September 28, 2006 | Read Time: 4 minutes
Making some of the provisions of the federal Sarbanes-Oxley Act mandatory for nonprofit organizations would
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ALSO SEE: Chart: Nonprofit Groups and Accountability Practices |
require substantial numbers of groups to alter their practices, says a new report.
But imposing some other provisions on nonprofit organizations “would result in little change because most nonprofits are already in voluntary compliance, or because they must comply with other regulations that resemble Sarbanes-Oxley provisions,” according to the report, which analyzed responses to a survey last year by the Urban Institute, a research organization in Washington.
The 2002 Sarbanes-Oxley Act was designed mostly to improve governance and accountability at publicly traded companies. But some nonprofit organizations have voluntarily adopted many of the provisions, and some federal and state officials have promoted their use.
“Our findings strongly confirm the importance of acknowledging the potentially different impact, cost, and value of applying provisions to nonprofits of different size,” said the report by Francie Ostrower, a senior research associate in the Urban Institute’s Center on Nonprofits and Philanthropy, and Marla J. Bobowick, vice president of products at BoardSource, a Washington nonprofit group that helps organizations build effective boards.
Audit Committee
One provision of the Sarbanes-Oxley law requires that companies follow certain requirements for their audit committees. For example, audit committees must be directly responsible for hiring and overseeing external auditors, and companies must disclose if audit committees have at least one financial expert or, if not, explain why.
The new report said that only 20 percent of all nonprofit groups in the survey had separate audit committees, which was “the least commonly accepted practice related to Sarbanes-Oxley issues in all size groups.”
But the report said the practice was far more common among large nonprofit organizations: 15 percent of groups with less than $100,000 in annual expenses had audit committees, but 35 percent of organizations with $2-million to just under $10-million in annual expenses had such committees, as did 58 percent of groups with expenditures of more than $40-million.
“It was only among nonprofits with over $40-million that a majority of organizations had an audit committee,” the report said. “For most others, and even for many of the largest nonprofits, having a separate audit committee would represent a change in current practice.”
Among nonprofit organizations that did have audit committees, however, the great majority of them had at least one financial expert on the committee, the report said.
“Most organizations with audit committees (54 percent) had created or revised the committee since 2002. The finding supports the idea that passage of the Sarbanes-Oxley Act spurred many nonprofits to reexamine and revise their practices.”
A slight majority — 51 percent — of nonprofit groups that do not currently have an audit committee said it would be somewhat or very difficult for them to comply with a law requiring them to establish such a committee, and 54 percent of those without audit committees said it would be somewhat or very difficult to comply with a law requiring that a financial expert serve on an audit committee.
Reporting Complaints
The report noted that two provisions of the Sarbanes-Oxley law apply to both companies and nonprofit organizations. One, a so-called whistleblower provision, says that organizations cannot punish employees who report suspected illegal activities within the organization, and requires that companies establish procedures for handling complaints about accounting and financial matters.
“Among nonprofits with at least one employee, 67 percent had a formal process for staff to report complaints without fear or retaliation,” the report said.
The second provision of the Sarbanes-Oxley law that applies to both companies and charities says that organizations must not destroy, alter, or falsify documents and records to prevent their use in federal investigations and bankruptcy cases.
While the provision does not specifically require organizations to have a policy on written-document retention and destruction, 30 percent of nonprofit organizations did have such a policy.
“The percentage was considerably higher among larger organizations,” the report said, “but even a substantial minority of the largest groups (25 percent) had no written document-retention and -destruction policy,” and fully 86 percent of nonprofit groups with under $100,000 in annual expenditures did not have a written policy.
Among nonprofit groups with a written policy, 47 percent had created or revised it since 2002, when the Sarbanes-Oxley Act became law. “This certainly suggests that passage of the Act prompted many to reexamine and concretize their policies, the report said, “and it is somewhat surprising that this was not the case for a larger number of organizations.”
The report, “Nonprofit Governance and the Sarbanes-Oxley Act,” is available free online at http://www.urban.org/url.cfm? id=311363 and http://www.board source.org/sarbox.
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NONPROFIT GROUPS AND ACCOUNTABILITY PRACTICES
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