Attorney General Lockyer Unveils Reforms to Toughen Nonprofit Accountability, Fundraiser Controls Audit, Disclosure and Compensation Provisions Seek to Protect Charities and Donors
February 12, 2004
04-018
FOR IMMEDIATE RELEASE
(916) 324-5500
(SACRAMENTO) – Attorney General Bill Lockyer today unveiled
legislative reforms to strengthen accountability and oversight of
nonprofit organizations and commercial fundraisers by setting new
audit requirements, strengthening governing boards’ control
over executive compensation and solicitation campaigns, and barring
unapproved fundraising payments to celebrities.
“The vast majority of charities provide valuable, needed
services to our communities and do so in a manner that complies
with the law and basic principles of good governance and sound financial
management,” said Lockyer. “But our own investigations
and developments across the country show that bad actors are giving
nonprofits a black eye. These reforms aim to help charities and
the people they serve, and shore up donor confidence in charitable
giving.”
Lockyer’s
reform package will be carried in the Legislature
by Sen. Byron Sher, D-Stanford. “I’m extremely pleased
to have a lawmaker of Senator Sher’s stature shepherd this
important legislation,” said Lockyer.
The reforms would require large nonprofits with gross revenue of
$500,000 or more in any fiscal year to prepare annual financial
statements audited by an independent certified public accountant.
Charities would have to make the audited financial statements available
to the Attorney General’s Office and members of the public.
Audited financial statements prepared independent of the requirements
imposed by Lockyer’s proposal also would have to be made available
to the public and the Attorney General’s Office.
Under the reforms, nonprofit corporations that meet the $500,000
threshold would have to establish and maintain independent audit
committees, a provision similar to a requirement imposed on for-profit
companies by the federal Sarbanes-Oxley Act. Members of the nonprofit’s
finance committee and staff – including the president or chief
executive officer (CEO), and treasurer or chief financial officer
(CFO) – would be prohibited from serving on the audit committee.
“By providing more accurate, detailed and useful information
about nonprofits’ finances, independent audits will enhance
the ability of governing boards and the Attorney General’s
Office to assess charities’ operations and flag potential
problems,” said Lockyer.
A second major aspect of the package strengthens regulation of commercial
solicitation campaigns conducted on behalf of nonprofits. These provisions
largely grew out of Lockyer’s investigation of Hollywood fundraiser
Aaron Tonken, who failed to register with the Attorney General’s
Office as required by law.
Lockyer sued Tonken in March 2003, alleging he defrauded charities
and their donors, diverted donations to bank accounts he controlled
and refused to account for more than $1.5 million in contributions
to six charitable events he agreed to produce. Lockyer’s reforms
would require commercial fundraisers, within five days of receiving
donations, either to deposit the funds in a bank account controlled
by the charity, or give the money directly to the charity.
The Attorney General’s investigation of Tonken also revealed
he provided celebrities millions of dollars in cash, gifts and travel
to appear at charity fundraising events. The reforms would prohibit
such payments without prior, written approval from the nonprofit’s
governing board or CEO.
Lockyer’s package also would bar nonprofits from hiring commercial
fundraisers who are not registered with the Attorney General’s
Office. Additionally, charities and commercial fundraisers would
have to enter written contracts for each solicitation campaign.
The contracts, among other provisions, would have to specify the
charitable purpose of the campaign, the fundraiser’s fee,
the restrictions on payments to celebrities and the requirement
that donations be turned over to the charity or its controlled bank
account within five days. To aid enforcement, the contract would
have to be submitted to the Attorney General’s Office at least
10 working days prior to the start of the campaign.
The reforms also would require commercial fundraisers and nonprofits
to provide more detailed disclosure to potential donors about fees
paid to commercial fundraisers. If asked, the commercial fundraiser
or charity would have to disclose: the amount of the paid solicitor’s
fixed fee, and what percentage of the total donations the fee would
represent; or the fundraiser’s percentage fee and how much
of the total donations the charity would retain after subtracting
the fee.
Under other reforms in the package, people soliciting money for
charitable purposes would be barred from engaging in certain deceptive
acts. The prohibited conduct would include using a symbol associated
with a nonprofit without permission or using a name so similar to
that of another organization that it would deceive donors. Additionally,
solicitors could not say that tickets for an event will be donated
for use by others unless a charitable organization had agreed to
accept a certain amount of tickets. The total number of donated
tickets could not exceed the lesser of the total commitments received
from charities or the capacity of the event site.
Revelations of excessive compensation and benefits provided executives
of foundations and other charitable organizations spurred another
proposal in the reform plan. Under this provision, the governing
boards of foundations and other nonprofit entities would have to
review and approve at least annually the compensation and benefits
paid to the president or CEO, and the treasurer or CFO.
Lockyer stressed the objective of his reform plan was to help nonprofits.
“Everybody wins – charities, donors and the community
– if nonprofits and fundraisers operate lawfully and soundly,
and are subject to effective oversight,” said Lockyer. “These
reforms help achieve those goals.”
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