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Nonprofit Reform Debate Heats Up

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The leaders of New York's not-for-profit community continue to react to proposals by Eliot Spitzer, the state attorney general, regarding nonprofit accountability reforms.

In a January speech to a group of CPAs, Spitzer said he was drafting state legislation paralleling the federal Sarbanes-Oxley Act, which Congress passed last year in the wake of nationwide accounting scandals. Spitzer's legislation would require many New York-based nonprofits to certify financial statements, create audit committees to scrutinize accounting practices, and ensure "a sufficient number of independent board members."

That's enough for Norma Munn, chairperson of the New York City Arts Coalition, to be wary. Depending on how the legislation is written, she says, arts groups could have difficulty complying.

"As I understand them, the changes require nonprofits to create audit committees to certify that its internal processes and procedures are being carried out in an honest, non-fraudulent manner. What Spitzer may have in mind by using a threshold—say, $250,000 in annual income—is to shield small arts organizations from some of this because of the costs and time involved. The problem is mid-size arts groups: Some are too large to fall below any income threshold, yet aren't large enough to cope in a sophisticated auditing environment. Also, I can almost guarantee there isn't any nonprofit liability insurance that would cover an audit committee functioning the way Spitzer would want it to."

Nonprofit liability insurance, she says, is key to a successful nonprofit. "Let's say I sit on the board of a theatre. This is insurance to protect me against being sued for some accident or misbehavior. All of which is contingent on my own behavior—if something happens but I look the other way, that's negligence."

As for "independent board members," Munn is among those questioning how Spitzer defines the term. "Most nonprofit board members think it's important to have good processes and no conflicts of interest. So to me, board members can still be independent and critical of an organization. But this proposal seems to go beyond that. My honest opinion is that Spitzer is asking for an audit committee to act like an outside police element—asking people to hunt for problems. Given the fact that it's following the corporate scandals, that's bound to be the impression. In the end, I think everyone may underestimate how difficult compliance may be."

Jon Small Offers Views

Holding a more measured opinion is Jon Small, president of the Nonprofit Coordinating Committee, a 1,100-member group that counts the Actors' Fund and the Alliance of Resident Theatres/New York (A.R.T./NY) among its constituents. Its recent newsletter stated that since "many corporate board members also serve on the boards of nonprofits, it is inevitable that nonprofit board members will soon be focusing more intently on nonprofit accountability as a result of their experiences in complying with the new law at for-profit corporations."

In addition, says Small, Spitzer is only proposing to enshrine into law what's already considered best practices for nonprofits. "Every nonprofit should have a committee that meets and finds out what the issues are, if any, with the auditor, so I don't think the audit committee requirement is inherently bad—I think it's a good thing."

In the business world, he adds, "an 'independent' board member usually means someone who isn't doing business with the company. In nonprofits, most board members aren't doing business with the company either. So I think you can say most nonprofit board members are 'independent.' " He says he'd be "surprised" if nonprofit board members who make financial contributions—as many do—wouldn't be considered independent.

Finally, Small is unconcerned by the fact that Spitzer has yet to reach out to industry leaders to shape the bill. Last month, Back Stage contacted Ben Cameron, executive director of Theatre Communications Group, and Virginia Louloudes, executive director of A.R.T./NY, and both said they were unaware of the proposals. "Earlier input is highly desirable," Small says, "but it's also possible to have material input once legislation has been written."

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