CFO of the Year Awards
Following the new rule book
Many nonprofits voluntarily comply with Sarbanes-Oxley

by Richard Foster
for Virginia Business
July 2007

For nonprofits, Sarbanes-Oxley can be a bear. It means a lot of extra work for something that doesn’t apply to them in the first place. Why implement audit committees and policies on document destruction when the law passed by Congress in 2002 in response to the Enron scandal was intended to shore up the accounting and financial practices at public companies?

But many nonprofits are voluntarily complying, because Sarbanes-Oxley may as well be the new Good Housekeeping Seal of Approval. In the nonprofit world, following many of the law’s requirements can bring an organization more credibility and possibly more donations. Many nonprofits get inquiries from potential donors about “whether or not they are in compliance with Sarbanes-Oxley, even though they’re not required to be,” says financial consultant Wayne Berson. “Those that are [in compliance] have reported that they’ve seen an increase in contributions” as a result of the more stringent auditing and disclosure policies.

Some of this voluntary compliance stems from the fact that the nonprofit world has seen its own share of accounting and embezzling scandals. Some state legislatures, such as California and New York, want to make some of the Sarbanes-Oxley measures mandatory for nonprofits. Plus, many accounting firms are also recommending — if not requiring — their nonprofit clients to implement the standards.

In recognition of the new challenges facing nonprofit organizations, categories honoring large and small nonprofits have been added to the Virginia Business/Virginia Society of CPAs’ CFO of the Year Awards. The awards presented June 28 also recognize the contributions of CFOs serving public companies, small private companies (fewer than 100 employees) and large private companies (100 employees or more). Tatum, Hirschler Fleischer, RSM McGladrey and Marsh are corporate sponsors for the awards program, now in its second year.

In advising nonprofits, Berson, national director of nonprofit services for Chicago-based auditing and financial advisory firm BDO Seidman LLP, recommends that his clients implement most of Sarbanes-Oxley. Nonprofits should have audit committees and policies concerning whistle-blowers, document destruction and retention, and conflicts-of-interest, says Berson, who works out of the firm’s Washington regional office in Bethesda, Md. He also suggests board oversight of employment contracts for CEOs and CFOs.

Board members of nonprofits “have a fiduciary responsibility to the nonprofit,” he says, and besides, many of the transparency measures in Sarbanes-Oxley are “general good governance.”

That’s why many large YMCAs across the country are implementing some of the law’s requirements, says W. Randolph Spears, senior vice president and CFO of the YMCA of Greater Richmond. “Many parts of Sarbanes-Oxley are important to follow no matter what kind of organization you have,” says Spears, a former partner with Ernst & Young LLP. “Things like audits, audit committees and conflict-of-interest policies make good common sense.”

And some supporters of nonprofits are demanding that they be held to the same operating standards as public companies. “The public wants to know why you’re not doing this when all the other nonprofits are. Donors are demanding this more and more,” says Monique Valentine, chairman of the Virginia Society of CPAs and CFO for the nonprofit, Arlington-based Associated General Contractors of America. “I think it’s critical, no matter what size nonprofit you are, to try to implement as much of Sarbanes-Oxley as possible, because of the public scrutiny.”

Berson, however, does not recommend that nonprofits (especially smaller ones) implement all of Sarbanes-Oxley, particularly the controversial Section 404. It calls for detailed assessments, evaluation and documentation of internal financial controls, transaction flows and operating effectiveness.

In fact, In fact, even public companies have difficulty complying with Section 404. As a result, the Securities and Exchange Commission announced in May that it would be streamlining Section 404, allowing public companies to scale evaluation procedures to company resources and circumstances.

Even so, some of BDO Seidman’s nonprofit clients, such as the Associated General Contractors of America, still implemented some of the original Section 404 measures, despite the fact, Berson says, that it could be “very time-consuming and very, very expensive.”

