NACBA
LEDGER
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 (800)898-8085
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.