Sarbanes-Oxley Act Nonprofits

Sarbanes-Oxley Act of 2002 was passed largely in response to the scandal that erupted at Enron. As Coalson (2008) notes, “supporters of the Act hoped it would usher in a new era in corporate governance and restore investor confidence in publicly-traded companies and the American capital market in general” (p. 648). Essentially, the Act gave boards greater responsibility in overseeing their organization’s financials and placed upon them “new financial disclosure requirements” so as to present the kind of fraud that happened at Enron from ever happening again (Ostrower & Bobowick, 2006, p. 1). And while only two of the Act’s provisions dealt directly with nonprofits, the provisions did at least direct light to the financial responsibilities that nonprofits should also embrace. This paper will discuss the effect of the Sarbanes-Oxley Act of 2002 on twenty-first century nonprofit governance.
The effect of the Act on nonprofit governance was felt almost immediately. For example, in 2004, the Senate Finance Committee published a report that called for greater and stronger nonprofit governance—that nonprofits be held to the same strict accounting standards as publicly-traded companies (Ostrower & Bobowick, 2006). This guidance from the Senate Committee led many state legislators to propose and even pass regulatory guidelines obliging nonprofits to adhere to many of the same rules applied to public firms via the Sarbanes-Oxley Act. In California, the Nonprofit Integrity Act of 2004 made it a law for nonprofits that saw more than $2 million in gross revenue to undergo an audit (via an independent audit committee). In the light of this new direction, other nonprofits have taken it upon themselves to get in front of the changing winds and address issues of governance even though not legally compelled to in their state.
For smaller nonprofits, the issue is not so simple. Should Sarbanes-Oxley be extended to cover all of them, nonprofits that cannot afford the expense of conducting internal audits so as to demonstrate conformity to the law would be hard-pressed to stay in business. As Ostrower and Bobowick (2006) show, the extent to which many nonprofits currently adhere to Sarbanes-Oxley depends on the nonprofit. What the Act would require of them across the board would be an independent audit committee. While most nonprofits do undergo a routine external audit, not all do. And more than half of those nonprofits that do not undergo a yearly audit report that “it would be somewhat or very difficult to comply with a law requiring them to have one” (Ostrower & Bobowick, 2006, p. 3). As for those nonprofits who did undergo routine audits, they reported that it would be difficult for them to rotate their audit firm or lead partner every five years so as to be in conformity with Sarbanes-Oxley (Ostrower & Bobowick, 2006). In other words, the nonprofit industry is simply not at the same level as that of companies like Enron, which were really what the law was meant to address.
In conclusion, the main effect of Sarbanes-Oxley on nonprofits has been that it has rekindled a debate on the type of governance that nonprofits should engage in. While the law itself stipulates precise accounting and auditing practices that companies should engage in, and only briefly mentions how nonprofits should govern themselves, the fact is that the law has brought nonprofit governance into the light. Can nonprofits address the issues among themselves that the Act has placed upon publicly-traded companies? Should they be held to same accounting standards? The bigger the nonprofit, the harder it is to say no. For instance, why shouldn’t the not-for-profit NFL be held to same standards of a company like Enron? In the 21st century, maybe it should be.
References
Coalson, J. (2008). The Sarbanes-Oxley Act of 2002: Are stricter internal controls
constricting international companies? Georgian Journal of International and Comp. Law, 36, 647-676.
Ostrower, F. & Bobowick, M. (2006). Nonprofit governance and the Sarbanes-Oxley
Act. Retrieved from https://www.urban.org/sites/default/files/publication/50636/311363-Nonprofit-Governance-and-the-Sarbanes-Oxley-Act.PDF