News & Views

With heightened scrutiny of corporate financial operations changing the way businesses structure their internal controls, nonprofits should take a close look at the newly legislated requirements and see how they can be reasonably adapted to their own organizations. Previous issues of Funding Solutions have focused on various ways that nonprofits can make certain their business activities are transparent.

We, at EHL Consulting, recently talked with Eric Fraint, whose firm in New Jersey works only with nonprofits. His observations have relevance to all who work with or volunteer for nonprofit agencies of all types and sizes.

Funding Solutions: Does federal or state legislation apply now to nonprofits as they do in the for-profit world?

Eric Fraint: The American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act, was enacted in response to several highly publicized corporate accounting scandals that seriously eroded the public's trust in these and other publicly traded institutions. Sarbanes-Oxley's rigorous compliance requirements paved the way for a new consciousness of best business practices that have permeated not just the corporate world but the nonprofit sector as well. Although the requirements set by Sarbanes-Oxley have not yet been imposed on nonprofits, the question is not "if," but "when."

It is likely that things will happen in a year or two, although it's hard to be specific. In the meantime, it's in a nonprofit's best interest for leadership to look at the provisions of Sarbanes-Oxley and consider which of them constitute best practices for that organization. It is not necessary to adopt each element verbatim, but rather keep in mind the spirit of what is intended and respond appropriately.

FS: Can you cite some suggestions that nonprofits should consider now?

EF: Non-profits should consider four specific actions now:

• Sarbanes-Oxley requires that companies must have at least one "financial expert" serving on the audit committee. This is also a best practice for nonprofits. A nonprofit should have a finance committee, and if it is large enough, an audit committee as well. Keep in mind the spirit of what is intended in Sarbanes-Oxley. This group should be getting more involved with auditors -- selecting, reviewing and maintaining oversight responsibility. The finance or audit committee should have at least one person who is considered an expert -- someone who feels comfortable reading and interpreting financial reports.
• Sarbanes-Oxley's whistle blower policy protects employees who risk their careers by reporting suspected illegal activities in the organization. It is illegal for a company to punish the whistle blower in any way. This applies to nonprofits as well and it constitutes a best practice for any organization.
• The independence of board members, under Sarbanes-Oxley, refers to compensation and benefits provided to directors. There can be no economic relationship between a board member and the organization, or if there is, it must be fully disclosed. This is easy for a nonprofit to adopt.
• Partners in auditing firms must be rotated every five years, according to Sarbanes-Oxley. This is good for nonprofits, too. To go one step further, a company might consider rotating the entire auditing firm. Although this isn't required, it is a good practice, assuming the benefits outweigh the costs. At a minimum, the lead partners should be rotated every few years.

FS: What can you suggest to nonprofits with small-to-medium budgets?

EF: Nonprofits should review the provisions of Sarbanes-Oxley and consider the cost/benefit analysis of what might reasonably be adopted. Evaluate what relates to your organization. You aren't obliged to adopt each element verbatim, but use them as guidelines for what will work best.

Also consider that changes such as these don't always happen overnight. It is important to recognize that there's work involved with making these changes. Discussions need to take place and policies need to be examined. With the whistle blower provision, for example, some of the questions to address might be: To whose attention does the whistle blower bring his or her complaints? What happens when the employee blows the whistle? Is the person guaranteed anonymity? Is there follow-up? What if the person on the receiving end of the complaints is allegedly connected to the issue the employee is raising? How does the organization determine whether the allegations are being made in good faith?

With any of these practices, a thorough and ongoing examination, review and test should be standard procedure. Establishing policies that improve your operating efficiency and accountability can only serve to strengthen your organization. Furthermore, it shows your constituents and donors that your organization adheres to the highest standards of professionalism.

Eric Fraint is a CPA and the founder and President of Your Part-Time Controller, LLC, a firm specializing in providing accounting, consulting, and controller-type services to nonprofit organizations. Mr. Fraint has been an Adjunct Professor in Drexel University's Graduate Arts Administration Program where he taught the class on nonprofit financial management. He is an instructor on various financial topics for the Nonprofit Center at LaSalle University, and for the Philadelphia Cultural Management Initiative, an initiative of the Pew Charitable Trusts.

For further information on Your Part-Time Controller, go to:

www.yptc.com