The Nonprofit Revitalization Act of 2013 (“NPRA”) introduced a new audit committee requirement for many New York nonprofits. The compliance deadline was the date the NPRA went into effect, July 1, 2014. The New York State Charities Bureau recently issued guidance to nonprofits that may be facing timing issues as they designate an audit committee for the first time.
The NPRA made significant changes to the New York Not-For-Profit Corporation Law. It reduced many burdens on nonprofits and introduced enhanced governance and oversight requirements. For the first time, many nonprofits must designate an audit committee consisting of independent directors and adopt policies on conflicts of interest, related party transactions and whistleblowers.
Most of the NPRA’s provisions went into effect on July 1, 2014. Compliance with the new audit committee requirements, however, may be a lengthy process for some nonprofits. They may need to determine which directors are “independent,” recruit new directors to meet the independence requirements, take necessary corporate action to amend their bylaws and committee structure, develop new board procedures and engage an appropriate certified public accountant.
Recognizing these timing constraints, on February 24, 2015 the New York State Charities Bureau issued Guidance Document 2015-1, V.1.0 addressing some of the timing issues faced by nonprofits following the introduction of the new audit committee requirements enacted by the NPRA. See http://www.charitiesnys.com/pdfs/Audit_Committees.pdf
Under the NPRA, nonprofit corporations that are required to file an independent certified public accountant’s audit report must now designate an audit committee consisting solely of independent directors, or the independent directors on its board must perform the duties of an audit committee. The audit committee, or independent directors on the board, must oversee the corporation’s accounting and financial reporting processes and the audit of the financial statements, annually retain or renew the retention of an independent certified public accountant, and upon completion of the audit, review the results of the audit and any related management letter with the independent auditor.
For reporting nonprofit corporations that have annual revenues in excess of $1,000,000, additional audit committee oversight requirements apply. These include (i) reviewing with the independent auditor the scope and planning of the audit before it begins, (ii) reviewing and discussing with the auditor when the audit is completed any material risks and weaknesses in internal controls identified by the auditor, any restrictions on the scope of the auditor’s activities or access to requested information, any significant disagreements between the auditor and management, and the adequacy of the corporation’s accounting and financial reporting processes, and (iii) annually reviewing the performance and independence of the auditor.
The Charities Bureau in its guidance recognizes that “for some nonprofits the independent director requirement represents a substantial change from existing practices” requiring time to put in place new board members. While it appears that the Charities Bureau does not expect all requisite independent directors to be in place at this time, it states that “it is important that nonprofits have begun the process for complying with the NPRA by ensuring that, as of the new election or selection, the members of the Audit Committee or members of the board assuming that function are independent directors.”
The Charities Bureau also recognizes that audit committees and boards may need assistance from outside individuals with accounting and financial expertise. There is no requirement in the NPRA that committee members have this expertise, so input from outsiders is permissible so long as formal deliberation and voting is limited to the independent directors, and members of management are not also involved in performing the audit committee’s duties.
In recognizing that nonprofits may need time to comply with the new audit committee requirements, the Charities Bureau states: “Organizations that are not yet in compliance with these requirements should have a written plan with a timetable to achieve compliance. In evaluating a nonprofit’s compliance with the audit oversight provisions of the NPRA, the Charities Bureau will consider whether it has made timely and good faith efforts to make any necessary changes to its board structure and implement procedures to comply with the new requirements.”
This release only provides summary information. Nonprofits subject to compliance with the audit committee and other requirements of the NPRA should seek advice from a qualified attorney or accountant.
Clapp Kelner PLLC is a boutique corporate law firm based in New York City with extensive experience counseling boards, committees and management on a wide range of transactional, compliance and governance issues. Our experience covers listed companies, public authorities and nonprofits. For further information, see www.clappkelner.com
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