SB73

SECTION 1. Nonprofit corporations are an indispensable part of our society, offering relief from disasters, nurturing our spiritual and creative aspirations, caring for vulnerable people, protecting our natural and cultural heritage, and finding solutions to medical and scientific challenges. These greatly needed missions can only be accomplished by restoring and preserving the trust and confidence of our public donors.

In response to the egregious corporate and accounting scandals of Enron, WorldCom, Tyco, and others, The federal American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act, was signed into law. Its purpose is to instill investor confidence in the market by raising the standards of corporate transparency and accounting. While this law applies to nearly all publicly traded corporations, only two of its provisions apply to nonprofit corporations.

The tragedy of September 11, 2001, brought an outpouring of support for its victims by public charitable donors. However, these donations often did not reach their intended recipients because of delivery problems and management indiscretions. Many new cases of mismanagement and abuse of charitable assets by managers, officers, and directors of nonprofit corporations are surfacing and increasing at an alarming rate.

According to the Better Business Bureau's Wise Giving program, eighty per cent of the money received by charities in the United States comes from individual public donors. Recognizing the impact of public confidence on sustaining these necessary nonprofit corporations, several state legislatures have passed or are considering legislation with provisions similar to those in the Sarbanes-Oxley Act that will restore financial integrity and hold nonprofit corporations to clear standards of accountability.

The purpose of this Act is to restore the trust and confidence of the public in nonprofit corporations and charitable organizations by establishing good practices standards, providing clearer standards regarding financial oversight, and encouraging nonprofit corporations to strive for greater disclosure and transparency.

SECTION 2. Chapter 414D, Hawaii Revised Statutes, is amended by adding a new section to part VIII to be appropriately designated and to read as follows:

"§414D- Audit committees. (a) Every nonprofit corporation required to file an annual report and audit with the department director pursuant to this chapter that receives or accrues in any fiscal year gross revenue of one million dollars or more, exclusive of revenue from grants from, and contracts for services with, governmental entities for which the governmental entity requires an accounting of the funds received shall form an audit committee appointed by the board of directors.

(b) The audit committee may include persons who are not members of the board of directors, and shall not include any members of the staff, including the president or chief executive officer and the treasurer or chief financial officer.

(c) If the corporation has a finance committee, it shall be separate from the audit committee. Members of the finance committee may serve on the audit committee, except that the chairperson of the audit committee shall not be a member of the finance committee and members of the finance committee shall constitute less than one half of the membership of the audit committee.

(d) At least one member of the audit committee shall have adequate experience in financial matters to reasonably assess and analyze the financial statements of the corporation and the competency of the auditing firm.

(e) Members of the audit committee shall not receive any compensation for their service on the audit committee and shall not have any financial interest in or any other conflict of interest with any entity doing business with the corporation.

(f) The audit committee shall ensure that the auditing firm has the requisite skills and experience to carry out the auditing function for the corporation and that its performance is carefully reviewed.

(g) The audit committee shall review the annual audit and have full board approval before accepting or rejecting modifications to or finalizing the audited financial statement to be filed pursuant to section 414D-308(f).

(h) The audited financial statement shall be available for inspection by the attorney general and by members of the public no later than nine months after the close of the fiscal year to which the statement relates.

(i) The audit committee shall ensure that the lead and reviewing partners of the auditing firm shall not participate in the preparation of the audit for more than five consecutive years.

(j) The audit committee shall ensure that, while the firm is contracted to perform auditing services, the auditing firm does not provide non-auditing services to the corporation, except for tax preparation that shall be approved in advance.

(k) The audit committee shall establish procedures to accept complaints relating to financial matters, including complaints from anonymous sources within the corporation."

SECTION 3. Chapter 414D, Hawaii Revised Statutes, is amended by adding a new section to part XV to be appropriately designated and to read as follows:

"§414D- Whistleblower protections. (a) Any nonprofit corporation, except those with no paid employees, required to file an annual report pursuant to section 414D-308 shall comply with the requirements of this section.

(b) A nonprofit corporation shall not retaliate against any employee of the corporation who has filed a complaint with the governing board, directors or trustees, audit committee, the attorney general, or any other government agency pertaining to the following:

(1) Dissipation of the corporation’s assets;

(2) The mishandling or misuse of restricted funds;

(3) Related party transactions;

(4) Compliance with state or federal reporting requirements;

(5) Overriding or circumventing of the corporation’s internal controls;

(6) Private inurement; and

(7) Fraud.

(c) All records pertaining to any complaint that falls under this section and its resolution shall be retained by the corporation for four years from the date the complaint was filed and shall also be made available to the attorney general upon request of the attorney general. These documents shall not constitute public records subject to section 414D- (h) or chapter 92F.

