New Nonprofit Law Audit Committee Requirements Apply To More Than Just New York-Based Nonprofit Organizations

At the end of 2013, the state of New York enacted substantial revisions to the New York not-for-profit statute, resulting in a major overhaul of New York laws applicable to nonprofit organizations.

One particular section of the new New York nonprofit statute, relating to audit committees and required functions of audit committees, has broader coverage than simply regulating nonprofit organizations "incorporated" or "based" in New York. Under the new law, which is now in effect, out-of-state nonprofit organizations that are required to file independent accountant's audit reports with the New York attorney general -- which includes out-of-state nonprofit organizations that (i) are registered in New York to engage in charitable solicitations and (ii) have annual gross revenues in excess of specified "threshold" amounts -- are required to meet significant new audit oversight requirements.

For example, those out-of-state nonprofit organizations which are covered by the new New York statute must meet the following new audit committee requirements:

• Either the full board of trustees (acting solely through "independent" trustees on the board) or an appointed "audit committee" comprised entirely of independent trustees is required to oversee the audit and financial reporting function of the nonprofit organization.
• The required independent audit committee (or independent board trustees performing these functions) also is responsible for reviewing with the outside auditor the plan and scope of the audit before audit commencement, reviewing with the outside auditor any material risks or weaknesses in internal control which have been identified by the outside auditor, reviewing any restrictions on the scope of the outside auditor's work as well as any significant disagreements between management and the outside auditor, and annually reviewing the performance and independence of the outside auditor.
• The term "independent" trustee is defined in the statute and includes, among other requirements, that such person not be an employee of or have a substantial financial interest in, and not have a relative who is an officer of or has a substantial financial interest in, an entity that has made payments to or received payments from the nonprofit organization or an affiliate in an amount that, in any of the past three fiscal years, exceeds the lesser of $25,000 or 2 percent of such other entity's consolidated gross revenues.

The definition of "independent" trustee can be problematic for many nonprofit organizations, particularly those that provide opportunities for companies with which their trustees are associated to host events at the nonprofit's facilities or that otherwise provide similar business opportunities, for fees and other payments, to take advantage of the services, facilities or products of that nonprofit organization. Although it would appear that normal charitable contributions are not intended to be included within the calculation of the $25,000/2 percent of gross revenues standard, many nonprofits provide business opportunities to outside entities with which trustees are officers or are otherwise employed (or have a family member in an officer position). Ensuring that the required audit functions outlined in the New York statute are performed only by trustees meeting the independent standards may require planning, such as the use of subcommittees for particular audit committee functions.

Further, it will be important for nonprofit organizations which are based or incorporated outside of New York to determine whether they are subject to this new statute. If an organization is subject to this new New York law, the organization should undertake immediately to satisfy its audit and audit governance requirements. It can be expected that New York state, one way or the other, will ensure that out-of-state organizations soliciting charitable contributions within New York State are in full compliance with these requirements.

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