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Should nonprofits be legally bound to Sarbanes-Oxley?
By June Bradham
Nonprofit Development
Q: I am the CEO of a public company that has spent an enormous amount of time and money to comply with the Sarbanes-Oxley Act. I am also on three nonprofit boards that certainly act ethically but do not seem to be as worried about the details of the act as we are in business. Should I be concerned about the boards’ apparent lack of concern?
A: The main objective of the law you refer to, officially the American Competitiveness and Corporate Accountability Act of 2002, was to rebuild public trust in publicly traded companies.
At the moment, however, South Carolina has no legislation that ties this act to the nonprofit sector. Since the act does outline several best practices for governance, nonprofits are encouraged to voluntarily adopt the practices as outlined in Sarbanes-Oxley.
Q: The Sarbanes-Oxley Act requires that boards ensure their auditors’ independence from their clients. I serve on the finance committee of a nonprofit with more than
$1 million in total annual revenues. What should I recommend to be in compliance?
A: Although the act is not yet legally tied to organizations—excluding houses of worship or others exempt from filing the 990 Form—with $1 million or more in annual revenues, we suggest an annual audit be attached to their Form 990 or 990-PF.
Nonprofits with revenues less than $1 million should consider having a professional accountant compile an audit or, at the least, financial statements. Even better, you may wish to encourage your organization to form an audit committee that is separate from the finance committee. Note that no member of the staff, including the executive director, should serve on the audit committee. In part, the audit committee’s charge will be to ensure that the firm chosen to conduct the audit is competent to do the job.
Q: I understand that the U.S. Senate Finance Committee is examining increased regulation of the nonprofit sector through the imposition of Sarbanes-Oxley-style legislation. Where does that stand?
A: This is a very hot issue and is scheduled to be examined in-depth this month in the Senate. The Senate Finance Committee’s Panel on the Nonprofit Sector prepared recommendations for Congress to improve the oversight and governance of charitable organizations. You can read more at www.independantsector.com.
Q: As the development officer for a local nonprofit, what should I learn from the corporate sector and the Sarbanes-Oxley Act?
A: First and foremost, be transparent with information. A recent study revealed that donors they give when they find a “new cause about which to care passionately” and because they receive “better information that donations are making a difference.” If the organization has a cause about which the donor deeply cares, has board and staff leadership who they respect and presents finances and programs in a way that is open, honest and meaningful, donors will be excited to participate.
Executive staff turnover
Q: I am on the board of three nonprofits. All three have experienced executive director turnover within three years. Is that normal?
A: Unfortunately, there is high turnover. The study “Daring to Lead 2001” offered the following key findings:
• Three out of four executives expect to leave their current jobs within five years;
• One in three executives is eventually fired or forced out of the job;
• Only 29% of executives have discussed a succession plan with their boards; and
• Even when executives do leave their jobs, most will stay in the nonprofit sector: 70% say that another nonprofit, a grant-making organization, or consulting is their ideal next job.
Additionally, a negative perception of the board of directors by the executive director is often strongly associated with executive director turnover.
Q: We have an excellent executive director of our nonprofit. What should we do to keep her?
A: Encourage your fellow board members to insist on mission clarity, provide strategic direction, set policy and ensure sufficient resources, both human and financial. The board that hires and evaluates the executive director must give him or her clear direction. It is then up to the director to be sure that the appropriate organization is in place to ensure that its work is successful. Adequate compensation is also important, as is encouragement by the board to powerfully execute the mission of the organization. Boards often hold back on approving bold endeavors, with the unintentional effect of frustrating an executive director who is attempting to make lasting changes in the lives of those the nonprofit serves.
June Bradham, CFRE, is the president of Corporate DevelopMint, a full-service fundraising consulting firm based in Charleston. E-mail questions to jbradham@corporatedevelopmint.com.
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