor, who decides to handle the incident internally as a matter of church discipline. The pastor is a mandatory child abuse reporter under state law. The employee decides to call the police and report the incident on her own initiative. The pastor learns of her action, and terminates her employment. The Sarbanes-Oxley Act’s whistleblower provision does not apply since the underlying offense is a violation of state, and not federal, law. However, state law may provide legal protections to the employee under these circumstances.

  32. Example 12. A church employee learns that the church is not paying over-withheld income taxes and FICA taxes to the government. The employee notifies the local IRS office. When the pastor learns that the employee notified the IRS, he fires him. Has the pastor violated the Sarbanes-Oxley Act’s whistleblower provision? Possibly not. The Act amends federal criminal law to include the following crime: “Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.” The pastor’s decision not to pay over withheld taxes to the government may be a federal offense, since section 7202 of the tax code imposes criminal penalties upon “any person required to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax.” As a result, the pastor’s dismissal of the employee for reporting the possible violation of this section may trigger liability under Sarbanes-Oxley. Note that this section requires that the employee provide to a “law enforcement officer” information relating to the commission of a federal offense. Is an IRS agent a law enforcement officer? Federal law defines this term as “an officer or employee of the federal government, or a person authorized to act for or on behalf of the federal government or serving the federal government as an adviser or consultant—(A) authorized under law to engage in or supervise the prevention, detection, investigation, or prosecution of an offense.” Construed broadly, this could include an IRS agent. In summary, it is possible that the pastor’s dismissal of the church employee violated the whistleblower provision under Sarbanes-Oxley. If so, this would be a felony exposing the pastor to a fine of not more than $10,000, or imprisonment of not more than 5 years, or both, together with the costs of prosecution. Finally, note that apart from the pastor’s potential liability for violating Sarbanes-Oxley under these circumstances, the dismissed employee may be able to sue the pastor and church under state law for wrongful termination or some other theory of liability.

  33. state charitable accountability laws
  34. There has been much confusion regarding the application of the Sarbanes-Oxley Act to churches. Adding to the confusion are laws that have been enacted or proposed by some state legislatures.
  35. Survey of State Laws Proposed or Enacted after Sarbanes-Oxley
  36. Note: Several states have proposed laws to extend some of the Sarbanes-Oxley protections to nonprofit organizations. This table reviews the major proposals made in 2004 and 2005 and their current status. Other states undoubtedly will consider similar legislation in the future. Since this table provides only a summary of the relevant legislative proposals, and cannot account for future developments, it should not be relied upon without the advice of an attorney.
  37. AR SB 156 Amends the state charitable solicitation law to require charities soliciting funds to disclose their actual address to donors. Passed both houses, sent to governor. The law exempts most religious organizations. AZ SB 1066 Would have amended a state law regulating the solicitation of donations by charities by requiring charities to certify annually that at least 90% of their income is used for charitable purposes. Died in committee. Even if it had been enacted it would not have applied to members’ donations to churches. CA SB 1262 The “Charity Integrity Act ” applies several of the Sarbanes-Oxley requirements to nonprofit organizations. Some of the key provisions are summarized below.Requirements for charities with annual revenue of The “Charity Integrity Act ” applies several of the Sarbanes-Oxley requirements to nonprofit organizations. Some of the key provisions are summarized below.

    Requirements for charities with annual revenue of $2 million or more: (1) Prepare financial statements audited by an independent CPA using GAAP; (2) audited financial statements must be made available for inspection by the state attorney general and the public; (3) board of directors must appoint an audit committee (cannot include staff, CEO or CFO); (4) the audit committee must confer with the auditor to satisfy committee members that the financial affairs of the charity are in order, review the audit and decide whether to accept it, and approve non-audit services by the independent CPA.

