Edward Charles Blog

Is SOX Right for Nonprofits?

Following the Enron and Worldcom scandals and evidence that manipulation of financial information was done to deceive investors and creditors the government determined to rebuild public trust in the corporate community in the wake of corporate and accounting scandals developed legislation to protect the investing community. The federal legislation that has become known as the Sarbanes-Oxley Act (SOX) requires publicly traded companies conform to new standards in financial transactions and audit procedures.

Surprisingly fraud is less likely for nonprofits than for-profit companies. Approximately 14% of nonprofits will experience fraud according to Gibelman and Gelman’s (2001, 2002) study. The average fraud cost to a nonprofit is $100,821 per occurrence.

Smaller nonprofits (those under $100,000 in revenue) lost on average an entire year’s revenue when fraud occurred whereas slightly larger organizations (less than $1 million in revenue) lost nearly 50% of their revenue when fraud occurred.

Los Angeles, CA – May 5th, 2009 – The nonprofit Edward Charles Foundation for Dissolving Charities was recently formed to assist dissolving charities recycle their assets back into the community. The Foundation is the first of its kind in the nation to offer this unique service.

Experts predict that one in 13 nonprofits could close their doors in 2009. Paul Light, professor of public service at New York University, said in the March 3, 2009 Philanthropy Journal, “About 100,000 out of the nation’s 1.3 million nonprofit organizations could go under this year due to the credit crisis and funding cuts.”

The Edward Charles Foundation was formed “to take the burden of dissolution off the shoulders of a nonprofit’s board of directors,” announced Foundation CEO Robert McKim.

“We seek to become the legal source to unwind a nonprofit organization, should that be required; and the firm of choice for nonprofits, and their lawyers and accountants. We work in an environment of transparency, honest ethics and the highest integrity,” he added.

The Foundation has developed a process that frees the board of directors from the work locating, negotiating and placing the assets of a dissolving nonprofit with another charity.

Many charities that are dissolving have assets which they are required by law to give to another charity, explained McKim. The assets of a nonprofit belong to the public and, therefore, must be recycled back to other public charities.

This is a time- and energy-consuming process for the board members and often is futile. Frequently, a dissolving charity is unable to find a nonprofit to receive its assets; or potential receiving charities are reluctant to accept assets from another nonprofit for no good reason. These phenomena make the dissolution of nonprofits impossible.

The Edward Charles Foundation will voluntarily receive the assets on behalf of the dissolving charity and at no cost or expense to the dissolving charity find a “happy home” for the assets – thus, relieving the dissolving charity and its board members of their financial and regulatory responsibility. The Foundation’s process for the effective liquation is to identify charities that can use equipment, vehicles or other administrative equipment and transfer the assets to them.

The Foundation provides a safe and temporary haven to accept and redistribute nonprofit assets. In concert with the trust department of a major financial institution, the dissolving charity’s assets will be placed in trust and will be redistributed to the assigned charity.

About the Foundation

The Edward Charles Foundation was established by Kent Seton, Esq., COO, and Robert McKim, CEO, to help recycle the assets of dissolving nonprofit organizations back into the community. Seton is an experienced attorney who for more than nine years has been the managing partner and founder of a boutique Beverly Hills law firm that structures the initial legal formalities in launching nonprofit organizations. McKim, CISA, CIPP is a for-profit executive and 25-year marketing veteran, who manages the day-to-day involvement of the Foundation.

Edward Charles Foundation is a nonprofit corporation organized and operated exclusively for educational and charitable purposes. “Specifically, this organization has been formed to provide three nonprofit services: educate the public on subjects useful to individuals and beneficial to the community; provide relief to the poor, distressed and underprivileged; provide the legal expertise and processes for charities that need to dissolve. Program administration will help the charities prepare to take advantage of these nonprofit services,” said McKim.

The Edward Charles Foundation can be found at www.EdwardCharlesFoundation.org or at 1880 Century Park East, Suite 315, Los Angeles, CA 90067; telephone 310.930.0066, facsimile 310.845.9094.

“If economic conditions continue to deteriorate, more and more nonprofit leaders will likely consider the [merger and acquisition] option,” said William Foster, co-author of the Bridgespan report. “But our study shows that there has never been a lack of nonprofits considering M&A when under financial distress.”

Although a merger can be a long, complicated, and emotional process for a nonprofit resulting in the loss of leadership from one or both of the original groups, in the long run they can result in financial stability and save organizations from having to close outright. Indeed, mergers are becoming an increasingly attractive option for many nonprofits that are struggling with reduced staffing and resources as a result of the economic crisis. According to a recent Bridgespan Group report, 20 percent of responding nonprofits said mergers could be a solution to their financial difficulties.

