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By Debra Ladyman, C.P.A.
In response to corporate and accounting scandals, the Sarbanes-Oxley
Act of 2002 (the Act) was signed into law July 30, 2002. Enacted to restore
public confidence and trust in America’s corporate sector, the Act
makes publicly traded companies, their senior management, and boards of
directors more accountable for financial management and reporting practices.
While the Act does not directly apply to nonprofit organizations (NFPs),
many provisions of the Act are being embraced by NFPs as part of carrying
out their fiduciary responsibilities. Several large NFP trade associations
and oversight bodies are providing related recommendations to their members.
Following are some of the key provisions of the Act that your organization
may wish to consider voluntarily adding to its corporate governance framework:
Establish an Audit Committee
Many NFPs have created an audit committee as a subcommittee of their
boards of directors. An audit committee has responsibility for oversight
of the NFP’s financial-reporting processes, and NFP management is
accountable to the audit committee on such matters.
An audit committee also may have the responsibility to hire, oversee,
and compensate the NFP’s external auditors. The committee should
communicate with the auditors about significant accounting policies and
judgments made by management and should pre-approve nonaudit services
provided to the NFP by its external auditor.
In selecting an audit committee, and to achieve increased benefits from
it, NFPs should consider the Act’s requirements for public company
audit committees:
- Independence — Each member should
be an independent member of the board of directors; these individuals
should not be members of management and should not receive compensation
from the NFP other than for their board service.
- Competence — The NFP should attempt
to have at least one “financial expert” as a member of its
audit committee.
Management Responsibilities
NFPs should consider developing a code of ethics for all employees,
including senior management. NFPs also should obtain conflict-of-interest
statements from management and the board of directors to clearly establish
the organization’s self-dealing policy.
Some NFPs also are requiring their chief executive and chief financial
officers to certify the NFP’s annual financial statements are stated
fairly. Management also is responsible to establish and maintain proper
internal controls, including those over financial reporting.
Whistle-Blower Protection
Organizations should develop procedures for managing employee complaints
and allegations, including developing a process that employees can follow
to report inappropriate activities and still maintain their anonymity.
Retain and Destroy Documents
For their protection, NFPs should implement policies for record retention
and periodic destruction, covering print and electronic files and documents,
voice mail and electronic back-up procedures. They also should periodically
assess system reliability.
If an official investigation is in progress or is expected to occur,
the organization’s policy should clearly state the NFP will stop
all document purging until the completion of the investigation.
Set Proper Tone
Be proactive: as your organization responds to the increasing emphasis
on corporate governance, assess your board practices and operations. This
will help protect your image and reputation and build stakeholder and
constituent confidence and trust. In addition, management should emphasize
to all organization employees the importance of their fiduciary responsibilities
and that inappropriate behavior by anyone in the organization will not
be tolerated.
Originally published in the 2005 Winter issue
of The CampLine.
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