ACCOUNTABILITY UPDATE Healthcare Trustees of New York State Audioconference September 22, 2005 Mark Thomas Wilson, Elser, Moskowitz, Edelman & Dicker General Counsel, HANYS

CENTERS OF ACTIVITY Federal Level – Congress & IRS Senate Finance Committee House Ways & Means Committee Joint Committee on Taxation Panel on the Nonprofit Sector State - Attorney General Much Less Active

STATE LEVEL AG Moving Away From “Sarbanes For Nonprofits” Legislation Continues Focus on Compensation, Insider Transactions Breaches of Fiduciary Duty by Board Grasso Lawsuit As Example Seeks Authority to Enforce Federal Tax Laws on Comp. & Inside Dealing Will Medicaid Fraud Issue Renew Accountability Debate?

FEDERAL LEVEL Senate Finance Committee Hearings & Staff Report in ’04 House Ways & Means Hearings Recommendations of Joint Committee on Taxation in January ’05 Transparency and Self Dealing Are Dominant Themes Route Is Tax Laws, Not Sarbanes

SENATE FINANCE COMMITTEE STAFF REPORT Five Year Review of Tax-Exempt Status File Corporate Documents, Conflict of Interest Policy, “Best Practices” Governance Policies, Financial Statements No Need for IRS to Renew Exemption Impose Tax on Charity If Self-Dealing, Compensation Rules Violated Currently Only Involved Individuals Penalized

FINANCE COMMITTEE (cont) Allow States to Prosecute Tax Rules on Excessive Compensation & Inside Deals Require CEO to Certify Accuracy of the 990 Return Require Independent Auditor Review of 990 Return Require More Disclosure on Deals With Related Corporations

FINANCE COMMITTEE (cont) Governance Proposals Federal Fiduciary Standard for Board Members Require Certain Duties of Boards  Largely Already Being Done by Providers Board Composition of 3 – 15 Members Give IRS Authority to Remove Board Members Proposed Accreditation of Charities

JOINT COMMITTEE ON TAXATION Large Chapter in January 2005 Report “Options to Improve Tax Compliance And Reform Tax Expenditures” Require Five Year Review of Tax Status Hold Organization Accountable for Pursuing Its Exempt Mission Only for Organizations Formed W/In Last 10 Years & Going Forward

JOINT COMMITTEE (cont) Consider Conversions to For-Profit Status as Potential Insider Deal If Assets Not All For Charitable Purpose, Insider Taxes Imposed If Charity’s Directors, Officers Become Ds & Os of For-Profit, Treat As Insider Deal  Compensation, Severance, Fairness of Deal

JOINT COMMITTEE (cont) Change Compensation and Insider Deal Rules Even if Follow Rules for Using Due Diligence, Not Presumed Fair & Reasonable Impose Tax on Charity if Compensation & Self-Dealing Rules Violated  Tax at Rate Double of Rate Imposed on Individuals

JOINT COMMITTEE (cont) Require Public Disclosure of Form 990-T Unrelated Business Income Return Require Certification By Independent Auditor that 990-T Is Accurate Public Scrutiny Enhances Transparency & Accountability Gives More Complete Picture of Charity’s Activities For-Profit Business Returns Not Public

PANEL ON THE NONPROFIT SECTOR Convened By Independent Sector In 2004 At Suggestion of Senate Finance Committee Blue Ribbon Nonprofit Governance Leaders June 2005 Report to Congress Partly Responds to Senate Finance 2004 Staff Report

PANEL ON NONPROFIT SECTOR (cont) As Recommended Practice, Charities Should Publicly Disclose Program Information & Evaluations of Effectiveness Not a Legislative Mandate 990 Form Not Appropriate Reporting Tool

PANEL ON NONPROFIT SECTOR (cont) Loans to Board Members Should Be Outlawed Compensation of Board Members Discouraged Penalties for Approving Excessive Compensation Should be Increased Should Be Clearer Disclosure Of Executive Comp and Due Diligence Procedures

PANEL ON NONPROFIT SECTOR (cont) Board Minimum Should be 3 But No Ceiling On Number is Warranted One-Third of Board Members should Be Independent No Financial Connection within Past 12 Months Strong Board Education on Fiduciary Duties Should Occur

PANEL ON NONPROFIT SECTOR (cont) Should “Consider” Separate Audit Committee Board Should Have Persons w/ “Financial Literacy” Should Have Conflict of Interest Policy Disclose to IRS Protection For Whistleblowers Strong Enforcement of Conflict Policy