Sox Research Paper

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Running head: Nonprofits and SOX

Heather Tanenbaum
Student ID: 3750548620
Accounting Capstone: Senior Seminar in Accounting ACC499 004016 Summer 2009
Nonprofits and the Sarbanes Oxley Act
Submitted:
Submitted to: Tee M. Thein
Table of Contents

Abstract

Introduction

SOX regulations for nonprofits
Reasons for nonprofits to adopt SOX

Conclusion

Research file memorandum

Communication memorandum

References

Abstract

Introduction

The Sarbanes-Oxley Act (SOX) of 2002 (U.S. House of Representatives 2002) was passed by congress as a result of a wave of accounting scandals and related financial irregularities in corporations such as Enron, WorldCom and Tyco. SOX is called the most significant securities legislation since 1933 and 1934 securities ACT. The Act attempted to make ethics more black and white rather than a gray area. The increased guidelines have changed businesses and business relationships. These new requirements have placed greater demands on directors, audit committees, auditors and management. Most, of these provisions where only made towards publicly held companies, similar regulations targeted nonprofit organizations (Panel on the Nonprofit Sector 2005). Two hundred and fifteen nonprofit organizations have voluntarily adopted provisions of the Sarbanes-Oxley Act of 2002 (SOX). Many, nonprofits are currently in the process of adopting SOX. The Panel on the Nonprofit Sector (2005), in its final report to Congress in June 2005, recommends more than 120 actions to be taken by charitable organizations, Congress and the IRS (Internal Revenue Service) to strength nonprofits against, transparency, governance and accountability. The most significant provision of the Act is the requirements in Section 404 the reporting on the effectiveness of internal controls over the financial reporting. PCAOB auditing standard 2 requires that the audit of internal control be integrated with the audit of the financial statements. The PCAOB requirements also only apply to public and private for profit companies, these would be new requirements for nonprofits wishing to adopt to SOX. The requirements of SOX section 404 requirements on internal controls have proven to be quite expensive for public companies (D’Aquila 2004; Pomeroy 2006), further research in to the current state of governance in the nonprofit sector would be beneficial before similar measures are mandated. Nonprofits have several reasons they might be compelled to adopt SOX provisions. First, several states are likely to emulate provisions similar to those of SOX. Some of these new laws incorporate elements of SOX including: expanding whistleblower protection, requiring officers of the organization to sign the corporation’s annual report, appointing an audit committee and increasing penalties against those who commit fraud or impede an investigation of fraud. California passed the Nonprofit Integrity Act in 2004. This Act addresses financial reporting, corporate governance, compensation, independence and fund raising (Silk and Fei 2005). New Hampshire requires audited financial statements for nonprofits with revenues greater than one million. Massachusetts, Connecticut and Kansas have similar requirements (Anderson and Kelley 2006). Second, unethical behavior seems as common in the nonprofit organizations as it does in the private sector. Recent scandals in nonprofit organizations such as: The NYSE, Upsala College, United Way and Education & Research Foundation, have had a negative effect on the public trust in their charitable organizations (Gibelman 1997). For nonprofits trust from the public is vital because the majority of their funds come from donors. SOX could result in more positive responses from donors, investors and future board members (Orlikoff and Totten 2004). Finally, some provisions of SOX already apply to nonprofits. Nonprofits must establish...
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