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How Nonprofits Have Responded to Sarbanes-Oxley: August Question of the Month Results

A Newsletter reader wrote, "I would like to see articles on voluntary implementation of Sarbanes/Oxley by nonprofits—what are nonprofits actually doing—also, articles on states implementing SOX law impacting nonprofits such as has been done in California and 4 other states." Last month we addressed the second half of his request (see "Nonprofits, Sarbanes-Oxley, and the States"); this month we look at the first half. (For background information on Sarbanes-Oxley, see "The Sarbanes-Oxley Act and Implications for Nonprofit Organizations.")

Voluntary Nonprofit Compliance

August's Question of the Month asked, "Has your organization made any changes in response to Sarbanes-Oxley legislation?" A majority—61 percent—of participants said that their organizations had.

Three-quarters of the respondents in the "Yes" category were associated with nonprofits having budgets of $1 million or more:

Annual Expenditures of Organizations That Have Made Changes % "Yes" Respondents
$20 million+ 10%
$5 million-$19,999,999 40%
$1 million-$4,999,999 25%
$500,000-$999,999 10%
$250,000-$499,999 10%
$25,000-$99,999 5%

The Food Bank of Central & Eastern North Carolina is placing "a much greater emphasis on accountability and transparency in all financial and programmatic activities," noted Sally Wade.

The majority of respondents who said their organizations have not made changes were from nonprofits with budgets of $249,000 or less:

Annual Expenditures of Organizations That Have Not Made Changes % "Yes" Respondents
Less than $25,000 15%
$25,000-$99,999 15%
$100,000-$249,999 23%
$250,000-$499,999 8%
$500,000-$999,999 8%
$1 million-$4,999,999 15%
$5 million-$19,999,999 8%
$20 ;million+ 0%
Don't know 8%

Changes may be coming to these nonprofits, however. "Although we have not yet made changes, it is likely that we will in the near future," an anonymous participant stated. Herm Smith of StreamTeach wrote, "We've attended a conference on the subject held by members of a local legal firm." And Barbara of the Berkeley Opera said, "California's Nonprofit Integrity Act has caught our (or at least my) attention. I review it as a resource to guide our attention to best practices as we tackle one problem or another."

What Nonprofits Have Done

Changes Made by Nonprofit Organizations*
Action % "Yes" Respondents
Created an audit committee 55%
Created a process to prevent retaliation against
Established a policy of switching auditors or auditing firms at least every five years 35%
Created a written, mandatory policy for document retention and destruction** 35%
Began having our board review our Form 990, 990-EZ, or
Established a conflict of interest policy 20%
Created a process for dealing with internal complaints 20%
Began making our financial statements available to the public 10%
Stopped getting filing extensions for our Form 990, 990-EZ, or 990-PF 10%
Began having our finances audited 5%
Began having our finances reviewed 5%
Began having our financial statements compiled by a professional accountant 5%
Began having our executive director/president/chief executive officer review our Form 990, 990-EZ, or 990-PF 5%
Began filing our Form 990, 990-EZ, or 990-PF electronically 5%

*Participants could select more than one item.
**An anonymous reader asked for information on "records retention as related to SOX."

An anonymous participant stated that his or her nonprofit "documented internal controls." Chip Levengood reported that EnterpriseWorks/VITA "renamed finance comm to be called finance and audit committee" and "strengthened the mandate and role of the Board Committee, now called Board and Governance Committee." He maintained, "Sarbanes Oxley and similar state legislation in many jurisdictions should not be a major problem for well managed NGOs, just as it should not be a problem for well managed private sector companies."

Sharon Loughridge noted that D.A. Blodgett for Children "expanded our finance committee to act as an audit committee and meet without staff with the auditors." The organization also created an ethics code and revised its conflict of interest policy. She wrote, "I think the additional safeguards are good steps [that] created increased discussion about these issues."

What Does It All Mean?

These responses suggest that:

  • Larger nonprofits have changed the way they do business in response to Sarbanes-Oxley.
  • Smaller nonprofits have not made changes—yet.
  • Creating audit committees and protecting whistle-blowers are the most common, but not the only, steps nonprofits have taken.
If these results are representative, then Sarbanes-Oxley has had a significant impact on the sector. Participants' comments indicate that the legislation will continue to affect nonprofits. As Jim Williamson of the Community Foundation of Greater New Britain observed, "As it might be applied to nonprofits, I believe that much of Sarbanes-Oxley is just plain 'good business practice.'"

