Articles

Effect of the Sarbanes-Oxley Act on Nonprofit Organizations

• Self Evaluation
• Board must do a thoroughly honest and comprehensive self evaluation of its own governance structures and effectiveness, including a review of the organization’s internal controls and compliance mechanisms.
• Board scrutiny should focus on the areas of finances and financial controls, executive compensation and the adequacy of policies and procedures for avoiding board and executive conflicts of interest
• Adopting some Sarbanes-Oxley requirements is advisable for most nonprofit organizations. Moreover, though not currently mandated by law, these and other requirements may ultimately be forced upon nonprofits by state law, state regulators, court decisions, IRS requirements, bond underwriting requirements or other mandates.
• Audit committee
• Sarbanes-Oxley requires an independent audit committee which consists entirely of board members who are not executives or otherwise employees of the organization.
• The audit committee responsibilities include consulting and working closely with the organization’s independent auditors, as well as establishing and monitoring internal financial controls, including procedures for handling whistle-blower complaints about irregularities.
• One or more members of the audit committee must have financial expertise, and no member of the audit committee should have any paid business, financial or consulting relationship of any kind with the organization outside of his or her service as a director.
• Financial Statements
• Sarbanes-Oxley requires that both the chief executive officer and the chief financial officer personally attest to the validity of the organization’s financial statements and internal controls. Under the law both officers must verify that:

• They have reviewed the financial statements
• The statements do not contain “any untrue statement of a material fact” or a material omission.
• The statements fairly present the organization’s financial condition.
• The chief executive and the chief financial officer have designed and evaluated systems of internal controls to ensure that they are aware of material information concerning the organization’s operations, and
• The chief executive and chief financial officer have disclosed to the board’s audit committee and to the independent auditors all deficiencies in controls and any fraud involving management and key employees.

• Code of Ethics
• Every nonprofit should have a code of ethics, a conflict-of-interest policy and a mechanism, such as an annual questionnaire, enabling board members and key executives to verify the absence of any conflicts or disclose any actual or potential conflicts.