WASHINGTON, D.C., September 19, 2006—Applying the Sarbanes-Oxley Act's audit committee provisions to nonprofit organizations would test the administrative mettle of two-fifths of America's charities, according to initial findings from the Urban Institute's National Survey of Nonprofit Governance. The 2005 survey, the first such national measure, gathered responses from 5,115 nonprofits of varied size, type, and location.
Only 20 percent of the survey's respondents had an independent audit committee, ranging from 15 percent among nonprofits with under $100,000 in annual expenses to 58 percent among those with over $40 million. The Sarbanes-Oxley Act, passed in 2002 after high-profile corporate scandals, requires publicly traded companies, but not nonprofits, to have an independent audit committee with at least one financial expert and no company employees.
Of the nonprofits without an audit panel, 51 percent said it would be somewhat or very difficult to create one. Among the smallest nonprofits, 28 percent indicated it would be very difficult, compared with fewer than 10 percent with over $2 million in expenses.
Fifty-four percent without a committee responded that it would be difficult to get a financial expert for such a committee. Smaller organizations were again more likely to characterize compliance as very difficult, ranging from 35 percent among the smallest entities to under 10 percent for nonprofits with expenses surpassing $2 million.
Forty percent of those with paid staff on the audit committee said it would be a challenge to comply with a law prohibiting their participation. Forty-six percent of the nonprofits whose audit and finance committees share members said it would be difficult to adhere to a law requiring separate memberships for the two panels.
The first wave of survey findings are examined in "Nonprofit Governance and the Sarbanes-Oxley Act," a research brief by Francie Ostrower, a senior research associate in the Urban Institute's Center on Nonprofits and Philanthropy, and Marla J. Bobowick, vice president of products at BoardSource.
"Our findings strongly confirm the importance of acknowledging the potentially different impact, cost, and value of applying provisions to nonprofits of different size, as some laws and proposals already are, by excluding organizations below a certain size," they conclude.
Some Sarbanes-Oxley provisions, such as one prohibiting publicly traded companies from making loans to their directors or executives, would have little effect on charities. Less than 1 percent of the surveyed nonprofits made loans to board members; fewer than 3 percent made them to staff.
Other Findings
-- 67 percent of the nonprofits had an external audit within the previous two years.
-- 62 percent of the groups that had not had an audit said it would be somewhat or very difficult to comply with a law requiring them to have one.
-- Among nonprofits that conducted audits, 76 percent made them publicly available.
-- 50 percent of the survey respondents had a conflict of interest policy for board members.
Several survey results hint that the legislation intended to curtail wrongdoing among profit-making ventures spurred many nonprofits to reexamine their practices. Fifty-four percent of those with audit committees created or changed their committees after 2002, while 47 percent of the nonprofits with conflict of interest policies established or revised their codes after that date.
Two Sarbanes-Oxley provisions apply to all organizations, including nonprofits: protections for employees who report suspected fraudulent financial activities and prohibitions against tampering with documents to prevent their use in an official proceeding. Sixty-seven percent of those surveyed with at least one employee had a formal process for staff complaints, and 30 percent had a written document retention and destruction policy.
"Nonprofit Governance and the Sarbanes-Oxley Act," by Francie Ostrower and Marla J. Bobowick, can be accessed at http://www.urban.org/url.cfm?id=311363 and http://www.boardsource.org/sarbox.
The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance challenges facing the nation.
BoardSource, formerly the National Center for Nonprofit Boards, is dedicated to increasing the effectiveness of nonprofit organizations by strengthening boards of directors.
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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