Suzanne E. Coffman, September 2005
© 2005, Philanthropic Research, Inc. (GuideStar)

Suzanne Coffman is GuideStar's director of communications and editor of the Newsletter.

From the President's Office, August 2005

Dear Friend:

The next few months are shaping up to be significant ones, and we may see several pieces of legislation affecting the nonprofit sector introduced in Congress after the summer recess. Although enacting legislation is a process, that process will affect the people and organizations that make up the sector—especially those of us involved with charitable nonprofits. We will be under renewed scrutiny from legislators, government officials, the media, and donors, even before any proposals become law.

What should we do to prepare for autumn 2005? First, be transparent. As I noted in April, at GuideStar we believe that transparency is the most effective means nonprofits have to demonstrate support for self-regulation. And self-regulation is the most effective means nonprofits have to promote charity reform that curbs abuses without hamstringing the sector.

How can you increase your organization's transparency? Use your communications to do more than woo donors—use them to define your mission, programs, and accomplishments in concrete, measurable terms and to tell the public how you evaluate your programs. Inform supporters how you spend their money. Incorporate these messages into your brochures, newsletters, correspondence, Part III of your Form 990 (if you file one), and your Web site (if you have one).

Upload your audited financial statement, annual report, letter of determination, and other official documents to your GuideStar Report. Update your organization's GuideStar report, if you have not already done so. Then direct your supporters and other members of the public to this information on GuideStar.

Paul Brest and M. Cass Wheeler, co-conveners of the Panel of the Nonprofit Sector, stated in their preface to the panel's Final Report, "Accountability is crucial to our sector. Charitable organizations ... can fulfill [their] missions only by maintaining the trust of the public. Meeting the ethical standards that will justify this trust requires a series of ongoing commitments: from each charity and foundation, which must set standards and implement practices that manifest its dedication to transparency and governance; from the charitable community as a whole, which must share recommended practices and educate its members; and from the government, which must strengthen the law and dedicate the resources necessary to enforce it" (emphasis added).

Second, make your views known. Tell your state and federal legislators what you think. Contact your state nonprofit association or other resources listed at NCNA to find out how you can join the response to charity-reform proposals. If your organization is part of a larger nonprofit, get in touch with your regional or national office to see what role you can play on this issue.

Finally, stay abreast of developments in the charity-reform arena. We will try in the GuideStar Newsletter to keep you updated on major changes. I hope you have had a chance to read the articles by Senator Rick Santorum (R-Pa.) and Diana Aviv of Independent Sector. Theirs are important voices on charity reform.


Bob Ottenhoff
President and CEO

Working Together to Make a Difference

Dear Friend:

Over the past nine months, the Panel on the Nonprofit Sector ( has provided the charitable community an unparalleled opportunity to demonstrate many of our most admirable features. Our efforts to build more transparent and accountable organizations can only help to strengthen our sector's greatest quality: our ability to provide indispensable services to communities across the country and around the world.

Promoting Charity Is a Must for Our Future

In the 2005 edition of Giving USA, the annual report on philanthropy, the Giving USA Foundation reported that, remarkably, Americans had donated nearly $250 billion to charitable organizations in the previous year. The enormity of these gifts confirms that the American people share my belief that there are few, if any, groups more critical to the future of our society than the nonprofit community. The kindness of the American spirit drives our citizens to give—it is the responsibility of our elected officials to create an environment in which charitable giving is encouraged, not penalized.

Scheduling Thanks: July Question of the Month Results

"I'd like to suggest a question for your monthly newsletter," a reader wrote. "How often do you change your basic 'thanks for the donation' form letter?" She explained, "We use specific forms for special events and particular fund drives, but I worry sometimes that donors will notice that the (unsolicited) $50 check they mailed in the spring is acknowledged with the same form letter as the $100 check they mail in the fall. We've been 'having a busy and successful year' for noticeably more than just one year now."

Nonprofits, Sarbanes-Oxley, and the States

Enacted in response to corporate accounting and oversight scandals in 2001 and 2002, the American Competitiveness and Corporate Accountability Act of 2002 became law on July 30, 2002. Known popularly as Sarbanes-Oxley, the act introduced significant new governance standards, requiring the boards of publicly traded companies to oversee closely financial transactions and auditing procedures.