Nonprofit Governance and the Sarbanes-Oxley Act

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The Sarbanes-Oxley Act, passed in 2002 following widely publicized governance scandals at corporations such as Enron, was intended to deter fraud in publicly traded corporations. The Act extended boards' financial oversight responsibilities and imposed new financial disclosure requirements. Only two of these provisions applied to nonprofits. Its passage nonetheless quickly sparked discussions about nonprofit accountability and whether nonprofits should adhere to certain provisions of the Act, either on a voluntary or mandatory basis.¹

In 2004, for instance, the Senate Finance Committee issued a draft paper calling for stronger nonprofit governance, and various proposals continue to be debated. Several states have proposed or passed regulations that extend some provisions of the Sarbanes-Oxley Act to nonprofit organizations. For instance, the California Nonprofit Integrity Act of 2004 requires charities with gross revenues of $2 million or more to have an audit committee. Some nonprofits have voluntarily adopted practices provided for by the Act. At the same time, efforts to extend provisions of the Act to nonprofits have been met with objections and concerns about the impact on smaller nonprofits.²

The recent Urban Institute National Survey of Nonprofit Governance provides new insights into the potential impact of extending some provisions of the Sarbanes-Oxley Act to nonprofit organizations. Conducted in 2005, it is the first national, representative survey of nonprofit governance.³ The study gathered responses from 5,115 nonprofits of varied size, type, and location.⁴ This bulletin, which presents preliminary findings from one part of the survey, examines the current extent of nonprofits' adherence to some major Sarbanes-Oxley provisions and nonprofit leaders' perceptions about the ease or difficulty of compliance were similar provisions to become mandatory for nonprofits.⁵

How much of an impact would extending provisions of Sarbanes-Oxley to nonprofit organizations have? The answer suggested by the survey's preliminary findings is "it depends." Nonprofits' current adherence to Sarbanes-Oxley varies considerably for different provisions. Thus, making some of the Act's provisions mandatory for nonprofits would require substantial numbers of nonprofits to alter their practices, but the passage of others would result in little change because most nonprofits are already in voluntary compliance or because they must comply with other regulations that resemble Sarbanes-Oxley provisions.⁶

Adherence also differs markedly among nonprofits of different size (as measured by annual expenses). The differences between smaller and larger nonprofits are so pronounced that aggregate figures can be very misleading, and we therefore present findings separately for organizations in six different size categories, ranging from those with less than $100,000 in expenses up to those with over $40 million (see appendix table). The results underscore the need for policymakers and others promoting good governance practices to keep the diversity of the nonprofit sector in mind, and to consider carefully the relevance and potential impact of proposed reforms on nonprofits of different size.

Notes from this section of the report

1. Legal Times, February 21, 2005. For summaries of the Sarbanes-Oxley Act and its relation to nonprofits, see, for instance, American Bar Association 2005 Coordinating Committee (2005); BoardSource and Independent Sector (2003); Fremont-Smith (2004); NACUBO Advisory Report 2003-3; Oxholm (2005); and Reiser (2004).

2. See, for instance, Fremont-Smith (2004), 435.

3. See Ostrower and Stone (forthcoming).

4. The response rate was 40.6 percent. The sample was drawn from the Urban Institute's 2002 NCCS-GuideStar National Nonprofit Research Database of public charities that file IRS Form 990. The sample was stratified by size, and figures in this brief are based on analyses weighted to adjust for differential probabilities of selection as well as nonresponse patterns.

5. The final findings and full survey analysis will be presented in the full Urban Institute survey report later this year.

6. Nonprofits may be required to comply with such regulations depending on such factors as what state they are in, whether they receive government funds, and whether they operate in a regulated industry. See Brody (2004) and Fremont-Smith (2004).

Note: This report is available in its entirety in the Portable Document Format (PDF).

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