(d) If a nonprofit corporation or the responsible officer or agent wilfully retaliates against an employee for a complaint that falls under this section, the attorney general, in addition to any other statutory or common law remedies, may seek:

(1) Compensation for the employee;

(2) Back pay for the employee; and

(3) Any appropriate order prohibiting the reoccurrence of the unlawful conduct."

SECTION 4. Section 414D-155, Hawaii Revised Statutes, is amended to read as follows:

"§414D-155 Standards of conduct for officers. (a) An officer with discretionary authority shall discharge the officer's duties under that authority:

(1) In good faith;

(2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and

(3) In a manner the officer reasonably believes to be in the best interests of the corporation and its members, if any.

(b) In discharging an officer's duties, an officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:

(1) One or more officers or employees of the corporation who the officer reasonably believes to be reliable and competent in the matters presented; or

(2) Legal counsel, public accountants, or other persons as to matters the officer reasonably believes are within the person's professional or expert competence.

(c) An officer is not acting in good faith if the officer has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (b) unwarranted.

(d) An officer shall fully understand all financial statements and reports. By signing any financial statement or report the officer is ensuring its accuracy and completeness.

[~~(d)~~] (e) An officer is not liable to the corporation, any member, or other person for any action taken or not taken as an officer, if the officer acted in compliance with this section.

[~~(e)~~] (f) Any person who serves as an officer to the corporation without remuneration or expectation of remuneration shall not be liable for damage, injury, or loss caused by or resulting from the person's performance of or failure to perform duties of the position to which the person was appointed, unless the person was grossly negligent in the performance of or failure to perform the duties. For purposes of this section, remuneration does not include payment of reasonable expenses and indemnification or insurance for actions as an officer as allowed by sections 414D-159 to 414D-167."

SECTION 5. Section 414D-301, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) A corporation shall maintain [~~appropriate~~] complete and accurate accounting records[.] using generally accepted accounting principles."

SECTION 6. Section 414D-308, Hawaii Revised Statutes, is amended to read as follows:

"§414D-308 Annual report. (a) Each domestic corporation, and each foreign corporation authorized to transact business in the State, shall deliver to the department director [an] complete and accurate annual [~~report~~] reports on a form prescribed and furnished by the department director that sets forth:

(1) The name of the corporation and the state or country under whose law it is incorporated;

(2) The mailing address of its principal office, the address of its registered office in this State, and the name of its registered agent at its registered office in the State;

(3) The names and addresses of its directors and officers; and

(4) A brief description of the nature of its activities.

(b) The annual report shall be filed within the time periods prescribed in subsections (c) and (d).

(c) Notwithstanding any of the provisions of this chapter to the contrary, annual reports reflecting the period from January 1, 2002, through December 31, 2002, that would otherwise be required, may be voluntarily filed with the department director if the annual report complies with the requirements of this section.

(d) Effective January 1, 2003, for a domestic or foreign corporation whose date of incorporation or registration in this State falls between:

(1) January 1 and March 31, an annual report shall be filed on or before March 31 of each year and shall reflect the state of the corporation's affairs as of January 1 of the year when filed;

(2) April 1 and June 30, an annual report shall be filed on or before June 30 of each year and shall reflect the state of the corporation's affairs as of April 1 of the year when filed;

(3) July 1 and September 30, an annual report shall be filed on or before September 30 of each year and shall reflect the state of the corporation's affairs as of July 1 of the year when filed; and

(4) October 1 and December 31, an annual report shall be filed on or before December 31 of each year and shall reflect the state of the corporation's affairs as of October 1 of the year when filed;

provided that if a domestic or foreign corporation is incorporated or registered in the same year in which the annual report is due, the domestic or foreign corporation shall not be required to file an annual report for that year. Thereafter, the domestic or foreign corporation shall comply with the requirements of this section.

(e) If, in good faith, an annual report does not contain the information required by this section, the department director shall promptly notify the reporting domestic or foreign corporation in writing and return the report to it for correction. If the report is corrected to contain the information required by this section and delivered to the department director within thirty days after the effective date of notice, it shall be deemed to have been timely filed.

(f) Every nonprofit corporation required to file an annual report with the department director pursuant to this chapter that receives or accrues in any fiscal year gross revenue of one million dollars or more, exclusive of revenue from grants from, and contracts for services with, governmental entities for which the governmental entity requires an accounting of the funds received shall file with each annual report a complete audited financial report that is audited by an independent certified public accountant in conformity with generally accepted auditing standards.

(g) Wilful or persistent failure of a corporation to file a complete and accurate report or audit report as required by law shall constitute a breach of the directors' and officers' duty to the corporation and shall subject the corporation or its directors, at the suit of the attorney general, to an action or special proceeding for injunctive relief."

SECTION 7. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 8. This Act shall take effect upon its approval.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	73
TWENTY-FOURTH LEGISLATURE, 2007
STATE OF HAWAII