Sarbanes-Oxley The Law That is Changing Nonprofits Barbara Clemenson, CPA, CFRE Clemenson - Sarbanes Oxley 1
Goals for Workshop Understandable Awareness of the Sarbanes-Oxley Act Acquaintance with its Provisions Interesting Applicable Clemenson - Sarbanes Oxley 2
Overview Why Did It Happen? The Mood The Economy The Human Heart The Regulatory Context What Happened? The Reaction The Results The Repercussions The Implications Finances Effectiveness and Efficiency Governance Clemenson - Sarbanes Oxley 3
Why Did It Happen? The Mood End of Cold War Desert Storm Profound Advances in Technology and Communication Personal Computers Internet Optimism Self-Focus: Gratification Clemenson - Sarbanes Oxley 4
Why Did It Happen? The Economy 1980s is History Expansion Seemed Unlimited Capital was Available Credit was Easy Inflation was Low Unemployment was Low Risks Seemed Negligible Securities and Businesses were Overvalued Clemenson - Sarbanes Oxley 5
Why Did It Happen? The Human Heart Pipe Dreams: Greed, Ego and the Death of Enron Final Accounting: Ambition, Greed and the Fall of Arthur Andersen Clemenson - Sarbanes Oxley 6
Why Did It Happen? The Regulatory Context Accounting Self Regulation Financial Sector Deregulation Weak Governmental Oversight Weak Corporate Governance Rules-Based Accounting Standards versus Principle-Based Accounting Standards Attitude of: What Can I Get Away With? rather than What is Right? Clemenson - Sarbanes Oxley 7
What Happened? Business Failure Accounting Failure Failure of Self-Regulation Failure of System of Checks and Balances Collapse of Reputation and Trustworthiness Clemenson - Sarbanes Oxley 8
What Happened? The Results Financial Loss Anger Systems Failure Political Change Regulatory Change Community Change Cascade Effect Clemenson - Sarbanes Oxley 9
The Reaction: Political Sarbanes-Oxley Act: Public Company Accounting and Investor Protection Act of 2002 Scope: Public Companies and their Auditors Regulatory Mechanism: SEC and its PCAOB/Public Company Accounting Oversight Board Clemenson - Sarbanes Oxley 10
Sarbanes-Oxley Main Provisions Public Company Oversight What Used To Be Primary: Accounting Profession: Auditors Secondary: The SEC Provisions under SOX Primary: The SEC and its PCAOB Secondary: Accounting Profession: Auditors Clemenson - Sarbanes Oxley 11
Sarbanes-Oxley Main Provisions Auditing Standard-Setting Setting What Used To Be Auditing: ASB promulgating GAAS Provisions under SOX Auditing: PCAOB for public companies ASB for all non- public entities Clemenson - Sarbanes Oxley 12
Sarbanes-Oxley Main Provisions Accounting Standard-Setting Setting What Used To Be Accounting: FASB Provisions under SOX Accounting:???? promulgating GAAP Clemenson - Sarbanes Oxley 13
Sarbanes-Oxley Main Provisions Auditor Oversight What Used To Be AICPA Peer Review Public Oversight Board Quality Control Inquiry Committee Professional Ethics Division CPE Provisions under SOX SEC/PCAOB for those auditing public companies AICPA for all CPAs Clemenson - Sarbanes Oxley 14
Sarbanes-Oxley Main Provisions Scope of Services Permitted by Auditors What Used To Be Theory - Independence Practice - Audit = Loss Leader for lucrative consulting services Provisions under SOX Practice - Independence. Most other work, except for taxes, prohibited Clemenson - Sarbanes Oxley 15
Sarbanes-Oxley Main Provisions Responsibility of Auditors to Detect Fraud What Used To Be Reasonable assurance there is no material misstatement in the financial statements Presumption of innocence Expectation Gap Provisions under SOX Specific, planned, detailed and documents testing for fraud as part of the audit Presumption of potential fraud Closes Expectation Gap Clemenson - Sarbanes Oxley 16
Sarbanes-Oxley Main Provisions Organization Responsibility for Fraud Prevention and Detection What Used To Be Internal Controls - Reasonable Internal Audit - Monitoring and Reactive Audit Committee - Passive Provisions under SOX: Section 404 Internal Controls - Extensive, Documented and Tested Internal Audit - Proactive and Monitoring Audit Committee - Active Clemenson - Sarbanes Oxley 17
