Nonprofit leaders should bring some birthday cake to their next board meeting and use it as a way to celebrate and reflect on the changes in governance that the Sarbanes-Oxley Act brought about when it was enacted 10 years ago this week.
The law, named after its two legislative sponsors, was a response to Enron, WorldCom, and other corporate scandals that raised major accountability concerns in the for-profit world. It instituted new controls intended to prevent wrongdoing and enhance both the integrity of financial reporting and the quality of corporate governance.
But the law, and its spirit, continues to have widespread implications for nonprofits as well. It is thus worth encouraging board members to use this anniversary to reflect on these implications, especially at a time when so many nonprofit scandals have drawn headlines and attracted regulators’ scrutiny. Over the past 10 years, many nonprofits “got the Sarbanes message” and changed their practices. Those that didn’t became “outliers” when it comes to governance. But even for those nonprofits that did take action, leadership memories grow dim—10 years is a long time, so a Sarbanes refresher course makes sense for both board members and senior managers.
Three provisions of the law directly apply to nonprofits: They must have a system for accepting and dealing with whistle-blower concerns; they must have policies that protect against the intentional destruction of key documents, and their employees must not impede or obstruct governmental investigations.
But those aren’t the only ways the law has affected nonprofits.
Sarbanes-Oxley also worked to make changes for nonprofits through practice rather than through requirement. The entire relationship between nonprofits and their auditors has changed, as have the independence and responsibilities of board audit committees. Few nonprofits allow the cozy relationships that once existed between board members and the accounting consultants who review and approve financial statements, tax returns, and other documents. Many nonprofits have also adopted Sarbanes-Oxley-style ethics guidelines for their financial officers.
More important, however, is the way Sarbanes-Oxley has led to tougher laws and regulations, new guidance for nonprofits on smart governance, and an overall greater emphasis and sensitivity to governance matters in boardrooms themselves.
The roots of the Internal Revenue Service’s focus on charity governance can be traced to the Sarbanes-Oxley law’s concern about whether boards are adequately overseeing their organizations. Sarbanes-Oxley was clearly the model for the California Nonprofit Integrity Act and similar state laws and regulations focused on the accuracy and transparency of financial statements and related reporting by nonprofit organizations. The enhanced attentiveness of state charity officials to nonprofit governance can be attributed in large part to the ideas contained in the Sarbanes-Oxley law.
The measure has also influenced the ethical obligations of lawyers who serve nonprofits. Some large organizations have begun to adopt Sarbanes-Oxley-based provisions that require executives to return portions of their compensation when financial statements prove inaccurate or misleading.
Sarbanes-Oxley also prompted national organizations that seek to promote nonprofit accountability to step up their efforts to help charities and foundation trustees improve self-governance. Two of the most notable compilations are those prepared by a group appointed by Independent Sector, known as the Panel on the Nonprofit Sector, and by the American Bar Association.
Even the credit-rating agencies have adjusted the way they monitor nonprofits. Several of them—including Fitch, Moody’s, and Standard & Poor’s—now give ratings benefits to nonprofits that show they follow Sarbanes-Oxley practices on internal controls, auditor independence, and corporate governance.
But perhaps the more lasting impact of Sarbanes-Oxley on nonprofits has been the extent to which it has sharply increased awareness of the importance of corporate governance. It has done so by reorienting leadership focus on the boardroom, rather than solely on the executive suite. Nonprofits now clearly recognize the important contribution that effective, independent, and informed governance can make in achieving their missions.
The 10th anniversary of Sarbanes-Oxley arrives at a particularly opportune time. The nonprofit world has been buffeted over the past year by a series of particularly unfortunate scandals and controversies, many of them attributable to inadequate financial controls, inaccurate financial statements, and ineffective and inattentive governance.
These are precisely the types of failings that Sarbanes-Oxley, and the corporate responsibility movement that followed, were designed to prevent. It’s thus very important for nonprofit board and executive leadership to revisit the themes of the law and the reasons it became so broadly relevant to charities. It was—and is—all about preserving financial integrity and effective governance. That’s the best way to celebrate the anniversary.