Sarbanes-Oxley Compliance and Non-Profit Organizations
By: Elliot Kipnis, 08/05/05

As corporate CFOs and CIOs struggle with the provisions of the American Competitiveness and Corporate Accountability Act of 2002 (otherwise known as the Sarbanes-Oxley Act) many of their counterparts in the non-profit sector are bracing for similar legislation to be passed for non-profits. This article will examine how Sarbanes-Oxley applies to the non-profit sector and what types of financial oversight requirements for the non-profit sector are being considered. I will offer some suggestions as to how non-profit organizations should prepare for this increased scrutiny.

To begin, while it is generally assumed that because non-profit organizations do not issue stock, they are exempt from Sarbanes-Oxley, there are two provisions of the legislation that apply to all corporations, be they nonprofit or for-profit. These provisions are:

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

Document Destruction: The Sarbanes-Oxley Act makes it illegal to destroy or alter any document to prevent its use in an official proceeding (e.g. federal investigation or bankruptcy proceedings).

In addition to these provisions, in June 2004, the United States Senate Finance Committee held hearings on Charitable Giving Problems and Best Practices. During the hearing, Mark W. Everson, the commissioner of the IRS testified, " there are abuses of charity that principally rely on the tax advantages conferred by the deductibility of contributions to those organizations. If these abuses are left unchecked, I believe that there is the risk that Americans not only will lose faith in and reduce support for charitable organizations, but that the integrity of our tax system will also be compromised." As a result of these hearings a staff discussion paper was released with recommendations for closer regulation of nonprofits. The recommendations included:

Five-year review of tax-exempt status by the IRS.
Improving the scope and quality of form 990 and financial statements.
Improving non-profit transparency by improving the availability of financial records.

Not to be outdone, several states are also pressing for increased accountability of non-profits. California passed a "Nonprofit Integrity Act" that applies to nonprofits with budgets in excess of $2 million operating in that state. Among the act's key provisions
are requirements that nonprofits have an annual audit performed by an independent auditor and that the results of that audit need to be shared with the general public and the Attorney General. On the East Coast, New York's Attorney General, Eliot Spitzer has proposed a version of the federal Sarbanes-Oxley law to be applicable to New York's nonprofits.

With this in mind, how can non-profits prepare for what seems to be an inevitable push for increased scrutiny, be it on the state or federal level? In 2003, Board Source and the Independent Sector published a white paper, "The Sarbanes-Oxley Act and Implications for Nonprofit Organizations," that made a number of recommendations for non-profits. Among them were:

Create an independent audit committee. In the context of the Sarbanes-Oxley Act, "Independent" means that none of the members of the committee are part of the management team and that no one receives compensation from the company.

Have the CEO or CFO directly review your organization's Form 990 or 990-PF before it is submitted. While the current guidelines do not envision making knowingly signing a misleading financial statement a criminal offense (ala Worldcom), a public declaration of these forms' accuracy by a CEO can enhance your organization's credibility in funder's eyes.

Make sure that financial statements are easily available to the public. Current law requires that tax-exempt organizations make their Forms 990 or 990-PF available to anyone who requests them. However, to increase their availability, organizations might consider posting these documents directly on their web-sites.
 
While these recommendations are not currently legally required, many commentators are predicting that prospective donors will be requesting information about how non-profit organizations are enacting Sarbanes-Oxley requirements prior to making contributions. In fact, the authors of  Sarbanes-Oxley for NonProfits: A Guide to Building Competitive Advantage, argue that non-profits that comply voluntarily with aspects of SOX legislation will enhance their position within the marketplace by strengthening their internal infrastructure and becoming more attractive to funders as a result.

References:

The Sarbanes-Oxley Act and Implications for Nonprofit Organizations published by Board Source and Independent Sector (available at:  http://www.independentsector.org/PDFs/sarbanesoxley.pdf)

Sarbanes-Oxley for Nonprofits published by the Nonprofit Coordinating Committee of New York (NPCC) (available at http://www.npccny.org/info/gti10.htm)

Written Statement of Mark W. Everson, Commissioner of Internal Revenue before the Commissioner of Internal Revenue before the Committee on Finance, United States Senate Hearing on Charitable Giving Problems and Best Practices, June 22, 2004 (available at http://finance.senate.gov/hearings/testimony/2004test/062204metest.pdf)

Sarbanes-Oxley for Nonprofits: A Guide to Building Competitive Advantage, Peggy M. Jackson, DPA, CPCU & Toni E. Fogarty, PhD, MPH, ISBN: 0-471-69788-5, John Wiley & Sons, Inc. 2005
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