News & Views

Following the corporate and accounting debacles of Enron, Arthur Andersen and others, the American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act, was signed into law with the purpose of rebuilding the public's shaken trust in America's corporate sector.

Essentially, this legislation requires that publicly traded companies must adhere to significant new governance standards that broaden board members' roles in overseeing financial transactions and auditing procedures.

While Sarbanes-Oxley specifically applies to publicly traded corporations, the writing appears to be on the wall for nonprofits.

The aftershocks began to rumble when New York Attorney General Eliot Spitzer announced proposed new requirements similar to those of Sarbanes-Oxley but applicable to nonprofits. California became the first state to officially step up to the plate by passing its Nonprofit Integrity Act of 2004, which imposes new protections against fraudulent fundraising practices and requires greater financial accountability by charities and commercial fundraisers.

California's passage of this Act could signal the imminence of nationwide nonprofit regulation. Therefore, we suggest strongly that nonprofits of all sizes and in all states recognize this as an unstoppable trend -- one that is here to stay.

Beyond government regulations, there will be other implications. Starting with perceptive donors who may begin to question charities about their compliance with Sarbanes-Oxley, whether or not the Act specifically targets nonprofits.

In anticipating new, tough legislation, we feel that nonprofit boards and executive leadership should consider adopting these principles as a demonstration of "best practices" management.

The EHL Consulting Group, Inc. advises clients and friends to heed the call and take a close look at the provisions of Sarbanes-Oxley to determine whether their organizations ought to voluntarily and proactively adopt these new standards in financial procedures and auditing standards.

It can't help but send a positive message to donors and others that your charitable organization is committed to following the same stringent financial and auditing procedures as your counterparts in the for-profit world.inthe for-profit world.

• Create an audit committee (if you do not already have one) comprised of at least one CPA or a professional who understands financial statements. In a smaller organization, the finance committee can also function as the audit committee. Conduct an external financial audit ... annually, if you can afford it. Get the highest level of audit possible within your budget constraints.
• Rotate auditors or lead partner at least every five years. Require disclosure to audit committee of critical accounting policies and practices. Use audit committee to over see and enforce conflict-of-interest policy.
• CEO's and CFO's must be able to fully understand, interpret and sign off on detailed financial statements (Form 990, if you use that as a public financial statement), making sure that they are accurate and complete. They must be able to attest to the presence and use of internal accounting controls.
• Make sure you have a code of ethics for senior management and the governing board. An annual sign-off by all Board members regarding conflicts of interests adds credibility, too.
• Consider very carefully all transactions between your organization and any "insider," including executive compensation and fringe benefits and perks. "Insiders" means: organization officers, directors, trustees and management in decision-making positions, major donors, and members of the immediate families of any of the above; controlled and affiliated organizations and trusts: and businesses in which any of the preceding are in significant positions of authority (owner or manager). Establish a conflict-of-interest policy and a rigorous means of enforcing it.
• Develop, adopt and disclose a formal process to deal with complaints and prevent retaliation. Take any employee complaints seriously, investigate the situation and fix any problems or justify why corrections are not necessary.
• Have a written, mandatory document retention and periodic destruction policy, which includes guidelines for electronic files and voicemail.

By adopting these measures -- all making good business sense -- you are telling the world that your organizational accountability and responsibility are above reproach.

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... or contact The EHL Consulting Group.