Robert McKim, CEO of Edward Charles Institute for Nonprofit Mergers and Acquisitions states “we have never been as busy with many inquiries on how the process of mergers works.” We have developed a process for quick and effective mergers that starts with a comprehensive Feasibility Study that match compatibility of both parties. “It is better to find out if there are compatibility issues before the marriage because a divorce or dissolution is painful.”

No places have been harder hit in this economic crisis than New York City and Detroit. “The financial crisis in each of these markets is making it extremely difficult for nonprofits to keep their doors open,” states, Kent Seton, from Edward Charles Foundation.  “New York and Detroit cities are attempting to help out by using collective foundations and donor power to create emergency funds.”

The Ford Motor Company, financially the strongest of Detroit’s Big Three automakers, expects its giving to fall by about 40 percent from last year’s roughly $35 million, about $12 million of which went to organizations here. “We’re not making any long-term commitments at this time, nothing for capital campaigns, no new exhibitions with cultural partners,” said James G. Vella, president of the Ford Motor Company Fund. By Stephanie Strom, New York Times, March 25, 2009

The disappearance of donations from car makers, their suppliers and dealers have dealt a particularly hard hit to Detroit’s arts organizations, which Douglas Bitonti Stewart, the executive director of the Max M. and Marjorie S. Fisher Foundation, called “the venerable and the vulnerable.” The opera canceled one show, and question marks hang over performances and exhibits at other organizations.

Recently, more than a dozen local foundations gathered to discuss whether to pool their money into an emergency fund for struggling charities and to share ideas about how to use resources limited by the stock market’s plunge. A year ago, 10 of them pledged a total of $100 million over eight years to help restructure Detroit’s economy to attract skilled workers and fill its empty houses and storefronts.

According to Stephanie Strom, New York Times, Financial Safety Net of Nonprofit Organization Is Fraying; Survey finds, Published: March 25, 2009 to a survey of some 900 nonprofit leaders around the country.

Only 12 percent of those organizations expect to end the year with an operating surplus, compared with 40 percent who ended their most recent fiscal years with money on hand, according to the survey by the Nonprofit Finance Fund, a charity that provides loans and other financial services to nonprofit groups.

Almost a third said they did not have enough cash on hand to cover more than one month’s expenses, while roughly another third said they only had enough money to get them through the next three months.

This next few months as we Edward Charles Institute for Nonprofits and Acquisitions has experienced a tremendous interest in collaborations from smaller agencies struggling to keep services while attempting to generate dollars they need to keep afloat.

According to Philanthropy News Digest, March 31, 2009;

Survey of 986 nonprofit leaders from across the country found that a large number of respondents expect decreases in government funding (43 percent), foundation support (62 percent), and individual contributions (49 percent) this year.

Only 12 percent expect their organizations to operate at or above break-even, while 16 percent anticipate being able to cover their operating expenses in both 2009 and 2010. Some 31 percent of respondents said their organizations don’t have enough operating cash on hand to cover more than a month of expenses, while another

31 percent said they have less than three months’ worth of cash on hand. Compounding the problem, 93 percent of safety-net organizations said they anticipate increased demand for their services in 2009.

http://fconline.foundationcenter.org/pnd/15017554/story

About 100,000 of the 1.3 million nonprofits in the U.S. could go under this year due to the credit crisis and funding cuts, says Paul Light, professor of public service at New York University, The Colorado Springs Gazette reported March 3 (see story). Light says, “Nonprofits could improve their chances of survival by merging, pooling resources and stewarding funds more carefully.”

According to Glenn Collins, New York Times, “Some 85 percent of the city’s nonprofits have annual budgets under $3 million, ‘and most of them don’t have endowments or cash reserves’, said Fran Barrett of the Community Resource Exchange, which provides management and financial help to about 300 community groups. ‘Some smaller organizations will have to shut their doors’.”  But most professionals acknowledge that merging requires a delicate approach.

Welcome to the official blog of the Edward Charles Institute for Nonprofit Mergers and Acquisitions.

The Edward Charles Institute for Nonprofit Mergers and Acquisition is the only organization whose main mission is to become the merger and acquisition firm of choice for nonprofits, their lawyers and accountants. The Institute has developed a process that is unique to the industry; “we are matchmakers,” according McKim, CEO.