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Three Things That Are Making Regulators Buzz

Changes in the way nonprofits operate are a topic of discussion but a number of underlying legal issues and compliance considerations seem to be perpetual. Internal operational issues are of great interest to regulators of nonprofits, but are also pertinent to non-regulated nonprofit entities. Here are three hot-item areas to consider:

  1. Governance and Compliance: One legal problem that nonprofits continue to face is failure of boards to properly implement approved compliance policies. Failure of organizations to follow corporate polices can lead to improper benefits to insiders and scrutiny of insider transactions by the IRS or charity regulators. More importantly, failure to insure policies are being followed can possibly lead to fraud and embezzlement that will damage the nonprofit’s finances as well as their reputation. Board members should meet regularly in-person and continually review policies to ensure they are within applicable laws and best practices. Taking the time to ensure policies are being properly implemented is also imperative.
  2. Scrutiny of Fundraising: State charity regulators are increasingly seeking ways to prosecute charities and their fundraisers for charitable solicitation fraud. Investigations of charities can result of high fundraising costs such as hiring a professional fundraiser to solicit charitable contributions from the public. Fraud can arise if funds are spent on programs other than what was indicated to the public. Organizations should carefully review their fundraising practices including their contract, registrations filings, and solicitation materials. Some solicitations can also create unintentional donor-restricted gifts.
  3. Social enterprise activities: Many charitable organizations are developing new service offerings and are also selling goods or services in addition to fee for services and soliciting contributions. Such activities may lead to questions regarding unrelated business income tax (UBIT). Revenue-generating activities can create risk to an organization; thus, some organizations create wholly-owned subsidiaries to shield themselves from these risks. Any changes in funding sources and legal structure should be carefully structured to avoid jeopardizing the nonprofit’s tax-exempt status. Benefit corporations can exist to provide some protections for boards seeking to balance financial and non-financial interests in their decision-making.

GBQ can help review internal controls and compliance with board policies as well as answer any questions you may have. Ask your engagement team during your upcoming engagement, or contact them directly.

Article written by
Aaron Gerten, CPA
Assurance Senior