October 30, 2003 | Read Time: 4 minutes
Nonprofit organizations should apply to their own operations many of the same requirements companies must now follow as part of a federal law intended to improve governance and accountability, say several legal and financial experts.
In a position paper on the issue, two prominent nonprofit associations write that, while most provisions of the so-called Sarbanes-Oxley Act that passed last year apply only to publicly traded corporations, the new law is likely to raise the bar for nonprofit groups as well, especially in the wake of several well-publicized lapses in charity governance.
“Nonprofit leaders should look carefully at the provisions of Sarbanes-Oxley and determine whether their organizations ought to voluntarily adopt particular governance practices,” states the position paper, drafted by BoardSource, which promotes better governance of nonprofit organizations, and Independent Sector, a coalition of major charities and foundations.
To help educate nonprofit leaders about the law’s provisions and generate discussion, the two umbrella organizations also held a series of teleconferences on the topic this month. Among the panelists: Marc Owens, a Washington lawyer who formerly headed the exempt-organizations division of the Internal Revenue Service. Mr. Owens told the callers who participated: “If board members understand the important role their sector plays, they’ll understand the need for fair and rational rules.”
Independence of Trustees
The major provisions of the Sarbanes-Oxley Act are intended to ensure that people with financial expertise, including members of the board of directors, have both the access and the independence needed to audit a company’s financial records and oversee the managers’ performance.
Publicly traded companies are required, among other things, to have an audit committee comprising independent members of their boards of directors — people who are not part of the company’s management and who are not compensated for their services.
The law also requires lead partners of the firms that audit a company’s accounts to rotate off the audit every five years, and bars auditing firms from concurrently providing other services — like bookkeeping, actuarial or legal services, or investment advice — to the company. And it requires the chief executive and chief financial officers to certify that the financial statements fairly and accurately present the company’s financial condition.
Mr. Owens has suggested a tiered approach for nonprofit groups.
Virtually any nonprofit organization can draft a conflict-of-interest policy, for example, or adopt such rudimentary controls as requiring two signatures on every check, he said. Organizations large enough to afford to take further steps without jeopardizing their mission should do so, he added, such as publishing annual financial statements or hiring outside auditors. Audit committees make sense for nonprofit groups as well, he said.
“The audit committee ought to be of different individuals than people on the finance or investment committees,” Mr. Owens said, “because you want them looking over the shoulders” of the people on those other committees.
Ian Benjamin, managing director of the New York nonprofit office of American Express Tax and Business Services, had a slightly different view, saying there may be times where it would make sense to have some overlap between audit and financial committees.
The main exception, he said, is that an audit committee should not play a role in overseeing investments.
“Each organization needs to look at itself carefully and closely and make a decision about where to put audit-oversight responsibilities.”
Participants were somewhat divided over what role, if any, nonprofit executives should play on audit committees. Mr. Owens recommended against any formal participation by such executives to preserve the committee’s independence from the organization’s management. Mr. Benjamin said he would expect both the chief executive and chief financial officers to attend audit-committee meetings, but to leave the room during any discussions bearing on their own performance.
Two provisions of the Sarbanes-Oxley Act do apply to nonprofit groups currently, Mr. Owens noted. It is illegal for any corporate entity, whether for-profit or nonprofit, to punish whistle-blowers, or retaliate against any employee who reports suspected cases of fraud or abuse. And the law makes it a crime to alter, falsify, or destroy any document that may be relevant to an official investigation.
The position paper, “The Sarbanes-Oxley Act and Implications for Nonprofit Organizations,” can be found on the Web sites of BoardSource (http://www.boardsource.org) and Independent Sector (http://www.independentsector.org).
