Posted on October 19, 2005

Nonprofits Are Embracing Corporate-Style Compliance, Report Finds

Three years after passage of the Sarbanes-Oxley Act, lawmakers and nonprofit leaders are still trying to identify governance reforms that will curb abuses by larger organizations without penalizing smaller entities, a new report from Standard & Poor's finds.

Sarbanes-Oxley was passed in 2002 to protect investors by improving the accuracy and reliability of corporate disclosures. Designed with deep-pocketed public companies in mind, the legislation addressed such issues as the establishment of accounting-oversight boards, auditor independence, corporate responsibility, and enhanced financial disclosure. Recognizing the need to bring the same kind of accountability to the nonprofit sector, lawmakers and nonprofit leaders have worked to identify governance reforms that will curb abuses by larger organizations without imposing financial and administrative hardships on smaller nonprofit entities. At the state level, this has included efforts to increase registration, audit, and compliance requirements as a function of organizational size.

Meanwhile, state associations of nonprofit groups worried about a more burdensome level of government regulation have been crafting their own recommendations, which, typically, include the preparation of audited financial statements by independent auditors, an audit committee requirement for organizations above a certain size, clearly stated codes of ethics and whistleblower policies, and increased disclosure about board members.

"Although many people agree that enhanced oversight may be beneficial, and encourage greater confidence in charities, sector officials seem to prefer that new guidelines come directly from the sector," said S&P credit analyst Mary Peloquin-Dodd. "The wide range of missions, sizes, and scopes of organizations comprising the nonprofit sector makes it difficult to create a single list of requirements that work for everyone."