With $17 million in annual revenue and 65 employees, the Associated General Contractors of America is a relatively large nonprofit, Valentine says, but it didn’t take lots of resources to bring it into close compliance with Sarbanes-Oxley. The effort cost less than $5,000, including manpower and auditor consulting fees. But some of that is because her association was already using some of the internal controls and accountability measures built into Sarbanes-Oxley. “For a lot of nonprofits, this is business as usual,” Valentine says. “The ones that are well managed, a lot of them are already doing a lot of this stuff anyway.”

She acknowledges that it can be “a little bit harder” for smaller nonprofits to devote time, money and staff to the effort, “but there are things that are low-cost or no-cost … alternatives that just take time, like the formation of an audit committee, putting in a code of ethics, CEO review and certification [of financial statements]. These are all things that don’t cost money that they should be doing.”

Often, a nonprofit’s board members are behind any push to meet Sarbanes-Oxley standards. That’s not surprising since board members usually are business leaders familiar with the workings of large public companies. For example, when Marge Connelly became chairwoman of the Central Virginia Foodbank a few years ago, her first priority was to have the organization meet Sarbanes-Oxley standards. At the time, Connelly was a top-ranking Richmond-area executive with Capital One Financial Corp. and “she was going through [the Sarbanes-Oxley compliance process] at Capital One, and she insisted we get that done,” says Roy Peters, the foodbank’s CFO.

Connelly, now COO and president of Wachovia Securities’ Business Services Group, says she thinks of donors as being a lot like shareholders. “They want to be sure that the money they put into the organization is being managed in a disciplined and well-controlled manner so that it has the chance to generate the greatest possible return.”

In an investment, that return takes the form of a dividend or an increase in share price, Connelly notes. In donations, the return is represented by a new program or an increase in the number of people served. “The underlying concern is the same,” she says. “People want to know that you are using their money appropriately and don’t want to worry about any kind of impropriety.”

No longer a member of the foodbank’s board, Connelly says the organization already was well-run, but these changes make it run even better and enables it to be more accountable to donors. The foodbank now has written accounting procedures and policies, a formal code of ethics and a whistle-blower policy, along with other Sarbanes-Oxley measures. Peters says that “documenting your controls and making sure they’re functioning is an important role for any CFO … who wants to make sure those controls are in place and working. If they’re not written, it’s kind of hard to really judge them.”

Even without Connelly’s leadership, the foodbank eventually would have added components from Sarbanes-Oxley, Peters says. The national umbrella organization for foodbanks, America’s Second Harvest, now requires that affiliates incorporate some elements of Sarbanes-Oxley, such as a whistle-blower policy.

Government grants also require nonprofits meet certain Sarbanes-Oxley standards as a qualifying prerequisite, says Valentine. And organizations such as the Better Business Bureau also ask about similar accountability measures when evaluating a charity. (The BBB’s standards can be found at www.give.org.)

Still, not every nonprofit wants to climb aboard the Sarbanes-Oxley train. The Richmond SPCA, for one, has not implemented Sarbanes-Oxley but its financial practices are responsible and stringent, says Connie Moser, director of finances and human resources. For instance, the SPCA’s executive director has not conducted an internal controls review, although Moser says that has been done by SPCA auditors. And the SPCA has not wanted to disclose some information beyond its board and staff, such as details about large donations.

The finance committee of the SPCA board meets at least five times a year to review the organization’s budget and finances. “We pay very close attention to our budget,” says Moser. “We have monthly reporting meetings, which are both financial and statistical, against our goals for the year so that we can immediately see if something’s falling out of line. We take our finances very seriously, just not necessarily to the letter of Sarbanes-Oxley.”

However, Moser has heard that the SPCA’s auditing firm will begin requiring some Sarbanes-Oxley measures in the organization’s next fiscal audit in September.

And before long, nonprofits may not have a choice. “At this point, most of it is still voluntary but different states … are looking at making some of these provisions mandatory for nonprofits,” says Valentine. “We’re going to see increased regulation at the state level. States are going to start requiring this stuff for nonprofits.”