By Lauren Haverlock
In the middle of this unusually seasonable California winter, a little heat might be welcome. But we would probably prefer that it come from somewhere besides the California Attorney General.
As of Jan. 1, 2016, the AG’s Office finalized amendments to regulations that clarify the specific actions they can undertake in enforcing the state’s charitable regulations. These charitable regulations, known as the Supervision of Trustees and Fundraisers for Charitable Purposes Act, detail the actions certain organizations that operate or fundraise in California (most notably charities, but also commercial fundraisers, commercial co-ventures, and fundraising counsel) must follow to be compliant with the California Attorney General, regardless of state of legal domicile. This area of the California Government Code, previously amended by the California Nonprofit Integrity Act, includes details of annual reporting requirements, guidelines for financial statement audits, and (now) clarifications in the AG’s Office’s enforcement powers.
The AG’s Office, via its final regulation responses reiterated that the changes it has made are mostly clarifications to existing law and not new powers bestowed upon the Attorney General. But the regulations have instilled a bit of fear into California’s nonprofit sector. Some examples of the clarifications include:
- Registration with the California Attorney General can be refused, suspended or revoked for misuse of charitable funds, failure to prepare annual financial statements, reporting misleading statements on filed reports, or for the very broad reason of failure to comply with Standards of Conduct for nonprofit corporations.
- Nonprofits are required to report revocation of exemption status by the IRS or FTB within 10 days of being informed of such revocation. In these cases, registration will be automatically suspended and could be revoked due to adverse action by a government agency.
- A registration for a charity will be automatically suspended for additional reasons, including, but not limited to, suspension of corporate status and failure to file a report for three years in a row.
- When suspended or revoked or not in good standing with the Attorney General, an organization cannot expend any charitable funds without approval from the AG’s Office. If an organization does expend funds when its exempt status is suspended or revoked, the AG’s Office can hold the members of the board or the person responsible personally liable for the amount expended and/or undertake civil actions against the individuals.
- Within 30 days of revocation of registration, the organization needs to provide an accounting of all of its charitable assets for a time period of at least 180 days prior to its registration but possibly for as long as 10 years prior.
- The AG’s Office has the power to direct a suspended or revoked registrant to transfer its charitable assets to another organization or into a blocked bank account.
- The Attorney General can issue a cease and desist order (to operate as a charitable organization in California) for any violations of the regulation, including a failure to file a complete financial report or operating when an organization is suspended or revoked. Violation of a cease and desist order could result in a contempt sanction for violators.
- Penalties can be assessed (not to exceed $1,000) and registration can be suspended for each act of omission or violation of the Act. A 30-day notice will be issued before the penalties begin accruing
One concern with these new rules is the timeframe given for organizations to correct their actions and avoid sanctions. The AG’s Office has acknowledged this, concluding that their notices, which generally provide 30 days for organizations to comply with requirements, provide enough of a buffer for exempt organizations to correct their actions, thus eliminating concerns about penalties, revocation, or personal liability. According to the Attorney General, mailing information to the address on record satisfies the requirement to properly serve notice of action to an organization, so it is very important that organizations that are registered always provide updated contact information to the AG’s Office.
If an organization doesn’t address or correct their actions before the given deadline, for whatever reason, harsh restrictions are placed on the operations and activities of the organizations. Many nonprofits are run by volunteer boards, where turnover can be high and the administrative costs are low, so luxuries like continuity, professional advice, office space, or paid employees make tracking the various deadlines and filings difficult. As you can see in the public commentary, many are concerned that these regulations could also cause a mass exodus of volunteer board members because of a perception of increased personal liability and risk that could result from innocent administrative mistakes.
The Attorney General has reiterated that the law is not intended to punish the innocent or the unknowing, but to give them teeth to demand accountability from the egregious violators. Unfortunately, the verbiage of the law does not reflect that position.
If the updated regulations are simply the baring of the Attorney General’s teeth, we can already see some evidence of their intentions to bite. At the end of 2015, the AG’s Office posted notices of complaints filed against two separate charities, Cars for Causes and People’s Choice Charities. When reading through these complaints, we are able to see evidence that the California Attorney General is not only holding charities accountable for proper usage of their charitable assets, but it is also holding individuals personally responsible.
In People v. People’s Choice Charity, the named defendants are the charity itself, the founder and president, and the board of directors. In People v. Cars for Causes, the named defendants are not only the charity and the charity’s insiders (president, executive director, compensated executives, and all directors and officers, past and present), but also the CPA firm in charge of its audit and tax filings, the partner in charge of the engagement at that CPA firm, and an outsourced professional fundraising company.
The silver lining, if any, of these clarified rules and processes is that we have been able to gain a little bit of insight from the California Attorney General through its commentary and responses to public concerns. The AG’s Office is adamant that this will not change how it operates nor will it use its new teeth to gnaw on smaller and well-meaning nonprofits. These new rules are intended to help ensure that abusers of charitable funds are held accountable for misleading the donating public. But in the meantime, California is holding the charitable sector’s feet to the fire… and the burn is being felt intensely in the industry.
Lauren Haverlock, (Tax Principal, Green Hasson Janks)
Lauren Haverlock has over 11 years of experience in public accounting and has focused in the exempt organization area for the last seven years of her career. She mainly focuses on preparing, reviewing, and consulting on federal and state returns for public charities, private foundations, and other exempt organizations. Her experience in this area varies from large organizations with over $100 million in assets to smaller entities. Lauren holds a BS in Accounting from California State University, Long Beach and a Masters in Science, Taxation from the University of Southern California.