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Saturday , September 22 , 2018

The Relevance of the Sarbanes-Oxley Act to Non-Profit Organizations:

Changes in Corporate Governance, Organization, Financial Reporting,

Management Responsibility and Liability

by John Knubel © 2004

The Sarbanes-Oxley Act was enacted in response to Enron, Worldcom (MCI), Health-South and several other recent episodes involving corporate fraud, mismanagement and abuse of power. The act is primarily legally binding only to publicly traded companies but a small part of it is legally binding for unlisted and not-for-profit companies. (Many believe the Act only applies only publicly listed companies. This is not entirely true). Sarbanes-Oxley defines a new ‘best practice’ for Corporate America and sets a new precedent that could be applicable in court even for non-publicly-listed companies.

Formally passed by Congress in July 2002, the full meaning of the act is still evolving. The Securities and Exchange Commission (SEC), NASDAQ and the New York Stock Exchange are still in the process of writing interpretative regulations and rulings which have the full force of law for publicly traded companies and the ‘force of best practice precedence’ for the rest of corporate America, including the non- profit sector. These interpretative rules are long and complex. For example, the written rules published in final form last January for Sections 406 and 407 covering the Board Audit Committees and organizational Codes of Ethics, are about 60 pages long.

The implications of the Act are pervasive. It mandates increased personal liability for Senior Managers, the Board and Audit Committees. It defines new reporting requirements and gives new definitions of conflict of interest for Board Audit Committees, Auditors, Senior Management teams and internal audit organizations. It restricts the services Auditors can provide and restricts hiring practices between these entities. A new national accounting oversight board organizational structure is established.

Why non-profit companies should be concerned. In addition to representing best industry practices, the act addresses financial governance problems and issues that people are going to jail for violating today. These problems and issues are common to all organizations whether they are publicly listed or not. Personal management liability issues are an additional concern and it appears the Act and its supporting interpretative rules will become a standard for defining corporate responsibility throughout corporate America. It could be applicable in future court cases.

Wiser nonprofit senior management teams and boards are investing time and money to understand the Act and how to comply with it. They are adopting the organizational structures recommended by the Act as well as implementing the codes of ethics required. They are conducting detailed reviews of their organizations and comparing themselves to the Act’s new requirements in its key areas including: (1) Board Audit Committee and Senior Management Organization, (2) Financial reporting and accounting, (3) Corporate ethics and culture, and (4) Senior Management accountability requirements, especially concerning Board and Senior Management responsibility and personal liability.

Additional information on the Sarbanes-Oxley Act and suggestions for conducting organizational reviews can be obtained by contacting us via the link at the bottom of this page.

John Knubel

John Knubel has 30 years Executive Experience in business and government. His private sector experience includes general management and leadership in Real Estate, Banking, Insurance, and the Financial Services Industries. His government experience includes service at the Assistant Secretary level of a Cabinet level Department (the Department of Housing and Urban Development), and at the Deputy Assistant Administrator level, at an agency that was predecessor to the Department of Energy.  He also served on the National Security Council Staff where he headed the Program Analysis Staff, and as a Senior Advisor at the Federal Retirement Thrift Savings Plan and the Nuclear Regulatory Commission. 

John is currently a consultant with Analytical Insights and Solutions in Potomac, MD.