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Non-Profit 404?

Corporate scandals that have affected companies such as Enron Corp. and WorldCom Inc. have vividly brought the issues of transparency and accountability to the forefront of the business world for public companies. But like their for-profit counterparts, non-profit organizations in the U.S. are also increasingly being pressured to answer to the general public.

Recent instances of fraud have affected such high-profile charitable organizations as the United Way, the American Red Cross and the Nature Conservancy. Although Sarbanes-Oxley rules currently apply only to publicly held companies, the character of the law applies to all organizations--and could, realistically, be mandated for the non-profit sector in the near future.

In fact, many industry insiders believe that this type of regulation will come sooner, rather than later. Taxpayers, regulators and legislators are calling for some type of formal regulation within the non-profit sector. And donors also increasingly want to know how much of their contributions go to aiding the actual cause. As a result, many private companies have adopted Sarbanes-Oxley practices at the advice of financial institutions (lenders) and others.

Ken Mierzwinski, believes that non-profits that are not prepared for compliance could be severely challenged once these regulations take effect--much like the recent Section 404 compliance scramble by public companies.

Mierzwinski suggests that organizations take the following steps to help ease the transition into inevitable compliance requirements:

  • Educate the organization: Most non-profits have little knowledge of Sarbanes-Oxley requirements because these regulations have not been formally imposed. Before putting a compliance plan in place, the organizations' Director of Finance, CFOs and accounting managers should have a solid understanding of general compliance requirements and educate their team on these regulations. This will lead to setting realistic goals and expectations, as well as helping to prioritize activities.
  • Discuss options with external auditors: Obtaining auditor input and viewpoint can help put specific compliance priorities into perspective and, therefore, organizations can better address compliance requirements.
  • Discuss and develop a high-level strategy: Finance Directors and CFOs should heighten the communication with board members and senior-level executives and develop a high-level strategy focused on oversight, accountability and transparency for financial information. In addition, they should outline a specific plan and timeline to easily execute on the proposed strategy.

Because of the likelihood that non-profits will be required to comply with Sarbanes-Oxley in the not too distant future, organizations need to be adequately prepared to address the cost of compliance--both in time and money. By voluntarily moving toward compliance now, organizations can lessen the burdens when regulation actually comes.