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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.
Topics: Trends