In response to corporate and accounting scandals, the Sarbanes-Oxley Act of 2002 (the Act) was signed into law July 30, 2002. Enacted to restore public confidence and trust in America’s corporate sector, the Act makes publicly traded companies, their senior management, and boards of directors more accountable for financial management and reporting practices.

While the Act does not directly apply to nonprofit organizations (NFPs), many provisions of the Act are being embraced by NFPs as part of carrying out their fiduciary responsibilities. Several large NFP trade associations and oversight bodies are providing related recommendations to their members.

Following are some of the key provisions of the Act that your organization may wish to consider voluntarily adding to its corporate governance framework:

Establish an Audit Committee

Many NFPs have created an audit committee as a subcommittee of their boards of directors. An audit committee has responsibility for oversight of the NFP’s financial-reporting processes, and NFP management is accountable to the audit committee on such matters.

An audit committee also may have the responsibility to hire, oversee, and compensate the NFP’s external auditors. The committee should communicate with the auditors about significant accounting policies and judgments made by management and should pre-approve nonaudit services provided to the NFP by its external auditor.

In selecting an audit committee, and to achieve increased benefits from it, NFPs should consider the Act’s requirements for public company audit committees:

  • Independence — Each member should be an independent member of the board of directors; these individuals should not be members of management and should not receive compensation from the NFP other than for their board service.
  • Competence — The NFP should attempt to have at least one “financial expert” as a member of its audit committee.

Management Responsibilities

NFPs should consider developing a code of ethics for all employees, including senior management. NFPs also should obtain conflict-of-interest statements from management and the board of directors to clearly establish the organization’s self-dealing policy.

Some NFPs also are requiring their chief executive and chief financial officers to certify the NFP’s annual financial statements are stated fairly. Management also is responsible to establish and maintain proper internal controls, including those over financial reporting.

Whistle-Blower Protection


NFP Resources

Organizations should develop procedures for managing employee complaints and allegations, including developing a process that employees can follow to report inappropriate activities and still maintain their anonymity.

Retain and Destroy Documents

For their protection, NFPs should implement policies for record retention and periodic destruction, covering print and electronic files and documents, voice mail and electronic back-up procedures. They also should periodically assess system reliability.

If an official investigation is in progress or is expected to occur, the organization’s policy should clearly state the NFP will stop all document purging until the completion of the investigation.

Set Proper Tone

Be proactive: as your organization responds to the increasing emphasis on corporate governance, assess your board practices and operations. This will help protect your image and reputation and build stakeholder and constituent confidence and trust. In addition, management should emphasize to all organization employees the importance of their fiduciary responsibilities and that inappropriate behavior by anyone in the organization will not be tolerated.

Originally published in the 2005 Winter issue of The CampLine.