An Administrator's Guide to California Private School Law

Chapter 2 - Governance

compliance. The Audit Committee is responsible for recommending the retention and termination of an independent auditor and may negotiate the independent auditor’s compensation. If an organization chooses to utilize an Audit Committee, the Committee, which must be appointed by the Board, should not include any members of the staff, including the president or chief executive officer and the treasurer or chief financial officer. If the corporation has a finance committee, it must be separate from the audit committee. Members of the finance committee may serve on the audit committee; however, the chairperson of the audit committee may 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. 50 It is recommended that these restrictions on makeup of the Audit Committee be expressly written into the Bylaws. ii. Compensation Committee The Board is obligated to ensure fair and reasonable compensation of the Head of School and others. It must also avoid “intermediate sanctions.” 51 “Intermediate sanctions” are formally known as “excise taxes on excess benefit transactions.” In plain English, these are fines that the Internal Revenue Service (IRS) imposes upon certain specified individuals associated with a nonprofit when the individuals receive compensation or benefits in excess of the value of services, goods, or donations they have provided the nonprofit. Previously, when such “excess benefit transactions” occurred, the IRS only had two options: it could either ignore the violation or revoke the organization’s tax-exempt status. Ignoring the violation was unacceptable. However, revocation of the organization’s tax-exempt status was deemed too harsh because it punished innocent parties in the organization as well as the people served by the organization. These sanctions fall in the middle—hence “intermediate”—and punish the offenders rather than the nonprofit and the people it serves. These sanctions only apply to individuals who are “in a position to exercise substantial influence over the affairs of” a nonprofit and its family members. These individuals, known as “disqualified persons,” include, but are not limited to, the following:  The Corporation’s President, Chair, Treasurer or CFO  Voting members of nonprofit’s governing board  Substantial contributors  A disqualified person’s spouse  A disqualified person’s siblings, ancestors, children, grandchildren, great- grandchildren, and their spouses The penalty imposed upon disqualified persons for participating in an excess benefit transaction is 25% of the amount over the true value of the services provided, plus another 200% if the excess benefit is not corrected.

An Administrator’s Guide to California Private School Law ©2019 Liebert Cassidy Whitmore 39