Sarbox’s Influence Seeps into Nonprofits

Tax-exempt organizations are slowly making changes to their governance policies, following demands by proponents of the Sarbanes-Oxley Act's virtues.
Sarah JohnsonDecember 4, 2007

Five years after companies began complying with the Sarbanes-Oxley Act, nonprofit organizations have gotten into the rhythm of improving their governance policies and internal-controls documentation.

In a recent survey of nonprofit executives and board members, Grant Thornton found that 92 percent have implemented new accounting policies and procedures within the past few years, compared to only 59 percent who last year said they had new policies in place.

In many ways the call for changes in financial-reporting procedures at not-for-profits organizations — which notoriously have a reputation for nontransparent financial information and lack of consistent, regulatory oversight — are tied to the corporate scandals earlier this decade and Sarbox.

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The governance mantras inherent in the 2002 law for publicly traded companies have been carried over to the nonprofit sector from the corporate suits who sit on the not-for-profit boards. “They are generally regarded as good practices,” says Larry Ladd, the accounting firm’s director of higher education practice. The organizations’ audit committees are also taking their work more seriously than in the past, he adds.

Nonprofits have also been motivated by other mandates more directly aimed at them. The Internal Revenue Service has recently made changes to its Form 990, which nonprofits with more than $25,000 in revenue are required to fill out each year. And earlier this year the IRS proposed further revisions to the form, which is publicly available and often used by donors and watchdog groups to review a nonprofit’s financial activities.

However, in its survey of 603 representatives who hold posts at universities, religious organizations, among other nonprofits, Grant Thornton reported a slow trend of boards getting more involved in the submissions of Form 990s. Currently, only 30 percent have a policy that requires the board or one of its committees to review the forms.

In addition, nonprofits have recently adjusted to new accounting rules that require them to change how they treat alternative investments, such as private equity funds and hedge funds, on their books.

As CFO magazine reported earlier this year, proper accounting for nonprofits’ financials can be hindered by demands by potential donors for keeping their fund-raising and overhead costs down. To meet those requests, some nonprofits either leave out their fund-raising costs by not reporting them at all, and some create separate, supporting organizations to carry those costs.

While demands for better transparency of nonprofits is slow-moving, the changes underfoot by the IRS and nonprofits’ boards have brought about some progress in recent years.

For example, nine out of 10 nonprofits have a conflict-of-interest policy in place, a request made by the IRS last year. These types of policies discourage officers and directors from taking actions in matters related to an investment fund in which they serve a prominent role. In addition, 68 percent have a whistle-blower policy, another new requirement the IRS is expected to implement.

The IRS is also starting to ask for more detailed finance information from nonprofits, including data related to executive compensation (sound familiar?). This concept will be a new one for some nonprofits; 6 percent of the respondents reported their board never talks about how much they pay their executives, despite the fact that very subject has resulted in negative press for some organizations.

Congress itself has also joined the fray by holding hearings earlier this year to explore the accountability of nonprofit organizations and scrutinize the financial mishaps at the Smithsonian Institution, for example. The government’s increased interest in nonprofits’ financials should come as no surprise considering it essentially acts as their largest donor. “Because it is granting tax exemptions, the government has the right to expect at least full disclosures and increased transparency,” says Ladd.

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