Tuesday, August 17, 2010

Lessons for Charity Boards from AG Audit of CSU Stanislaus Foundation

In April of this year, the California Attorney General launched an investigation into the California State University Stanislaus Foundation. The probe followed upon the Foundation's refusal to turn over records to Senator Leland Yee that he requested under the California Public Records Act. Lee began his inquest after it was reported that the Foundation has engaged Sarah Palin as an fundraising event speaker. Since the Foundation is not an entity covered by the CPRA (Yee's pending legislation may change this), it was not required to provide records to Senator Lee, and so, thwarted by the Foundation, he requested the Attorney General investigate it.  Under the broad authority given to the AG under California law for the oversight of organizations holding charitable assets, the AG sought to determine whether the foundation, which has assets of more than $20 million, has spent its money to benefit CSU Stanislaus, as it has promised donors, the university and the public.

Based upon the limited review conducted, the AG found no diversion of charitable assets by the Foundation. Nevertheless, the Closing Letter (pdf) by Belinda Johns, Senior Assistant AG to the Foundation's counsel points out that the Board did not always exercise adequate fiscal oversight.  This Closing Letter is instructive for understanding what the duties of directors of nonprofit charitable organizations are with regard to adequate fiscal oversight, especially under California law.

The underlying principle of law is that the Board of Directors of an organization holding charitable assets in California has the ultimate responsibility for those assets and must manage and protect them from being diverted from the charitable purposes of the organization or, if applicable, the specific purposes for which the assets were given.  The Board must see to the "protection of charitable assets" under its control. As the AG's letter points out, among other things, that means that the Board is responsible for:
  • Comparing and analyzing revenues and expenses on a periodic basis to determine if the organization is meeting its budgetary goals.
  • Reconciling endowment accounts and correctly identifying restricted and unrestricted funds. Board members may be personally liable for restricted funds which are incorrectly released.
  • Reviewing budgets for special events. "Assessing the effectiveness of a fundraising event is essential to avoid waste of charitable assets."
  • Managing fundraising activities administered by outside groups. "The board must exercise control over the representations made by fundraisers in order to assure those representations are accurate and to determine whether they include language that may restrict donations for a specific purpose."
Johns also pointed out that the Board "does not appear to fully understand its duties and responsibilities under applicable law." Of how many other charitable organizations could this also be said? In particular, these duties and responsibilities are found in the following statues:
Note that these are all California state laws controlling nonprofit organizations, and not the federal tax code. While the IRS is an important regulator of charities, state laws have traditionally determined most of the governance for nonprofit organizations and the safeguards on charitable assets.

As part of the closing of the investigation, the Board of CSU Stanislaus Foundation agreed to undertake "'board training' to assure they fully understand their fiduciary duties" under these laws.  Boards of other organizations that find themselves not fully understanding their fiduciary duties could probably do no better than to initiate a similar board training by reviewing the Closing Letter and discussing how and where they can improve their management and protection of charitable assets.

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