The Sarbanes-Oxley Act of 2002 is the response of Congress to corporate scandals of the last few years (Enron, WorldCom, and Tyco, to name just a few). As a result of these scandals, individual shareholders and regulatory agencies have lost confidence in corporate management’s ability to exercise its fiduciary responsibilities. Financial reporting standards and procedures used by U.S. companies were scrutinized by the government, the media, and the general public. In addition the accounting profession responded with a thorough and ongoing self-examination undertaken by all accountants—from CEOs to auditors to regulators to standards setters.

The Sarbanes-Oxley Act (Sarbanes-Oxley) established the Public Company Accounting Oversight Board (the PCAOB) under the supervision of the Securities and Exchange Commission. Sarbanes-Oxley granted the PCAOB the authority to establish, or adopt auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for auditors of public companies. As issued, most provisions of the act are only applicable to public companies and their auditors.

Although Sarbanes-Oxley was not intended to regulate nonprofit organizations, it is important to note that there are two provisions of the law that apply to all corporate entities. First, it is illegal for any corporate entity to punish whistleblowers or retaliate against any employee who reports suspected cases of fraud or abuse. Second, it is a crime to alter, cover up, falsify, or destroy any document that may be relevant to an official investigation.

Although Sarbanes-Oxley was passed in response to recent corporate scandals in public companies, the nonprofit world has not been free from scandal. Recent controversies at the United Way and the American Red Cross have raised awareness and concern regarding nonprofit corporate management. As a result, a number of state legislators and attorneys general are considering proposals to increase nonprofit accountability at the state level. Some state officials have pushed to subject nonprofit organizations to rules similar to those that public companies must follow.

Some reasons the Act could impact nonprofit organizations include the following:

• Increased expectations by regulators (including state regulators) and donors for transparency of financial reporting and accountability of management.


• Increased professional skepticism by independent auditors that has lead to more in-depth questioning of management.


• Possible changes to IRS Form 990 to require disclosures about (a) the existence of conflicts of interest, (b) whether the organization has an independent audit committee, and (c) any transactions or financial relationships the organization has with its substantial contributors, officers, directors, trustees, and key employees.

Sarbanes-Oxley addresses several management principles that could become best practices for governance of nonprofit organizations. The following are examples of principles relevant to nonprofit management:

• Governance is best addressed through the creation and operation of a strong and independent audit committee  


• To maintain independence, both management and the audit committee should take great care when making any arrangements for the auditor to provide non-audit services  


• The CEO and CFO should understand the financial, compliance and other external information reporting  

Management of of nonprofit organizations should consider the trickle-down effect of the federal legislation on state legislation and continue to monitor developments in this area.

The AICPA’s website at www.aicpa.org includes a section for monitoring state activities related to the Sarbanes-Oxley Act.