SARBANES FOR NONPROFITS

Nonprofits could be in for some of the same headaches inspired by Sarbanes-Oxley accounting reform.

Orange County's nonprofits are giving mixed

Dubbed the "Sarbanes-Oxley for nonprofits," Senate Bill 1262 was sponsored by state Sen. Byron Sher, D-Stanford, and backed by Attorney General Bill Lockyer.

Gov. Arnold Schwarzenegger signed the bill in September with a caveat. In a letter to the state Senate, Schwarzenegger said he'd recommend reworking the law if it creates too much bureaucracy.

The goal of SB 1262: help prevent nonprofit fraud.

The law requires nonprofits to hire independent certified public accountants for annual audits, which must be made available to the public. The law also requires nonprofits to create audit and finance committees, which must be separate. The audit requirements apply only to nonprofits with $2 million or more in yearly revenue.

The law has some similarity to the federal Sarbanes-Oxley Act of 2002, which was created in the wake of accounting scandals at public companies such as Enron Corp.

Starting with the largest public companies, Sarbanes-Oxley requires companies to publicly detail their auditing processes, hire independent auditors and have chief executives and directors sign off on a company's financials-potentially making them liable for corporate fraud.

Two high-profile nonprofit scandals last year spurred lawmakers into action. San Francisco-based Pipe Vine Inc. siphoned millions of dollars of donations into its own coffers.

Pipe Vine raised funds on behalf of companies such as Bank of America Corp. and Clorox Co., as well as for the United Way, which directs donations to other charities.

In another case, Aaron Tonken & Associates held Hollywood galas to raise money for phony charities. Lockyer's office shut the company down, with Aaron Tonken sentenced to jail.

Under the new law, commercial fund-raisers such as Tonken and Pipe Vine would have to register with the attorney general's office and have a written contract with nonprofits they're raising money for.

"Everyone's intent-the Legislature, the governor-was not to make things more difficult for legitimate charities," said Michael Wagschal, senior philanthropic consultant for the Merrill Lynch Center for Philanthropy and Nonprofit Management. "But it is a challenge to capture the bad guys without hurting the good guys."

Orange County has the third most nonprofits in the state, after Los Angeles and San Diego, according to the California Association of Nonprofits.

Some 7% of the state's 125,547 exempt nonprofits are based in OC.

Shelly Hoss, president of Irvine-based Orange County Community Foundation, said the Nonprofit Integrity Act is a "a mixed blessing."

It stands to benefit givers, charities and government if it increases accountability, Hoss said. But most of the legitimate nonprofits already are accountable, she said.

Orange County Community Foundation, which disperses donated money to charities, already is in compliance with the law for the most part, according to Hoss.

The foundation may have to change the makeup of its audit committee, she said. Audit committees must be free of nonprofit staff, including chief executives and chief financial officers.

Like their public company counterparts, it's the smaller nonprofits that may have trouble complying with the law.

"They may find some of the requirements onerous," Hoss said.

One such nonprofit is Santa Ana's Mary's Shelter, a home for pregnant teens. The center's executive director, Barbara Nelson, said the law is burdensome and unnecessary.

The nonprofit hasn't reached the $2 million mark in revenue, but it could in the next few years, Nelson said. Its annual revenue is about $1.3 million.

Nelson said the law is the result of a "few rotten eggs" and "a knee-jerk reaction" by lawmakers that has spoiled it for all nonprofits. Nelson said that the legal system successfully has prosecuted nonprofits that cheat.

"There's no need for the extra regulations," she said.

Nelson argues that the money she'd spend to comply with the law would be better spent on the people that the charity helps. It costs the shelter $7,000 per teen per month, she said.

"I'm barely breaking even on a good year," she said. "I can't afford an accountant."

To get up to speed on the new law, Merrill Lynch's Wagschal recommends nonprofits read opinion papers put out by attorneys and associations such as the California Association of Nonprofits, which lobbied against the bill.

The attorney general's office also is hosting information sessions in the next two months.

Wagschal notes that many of the law's details haven't gotten much notice. One such detail could be good news for some: Unlike donations, government grant money doesn't apply to the $2 million threshold.

Many of Wagschal's family foundation clients will need to start doing audits or change from a corporate structure into a trust, he said.

Another challenge will be making the audits public, which likely will be done via the Internet, he said.

The rest of the law should be easier to comply with, he said.

"The audit is the most onerous thing in here," Wagschal said

Hank Paris, executive director of Santa Ana-based Child Guidance Center is taking the law in stride. Child Guidance Center, which provides child and substance abuse counseling to families and children, has $4.6 million in annual revenue.

The nonprofit plans to tap its volunteer community for accounting requirements.

"We're not intimidated by it," Paris said. "We have a lot of those things in place already."