Ralph Munro asked:

"How much will the new Sarbanes-Oxley Legislation for publicly held companies 'wash over' on to board members of non profits?"

Rob Fleming, CPA, and Mitch Hansen, CPA, of Clark Nuber in Bellevue, provide these observations:

As a result of corporate scandals such as Enron and WorldCom, the federal government adopted the Sarbanes-Oxley Act in an attempt to restore investor confidence. Although the Act is directed at public companies, private companies and nonprofits will soon feel the effects of the Act.

Within the Act is a provision that each State should consider applying provisions of the Act to private companies and nonprofits. The States of New York, Texas, and California have already implemented legislation applying provisions of the Act to nonprofits, and many other states are considering similar legislation. Provisions of the Act that could be applied to nonprofit organizations include:

• The organization should have an audit committee; the committee members should be independent; and the committee should have at least one financial expert or disclose that it doesn’t.
• Certifying individuals must certify that they have reviewed the report; the report doesn’t contain any untrue statements of material facts or a material omission; the financial statements fairly present the financial condition of the organization; the certifying individuals have designed and evaluated the internal control system to ensure they are aware of material information concerning the organization’s operations; and the signers have disclosed to the organization’s auditors and audit committee all deficiencies in the controls and any fraud involving management or key employees.
• The Act prohibits most personal loans from the organization to any key employee or director. Existing loans are grandfathered.
• Organizations must adopt a code of ethics for senior financial executives or disclose why they have not done so. Failure to implement a code could affect public perception of the organization, and decisions by contributors, grantors, insurers and lenders.
• The Act gives the SEC power to remove unfit directors. States, under existing laws, may more closely scrutinize boards and more frequently challenge a board member’s fitness to serve on the board.
  

Even if new legislation is not adopted by the states, nonprofits may still be held to the requirements of the Act.

The General Accounting Office has already implemented new independence standards applicable to all entities who receive federal funding. The IRS is in the process of revising the Form 990 to increase focus on corporate responsibility. Many corporate board members also serve on nonprofit boards and may push for compliance with the Act by the nonprofit board. Courts may apply the requirements of the Act to nonprofit entities in the same manner as the anti-fraud statute which was extended to cover private entities. Insurance companies may require compliance with some provisions before extending certain types of coverage. Lenders and bond issuers may require similar action before agreeing to lend funds, and may require compliance from existing borrowers.

Nonprofits are not literally subject to the Sarbanes-Oxley Act; nevertheless, they may soon feel its effects.

-- September 2003