    Requirements for charities regardless of revenue: (1) governing board or authorized committee must review and approve the compensation of the CEO and CFO to ensure that the payment is “just and reasonable”; (2) all trustees trust must review and approve any executive compensation to ensure it is “just and reasonable”; (3) commercial fundraisers must have written contracts with the charities for which they work; (4) several other requirements pertain to the use of professional fundraisers; (5) file articles of incorporation with state attorney general; (6) report to the state attorney general the assets held by the charity and how they are used.

    million or more: (1) Prepare financial statements audited by an independent CPA using GAAP; (2) audited financial statements must be made available for inspection by the state attorney general and the public; (3) board of directors must appoint an audit committee (cannot include staff, CEO or CFO); (4) the audit committee must confer with the auditor to satisfy committee members that the financial affairs of the charity are in order, review the audit and decide whether to accept it, and approve non-audit services by the independent CPA.Requirements for charities regardless of revenue: (1) governing board or authorized committee must review and approve the compensation of the CEO and CFO to ensure that the payment is “just and reasonable”; (2) all trustees trust must review and approve any executive compensation to ensure it is “just and reasonable”; (3) commercial fundraisers must have written contracts with the charities for which they work; (4) several other requirements pertain to the use of professional fundraisers; (5) file articles of incorporation with state attorney general; (6) report to the state attorney general the assets held by the charity and how they are used.

    Signed into law in September of 2004. The Act specifies that “the filing, registration, and reporting provisions of this article do not apply to … any religious corporation or organization that holds property for religious purposes, or to any officer, director, or trustee thereof who holds property for like purposes … or to an unincorporated association organized and operated primarily as a religious organization.” CO SB 205 Charities required to register with the state pursuant to the charitable solicitation law must disclose name and address of any paid solicitor. Modifies registration requirements for professional fundraising consultants to include information on their business entity. Passed both houses. The state charitable solicitation law exempts religious organizations that do not file Form 990 with the IRS. CT SB 946 Amends the state Solicitation of Charitable Funds Act by requiring the annual filing of audited financial statements with the state (for charities with revenues exceeding 0,000). Passed in the senate; being considered by the house. The Solicitation of Charitable Funds Act exempts religious organizations from registration. HI HB 2363 Authorizes the state attorney general to remove any officer or director of a nonprofit corporation for fraudulent or dishonest conduct, gross abuse of authority or discretion, or breach of a fiduciary duty. Signed into law in 2004. IA SB 2274 The Revised Nonprofit Corporation Act enacted, effective July 1, 2005. This law contains several provisions that pertain to the standards and fiduciary duties of officers and directors. Incorporated religious organizations are subject to this new law. MI SB 454 Would significantly increase the punishment for embezzlement of any employee or officer of a nonprofit organization. Referred to committee. No exemption for religious organizations. MN SB 948 Any charity receiving state funds must disclose to the attorney general the compensation paid to the highest-paid three officers or employees. Referred to committee. No exemption for religious organizations. NJ HB 1445 Would make changes to the Charitable Registration and Investigation Act. Referred to committee. The Act exempts most religious organizations. NY SB 5142 Would require nonprofit corporations to have an appraisal performed on property before they may sell the property; requires court permission to sell a property at an amount lower than its appraisal value; creates a rebuttable presumption that the sale of property to an officer, director, or employee of the corporation is not in the best interests of the corporation. Referred to committee. Provides additional protections against financial fraud and other abuses by the officers of not-for-profit corporations; prohibits self-dealing between an officer or director and such corporation in certain cases. Referred to committee. PA SB 210 Amends the Solicitation of Funds for Charitable Purposes Act to require audited financial statements for charities with annual contributions above a specified limit. Referred to committee. The Act exempts most religious organizations. TX SB 1215 Amends the nonprofit corporation law to require charities with annual revenues of 0,000 or more to have their financial statements audited by an independent CPA firm in accordance with generally accepted accounting principles; a “review” by an independent CPA is required for a charitable corporation with annual revenues of 0,000 or more but less than 0,000. Referred to committee. Most religious organizations are exempt from this provision.
  38. © Copyright 2005 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m46 m85 c0505
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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