Sarbanes-Oxley Act Pros And Cons

On July 30, 2002, the American Competitiveness and Corporate Accountability Act, better known as the Sarbanes-Oxley Act (SOX), was signed into law, with the intention of rebuilding public trust in corporate America. Its laws, which required boards to “oversee closely financial transactions and auditing procedures,” applied primarily to publicly traded corporations (Baker, 2005). Only two of the practices named within were required of not-for-profit companies. Nevertheless, due to the proliferation of fraud within the not-for-profit sector, it has become best practice for not-for-profits to adopt the governance provisions put forth in Sarbanes-Oxley. As both donors and the general public put not-for-profits under greater levels of scrutiny and
As best practice, not-for-profits with audit committees should consider implementing mechanisms to safeguard the independence of their audit committees, and to ensure, to the best of their ability, that their audit committee on a whole has sufficient expertise to make sound and ethical financial decisions for the organization (“Implications for Nonprofit Organizations”, 2003). By making serious effort to improve the overall quality of their decision-making, their potential contributors will be more inclined to trust that their donated resources will be put to prudent use, and thus will be more likely to part with their resources. In addition, not-for-profits should comply with standards such as switching their auditor every five years, and avoid using non-auditing services from their auditing firms (“Implications for Nonprofit Organizations”, 2003). By doing so, they avoid giving the impression that their audit processes lack independence, increasing trust in their operations as a result (Mintz & Morris, 2007). It is important to note that these practices have mostly been adopted by larger not-for-profits with the resources to furnish an audit committee and conduct annual audits. Nevertheless, 54% of not-for-profits with audit committees “had created
Section 806 makes it illegal for companies to terminate or retaliate against employees who report “any conduct the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders” (“Sarbanes-Oxley Act”, 2002). This regulation means that not-for-profits must work to set up confidential reporting systems and effective investigation systems to protect both the whistleblowers and the very integrity of the organization (“Sarbanes-Oxley Act”, 2002). Additionally, Section 802 of Sarbanes-Oxley makes it illegal for any organization to destroy, alter, conceal, or falsify “any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States” (“Sarbanes-Oxley Act”, 2002). To adhere to this regulation, not-for-profits must development a statement detailing their organization’s document retention policy; the new procedures they will implement because of the policy; the implications of the new law for organization; the duties of the organization’s employees to comply with the new law; and the new ethical expectation