Sarbanes-Oxley Main Provisions Governance: Audit Committee What Used To Be Theoretically: Independent Actively involved with Auditors Practically: May not have been independent Passively involved with Auditors Provisions under SOX Must pre-approve all services, audit and nonaudit, offered by audit firm Actively involved in monitoring and receiving information Must include one independent Financial Expert Clemenson - Sarbanes Oxley 18
Sarbanes-Oxley Main Provisions Responsibility for Financial Statements What Used To Be Management: Explicit Technical Responsibility Implicit Ethical Responsibility Provisions under SOX Management: Explicit Technical Responsibility Explicit Ethical Responsibility Sign-Off on Statements Code of Ethics Clemenson - Sarbanes Oxley 19
The Reaction: Regulatory The vast majority of Sarbanes-Oxley only applies directly to publicly traded companies and their auditors. In 2002, when the bill was first passed, the accounting profession talked about the possible trickle-down affect of its provisions into private companies and the nonprofit sector. Clemenson - Sarbanes Oxley 20
Cascade Effect Within a few months of its passage, we were no longer talking about a trickledown affect, but of a CASCADE effect! Sarbanes-Oxley has affected everything! Clemenson - Sarbanes Oxley 21
Issues That Nonprofits Should be Aware Of Whistleblower Policy Document Retention Policy Audit Committee and Auditor Relationship Internal Control Documentation Financial Expert on the Audit Committee Clemenson - Sarbanes Oxley 22
Issues That Nonprofits Should be Aware Of Scope of Auditor Services Applicable for all entities and auditors. Executive Pay Related Party Transactions 990 Form Clemenson - Sarbanes Oxley 23
The Reaction: Regulatory Actual and potential state implementation of Sarbanes-Oxley for all entities Potential federal bill regulating nonprofit organizations Potential funder requirement for nonprofits to adopt provisions of Sarbanes-Oxley Act as condition for funding Voluntary adoption of provisions of Sarbanes-Oxley Act as representing Best Practices Clemenson - Sarbanes Oxley 24
The Reaction: Community Climate of increased scrutiny and accountability In Ethics In Leadership In Finances In Programming and Services In Efficiency and Effectiveness Clemenson - Sarbanes Oxley 25
What Does It Mean? Finances Do it well Do it ethically: Pressure Points = Gifts in Kind - Acceptance; Valuation; Distribution Restricted Funds Allocations: Program versus Management and Fundraising Pledge Recognition Donor Advised Funds Proper Application of Human Resource Laws Clemenson - Sarbanes Oxley 26
What Does It Mean? Effectiveness & Efficiency Cost of doing business will go up Audit costs Internal financial costs Cost of proving effectiveness will go up Outcomes, not outputs Clemenson - Sarbanes Oxley 27
What Does It Mean? Effectiveness & Efficiency Threat or Opportunity? Opportunity to evaluate systems: Investment in the long-term integrity and public confidence of the organization Investment in program evaluation» Are we meeting real needs?» Are we creating lasting change?» If not, what do we need to do differently? If these legal, regulatory and community requirements are not taken seriously, this does constitute a threat to the long-term viability of the organization Clemenson - Sarbanes Oxley 28
What Does It Mean? Governance Ethics and Integrity - It Starts at the Top! Independence / No Conflict of Interest Board: Active Oversight / Passive Management Noses in, Fingers out Supportive Learning, not Performance-Based Sharing the same purpose and goal: Not adversaries, such as true in business Board/owner relationships Audit Committee: Active Auditor Interaction Independent Financial Expert Clemenson - Sarbanes Oxley 29
Conclusion The moral reality necessitating Sarbanes- Oxley reveals the deep corruption in our world. In that climate, the contrast of working ethically will make our organizations not only successful in the long-term, but give them lasting value to our clients, our funders and our community. Clemenson - Sarbanes Oxley 30