Sims Article

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NACBALEDGER

SUMMER 2004   29

By William H. Sims, CPA

HE AMERICAN Competitiveness

and Corporate Accountability Act

of 2002 (otherwise and more

commonly known as the Sarbanes-

Oxley Act) was the U.S. Government’s

response to the corporate scandals of

the last few years, namely Enron, 

Tyco, WorldCom, and Adelphia

Communications. 

The confidence of individual investors,

regulatory agencies and national lead-

ers in corporate management’s ability

to implement and monitor systems to

detect fraud was severely shaken. The

resulting public outrage at the extent of

these frauds brought into question the

financial reporting system used by cor-

porate America. As a result, Congress

passed, and the President signed, the

Sarbanes-Oxley Act (SOX) in July 2002. 

THE SARBANES-OXLEY

ACT: DOES IT APPLY 

TO NONPROFITS?

The purpose of SOX is to rebuild the

public trust in America’s corporate sec-

tor by establishing new governance

standards. While the thrust of the SOX

legislation is directed at publicly traded

corporations, the passage of this bill

should cause the nonprofit community

to take note as well. New York Attorney

General Elliott Spitzer has been a lead-

ing proponent of applying the SOX pro-

visions to nonprofits. If Mr. Spitzer is

successful in requiring New York organ-

izations to adhere to the SOX provi-

sions, then other states might follow.

Even if Mr. Spitzer is unsuccessful, non-

profit organizations are not necessarily

off the hook if they ignore SOX. As

investors, regulators, creditors, and the

donor community get comfortable with

the increased reporting for public com-

panies under SOX, it is very likely that

they will start asking nonprofits to

adhere to some or all of the provisions

in SOX. There is some speculation that

at least some of the SOX provisions will

apply, in time, to several groups of

“public interest” entities. Those public

interest entities could include nonprof-

it organizations—particularly those

that receive some amount of public

support, state and local governments,

and employee benefit plans.

In  order to be proactive, nonprofit

boards and management should con-

sider whether to adopt certain gover-

nance provisions of Sarbanes-Oxley. In

effect, many of these provisions could

become best practices for nonprofit

organizations. 

The following items are practices which

were either established by SOX or other

regulations and some of which are con-

sidered best practices for nonprofit

organizations:

• A nonprofit should consider increas-

ing the number of independent

members of its governing board to

ensure that at least some of them

T

Bill Sims,  CPA,  is a partner with Sal-

mon, Beach, and Company. He directs

their corporate administration and

serves as the engagement partner for 

a number of SBC’s

clients including not-

for-profit organizations

and closely-held busi-

nesses. He can be

reached at bsims@

salmonbeach.com.

WHILE THE THRUST OF THE SARBANES-OXLEY

LEGISLATION IS DIRECTED AT PUBLICLY TRADED

CORPORATIONS, THE PASSAGE OF THIS BILL

SHOULD CAUSE THE NONPROFIT COMMUNITY

TO TAKE NOTE AS WELL.

This article originally appeared in The Ledger, a professional journal of the National Association 

of Church Business Administration. Reprinted by permission. ©2004 NACBA www.nacba.net  [phone] 

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30  SUMMER 2004

NACBALEDGER

have experience in accounting and

financial matters.

• If a nonprofit doesn’t have an audit

committee, one should be consid-

ered and established—particularly if

the organization is of sufficient size.

If  an audit committee does exist, it

should review its governance to

make sure it operates within the

guidelines of SOX.

• Loans to executives and board

members should be limited, if not

prohibited. In particular, loans with

provisions that forgive all or a por-

tion of the loan principal should be

eliminated.

• A  nonprofit organization should

have a conflict of interest policy. For

those organizations that have such a

policy, it should be reviewed to see if

it needs updating.

• The lead audit partner or executive

should rotate off of the audit every

five years.

• The CEO, Controller, CFO, ED,

and/or persons in equivalent posi-

tions, should not have been

employed by the organization’s audit

firm during the year preceding the

audit (unless the audit committee

has been directly and sufficiently

involved in the audit).

• A  nonprofit organization should

develop and implement a zero-tol-

erance policy for unethical and ille-

gal behavior.

• The audit or finance committee

should establish procedures to doc-

ument and resolve complaints

received regarding improper

accounting practices and break-

downs in internal controls to ensure

that employees are given “whistle-

blower protection.” These proce-

dures should ensure that any

employees who come forward with

information to the audit committee

are not subjected to punitive meas-

ures by the organization. 

• Nonprofit organizations need to

think through their document reten-

tion policies as SOX addresses

destruction of litigation-related doc-

uments. Therefore, any intentional

document destruction must now be

monitored, justified and carefully

administered. It is still reasonable

and permissible to have a document

retention (and disposal) policy, but

an organization must exercise cau-

tion if any litigation is involved or

expected.

In  conclusion, Sarbanes-Oxley has

been in force for over a year now.

During this time of intense corporate

scrutiny, SOX is forcing nonprofit

organizations to evaluate their board

governance and methods of operation.

Regardless of the driving force behind

these actions, nonprofit organizations

have the opportunity to take a look at

their own governance policies and pro-

cedures. Proactive steps by organiza-

tions will hopefully keep the regulators

from stepping in and imposing their

own set of rules and regulations.