How the Sarbanes-Oxley Act Applies to Nonprofit Organizations

The dishonesty of investor-owned companies was uncovered and reprimanded in 2002 with the Sarbanes-Oxley Act. Congress was determined to outline better accounting controls for investor-owned companies. The act’s purpose was to make financial reporting one of management’s top priorities.

The Sarbanes-Oxley Act Ensures…

  • The establishment of an independent and competent audit committee of the board
  • A periodic change of auditors
  • The prohibition of auditing firms from bestowing audit services as well as nonauditing services
  • Sufficient disclosure of all critical accounting policies and practices by auditors
  • Disclosure and conflict-of-interest requirements on boards of directors
  • Public disclosure of internal control mechanisms, material off-balance sheet adjustments, and corrections to past financial statements
  • Protection from retaliation for those who uncover any improprieties within the organization

The Sarbanes-Oxley Act only officially applies to publicly traded companies. So, how can nonprofits benefit from the provisions it outlines?

If followed, the principles described will certainly be protective provisions for any nonprofit organization. Keeping auditors independent and having adequate internal controls established will certainly safeguard the accuracy of reported financial information.

Unfortunately, the nonprofit sector has had its own financial scandals due to inadequate disclosure, inaccurate financial reporting, greed and dishonesty. Therefore, legislators are responding. For example, the state of California was the first in 2004 to establish the Nonprofit Integrity Act. It requires any charity registered with the attorney general and receiving annual gross revenues of two million dollars or more to form an audit committee. Even the healthcare industry through the National Association of Insurance Commissioners has revised its Model Audit Rule to more closely resemble the requirements laid down through the Sarbanes-Oxley Act.