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Sarbanes-Oxley Controls

“To SOX or Not to SOX?” –

That is the question for non-profits

(from Social Service, a publication of NCSS and SSTI, Vol. 15, Feb-Mar 06)

“Why would legislation intended for for-profit public companies be finding its way into non-profit conversations? Then answer, in a nutshell, is transparency.”

- Sanjay Anand, Executive VP, SOX Group, CLA Solutions Chair, SOX Institute, New York -

The spirit and the Letter of the Law as it Applies to Non-Profit Organizations in 2006

On July 30, 2002, U.S. legislators enacted one of the most broad-sweeping legislation's since the Securities Act of the 1930s. The American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act (or SOX), was signed into law. After Enron, WorldCom, Tyco and a slew of other companies were determined fraudulent, lawmakers issued a wake-up call to all corporate, legal and financial entities. Accordingly, Sarbanes-Oxley is ushering in a new era of accountability and transparency. It requires publicly traded companies to implement and uphold detailed governance standards. It also expands board members’ accountability, while broadening their roles in the oversight of financial transactions and auditing procedures.

The primary intent of legislation's such as Sarbanes-Oxley is to improve transparency, accountability and responsibility of executives and boards of corporations; in particular in the context of the allocation, usage and reporting of funds that come from such sources as public investors, charitable donations and other sources from outside the corporation.

Two of the questions on the minds of executives and professionals at non-profit organizations are “which of the sections of the Sarbanes-Oxley Act really apply to non-profits?” and “is there legislation being put in place to enforce compliance with those sections?” While both questions are open-ended and do not have definitive answers at this time, it is the intent of this article to provide some guidance which will help prepare non-profits for what is likely to occur over the next few months and years.

Sections of SOX that Apply to Non-Profit Organizations

The two sections of the SOX Act that are most applicable to non-profits are:

Whistle-blower Protection: The Sarbanes-Oxley act provides new protections for whistle-blower, making it illegal for a corporate entity to retaliate against any employee who reports to law enforcement any suspected illegal activity by their employer.

Document Destruction: The Sarbanes-Oxley act makes it illegal to cover up, falsify, destroy or alter any document or accounting entry to prevent of obstruct its use in an official proceeding (e.g. federal investigation or bankruptcy proceedings).

In addition, here are some guidelines from USAid that non-profits can draw on from a “best practices” standpoint. Observe that some of these are more directly related to the letter of SOX while others draw on the spirit of the Act.

A Look at “Who’s Doing What?”

Several surveys have been conducted by various organizations since the passing of the Sarbanes-Oxley Act to gauge the response from non-profits.

Two recent surveys, conducted separately by Grant Thornton LLP and the Alliance for Children and Families, conclude that approximately 20 percent of non-profits in the US are already are trying to adopt at least some of the Sarbanes-Oxley provisions as best practices. The surveys were sent to more than 600 non-profit executives (approximately 300 executives per survey).

Close to 40% of respondents have discussed the implications of Sarbanes-Oxley with their board members. (Grant Thornton LLP)
Non-profit executives are more likely to have received their knowledge from the media or from members of their own board than from their accountants or auditors. (Alliance for Children and Families)
Among organizations with less than $10 million in revenue, 92% of respondents have adopted or modified internal control policies. Only 49% of organizations with more than $10 million in revenue have done the same. (Grant Thornton LLP)
In agencies where changes in financial reporting or auditing processes have been made, those changes tend to focus on the board’s role, responsibilities and function in reporting and auditing processes, on the composition of the audit committee membership, and the organisation’s conflict of interest statement. (Alliance for Children and Families)

Conclusions and Recommendations

In light of the current environment, it is wise for non-profit boards of directors to evaluate how the exercise their oversight responsibilities and fiduciary duties, and how the boards can respond to the governance challenges spawned by SOX and other legislative initiatives. Given the range of size and expertise of non-profit boards of directors, the evaluation of current practices and the implementation of any changes will require an assessment of costs, time, and risks. However, while Sarbanes-Oxley does not apply directly to non-profit organizations, implementing certain relevant provisions may serve the board of directors and the corporation well, particularly in the event of later legal or regulatory scrutiny. State legislatures may also pass legislation applying Sarbanes-Oxley-type responsibilities on non-profit boards of directors, their auditors and counsel.

In light of the “best practices” that can be gleaned from the Act, SOX and similar regulations are gaining steam across the globe and we are seeing an acceleration in the pace of voluntary and forced adoption of these regulations in virtually every country, virtually every form of enterprise (public, private, non-profit, government, etc.), virtually every size of entity and virtually every industry. It is prudent to proactively prepare before it becomes the law.