Update of the “Proper Management Rules” of Israeli Charitable Organization (‘amutah’)
Approximately two weeks ago, the Israeli Ministry of Justice issued a new revised edition of the booklet “Guidelines for Amutot conduct”, as well as a new and revised edition of the supplementary guidelines booklet regarding the “Registration of Amutot, Name, Objectives and Regulations”. These booklets include a number of revisions and clarifications to the previous drafting.
Link to the new booklets:
The main revisions in the new booklets are as follows:
- The Internal Auditor
- New provisions have been added dealing with the manner of calculating the amutah’s financial turnover for the purpose of determining whether the appointment of an internal auditor is required. It should be noted that pursuant to amendment number 14 of the Non-Profit Organizations (‘amutot’) Law, an amutah whose turnover exceeds NIS 10 million must appoint an internal auditor. The revision clarifies that the turnover in this regard is an amutah’s turnover according to the latest financial report that the amuath had to submit to the Amutot It is further noted that if the amutah included revenues in cash equivalents including volunteer value, usage value, donations in cash equivalents etc. in the financial reports, then these revenues will be included as part of the turnover regarding the obligation to appoint an internal auditor.
- It is also established that in borderline cases, it is advisable for the amutah to appoint an internal auditor. Furthermore, a provision has been included that recommends to an amutah whose turnover is expected to exceed NIS 10 million in the year following submission of its last financial report to prepare well in advance to appoint an internal auditor.
- An amutah may appoint an internal auditor voluntarily, even if its turnover is lower than NIS 10 million.
- The amutah must make a decision regarding the appropriate way of carrying out such an appointment, which may include publishing a job advertisement, an invitation to submit offers, or contacting a number of internal auditors, as it sees fit.
- For the purpose of assessing a person’s suitability for the role of internal auditor, all of the eligibility conditions stipulated in the Internal Audit Law (education, experience, etc.) need to have been met.
- The internal auditor is designated to be an additional internal control mechanism in amutot whose turnover exceeds NIS 10 million, and they are subordinate to the amutah’s executive board chairman or CEO in accordance with the amutah’s by-laws, or as determined by the executive board if not formalized in the by-laws.
- The audit activities of the audit committee (or the audit body) and of the internal auditor are separate from one another, performed independently by each one of them and are enshrined in a separate work plan, but there is no impediment to there being a relationship between them and in the booklet it is occasionally stated that the relationship is required as part of carrying out the audit activities by any party.
- The type of audit according to the internal auditor’s work plan depends on the nature of the anutah and its needs, for example the scope and type of its activity, the number of workers it employs etc. The amutah must appoint an internal auditor to suit the needs of the internal audit according to its characteristics as stated, inter alia, concerning the number of working hours required, special expertise as required etc. at its discretion.
- It is advisable to convene discussions on the findings of the internal auditor’s audit report, with the participation of all those who were presented with the internal audit’s findings. However, this is a decision entrusted to the amutah, so as to ensure the effectiveness of the internal audit as an internal management tool. It is further stated that since the CEO is the most senior position in charge of the ongoing administration, it seems that there is room to get his reaction and comments when formulating the audit report before its submission as a final report.
- Kinship and Conflict of Interest
- Employing a number of relatives in an amutah, even when it does not involve the relatives of committee members, members of the audit committee or the CEO is sufficient to indicate conduct contrary to proper administration which requires the employment of workers or purchasing of services according to objective criteria, taking the best interests of the amutah into consideration and not according to nepotistic considerations.
- Amutot must also avoid employing a number of relatives in senior positions or employing relatives in subordinate roles in light of the conflicts of interest inherent in such employment.
- The more public characteristics an amutah has, the greater the need to avoid situations where there is concern about a conflict of interests.
- Surplus Rights
- New provisions have been included which stipulate that in certain cases the Amutot Registrar will allow surplus rights to another person or entity, regarding the appointment of executive board members, provided that they are not serving as executive board members or a party subordinate to the executive board, such as the president or chairman of an amutah with executive powers.
- Furthermore, it is stated for the first time that in light of the principle whereby the role of an amutah’s institutions must not be rendered meaningless and in light of the cogent provision in the law which stipulates that the executive board will be elected by the General Meeting – there may be instances where the nature of the amutah will require a different approach, such as an amutah with numerous members, an amutah which is an umbrella organization, an amutah which is a dual-entity etc. In such cases, the Registrar will insist that the General Meeting elect the executive board members, including by requiring a change to the amutah’s by-laws.
- Audit Committee / Audit Body
A reference has been added to the fact that if an amutah chooses the option of an audit committee (as opposed to an audit body), then it must comprise more than the minimum number prescribed by law of two executive board members in light of the cogent provisions of the law regarding the obligation for a minimum appointment of two committee members. The composition of the audit committee requires at least two amutah members and an executive board member is prohibited from serving as an audit committee member.
- Taking out Loans
- As has previously been established, an amutah may borrow funds. However, in cases where the lender has a tie to the amutah (inter alia a member of the amutah or its institutions, an office holder in the amutah, a party who solicits donations for the amutah etc.) – the amutah must guarantee that the party registered as the lender is the party who provided the funds directly and that he is not a conduit for transferring funds from another external party, whose identity is unknown. To this end, the amutah must obtain a declaration from the lender that the loan’s funds are from his personal sources and not funds received from any third party whatsoever.
- An additional provision has been included in the new booklet relating to the fact that occasionally a third party is not interested in lending money to an amutah directly, but rather to an officer in the amuath only, even though the loan’s funds are meant for the amutah’s use to promote its objectives. In such a case, in order to ensure the monitoring of the loan’s source on the amutah’s books, and to avoid possible problems when repaying the loan to the third party, in the absence of evidence of providing the loan, the officer must sign a loan agreement between the third party and the officer in the amutah. This agreement will include the details specified above as well as the declaration that the loan was granted to the officer only and that the third party will not have any claims against the amutah in respect of the loan. In addition, a loan agreement will be signed between the officer and the amutah, with the loan agreement signed by the officer and the third party being attached thereto.
- Financial Reports
A clarification has been added in the booklet that there is no impediment to submitting financial reports in US dollars, pursuant to the principles of Accounting Standard 13 of the Israel Accounting Standards Board. However, pursuant to the conversion rules set forth in the aforementioned Standard 13, conversion of the financial report into NIS may have an impact on various sections in the amutah’s financial reports and consequently also on the surplus/deficit balance accumulated. Therefore, it is recommended that non-profit organizations submitting financial reports in USD should attach notes about converting the financial reports into NIS. It should be stressed that the above does not allow compiling financial reports pursuant to accounting principles in the USA or in another country and not pursuant to the Generally Accepted Accounting Principles in Israel.
Presenting financial reports pursuant to accounting principles that are not in accordance with Israeli Standards can result in a significant change in the operating results and the amutah’s net asset balance (accumulated surplus/deficit), thus influencing the Registrar’s decision regarding the tests required vis-à-vis a non-profit organization.
- Transferring Funds from the Bank Account
Transferring funds from the amutah’s bank account to another account, whether belonging to the amutah or to an external party, will be done by fax only (and not over the telephone), with the signature of the authorized signatories.