Sunday, March 3, 2019
Sox Research Paper
ravel head Nonprofits and SOX Heather Tanenbaum Student ID 3750548620 explanation Capst unity Senior Seminar in Accounting ACC499 004016 Summer 2009 Nonprofits and the Sarbanes Oxley Act Submitted Submitted to Tee M. Thein Table of Contents epitome Introduction SOX regulations for not-for-profits Reasons for nonprofits to tackle SOX Conclusion enquiry file archive confabulation memorandum References Abstract Introduction The Sarbanes-Oxley Act (SOX) of 2002 (U.S. House of Representatives 2002) was passed by sex act as a result of a wave of accounting scandals and related fiscal irregularities in corporations such as Enron, WorldCom and Tyco. SOX is called the most stainificant securities polity since 1933 and 1934 securities ACT. The Act attempted to make ethical motive more black and washcloth rather than a gray area. The increased guidelines sire changed businesses and business relationships.These reinvigorated charterments rent placed greater demands on directors, a udit committees, auditors and management. Most, of these preparations where l angiotensin-converting enzyme(prenominal) made towards habitually held companies, identical regulations targeted nonprofit institutions ( bloodshed on the Nonprofit arena 2005). Two hundred and fifteen nonprofit organizations have voluntarily select provisions of the Sarbanes-Oxley Act of 2002 (SOX). M both, nonprofits are genuinely in the process of arrogateing SOX.The Panel on the Nonprofit Sector (2005), in its final theme to copulation in June 2005, recommends more than 120 actions to be taken by kind-hearted organizations, Congress and the IRS (Internal Revenue Service) to strength nonprofits against, transparency, governance and answerableness. The most significant provision of the Act is the requirements in Section 404 the reporting on the force outiveness of interior functions over the monetary reporting. PCAOB auditing standard 2 requires that the audit of internal control be integ rated with the audit of the financial statements.The PCAOB requirements in addition only harbor to universe 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 instead expensive for in the public eye(predicate) companies (DAquila 2004 Pomeroy 2006), further research in to the current state of governance in the nonprofit sector would be skillful before similar measures are mandated. Nonprofits have several reasons they might be compelled to adopt SOX provisions. First, several states are possible to emulate provisions similar to those of SOX.Some of these new laws incorporate elements of SOX including expanding whistleblower security system, requiring officers of the organization to sign the corporations one-year 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). peeled 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, wrong 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 dialog box members (Orlikoff and Totten 2004). Finally, around provisions of SOX already consent to nonprofits. Nonprofits must install whistleblower protection and document destruction policies. some other provisions are inevitable, because of the large amount of grants nonprofits receive which come with the let regulations and restrictions (BoardSource 2003). The purpose of this paper is to provide a reasonable intellectual of how nonprofits have been affected by SOX. SOX regulations for nonprofitsSOX requires that companies have an audit committee that includes independent members and members of the mount. SOX also requires the company to disclosure whether one of the internal auditor is a financial expert and whether they are directly responsible for overseeing the external auditors. This is to ensure that the financial statements are understand, that there is proper communication with the external auditors and that there is an understanding of internal controls. In order to enhance standards for nonprofit accountability and financial reporting all nonprofits should h ave an independent audit committee (BoardSource 2003).Sox requires that nonprofits display whether a code of ethics has been adopted for senior financial officers. If they do not have a code of ethics reasons for not having one have to be disclosed. This is to encourage the development of a code of ethics in order to enhance trustworthiness to contributors and other constituents. The whistleblower protection policy applies to nonprofits as well as for profit organizations. This regulation protects whistleblowers from limited damages and attorneys fees. It also, prohibits the employer from punishing the whistleblower in any manner.SOX provides additional protection for whistleblowers by, instating criminal penalties for actions taken against whistleblowers. Nonprofits should develop confidential and nameless procedures for handling employee complaints. Although the CEO and CFO do not need to sign financial statements they do need to understand them and ensure that they are clean presented in all materially respects. The responsibility for approving the financial statements lastly belongs to the notice of directors. Section 404 of SOX requires companies to include an internal controls report along with their annual report.Their internal control report should state the responsibility of management to establish and maintain an internal control structure and procedures for financial reporting. It should also contain, an sound judgement at the end of the most recent fiscal year as to the effectiveness of internal controls and the procedures for financial reporting (OHare 2002 BoardSource 2003 Walters 2003 Tran 2005). SOX requires auditors of public companies to raise and maintain audit workpapers and other information related to any report in sufficient detail to support the auditors conclusions, for a period not less than seven years.Failing to do so is a criminal crime subject to fines and up to ten years in prison. Existing standards for audits of nonprof its do not include a mandated audit documentation retention period. Instead, those standards require nonprofits and auditors to retain recruits long enough to sastify any pertinent legal requirements of record retention. Reasons for nonprofits to adopt SOX Larger organizations with more resources lead be more probable to adopt SOX. The public and media are more likely to be harsher on larger nonprofits, which makes them more likely to have stronger governance mechanisms.The scorecard of directors have the ultimate responsibility of overseeing proper financial statement presentation (BoardSource 2003 Walters 2003). Research on the relationship between board size and satisfying time value has had mixed results. Yermack (1996) provides evidence that smaller boards are associated with a extravagantlyer firm value. In 2008, Coles find that are diversified among industries or have high leverage, are more likely to benefit from a larger board of directors. Corporate governance char acteristics, have been shown to be related to the size of the board.Bradbury (1990) finds board size and intercompany ownership to be determinants of freewill audit committees in public companies. In another study shows that larger boards are more likely to create audit committee boards (Beasley, Salterio, 2001). In a NASDAQ over the forebode study done by Pincus (1989), he found that managerial ownership, leverage, size of the company, pro designate of outside directors to total directors, use of Big 8 auditors and appointment in the National Market System are related to uncoerced formation of audit committees.As a result as the size of the board of directors of a nonprofit increases, so does the likely hood that they will voluntarily adopt SOX. Nonprofits with independent boards of directors are also more likely to adopt SOX. The main reasons nonprofits would voluntarily adopt SOX would be to increase the trust in the public in order to receive more funds. However some nonprof its, feel that the provisions in SOX burden the nonprofits so much that it is proficient not to adopt SOX.These nonprofits strongly believe that SOX should not be necessary for nonprofits for the following reasons One, nonprofits are grassroots organizations with small staffs and have boards filled with community- minded(p) people with little or no business and management background. If SOX was necessitate out of these nonprofits, the staff would be overwhelmed, along with the board and it would take away(predicate) from the nonprofits primary mission. Two, nonprofits are already held to higher standards by the public thusly private or government agencies because, if the public doesnt trust the organization they wont donate their money.Also, nonprofits receive a large portion of their funds from government grants which are held to strict oversight and laws and regulations. Three, certain regulations of SOX will increase overhead costs and make the nonprofits look less busi nesslike to contributors. On the other hand, by voluntarily adopting SOX, nonprofits are showing to the public that they are concerned about protecting funds, increasing operating cleverness and effectiveness, also enhancing accountability. Conclusion Research file memorandum Communication memorandum References Anderson, S. , and C. L. Kelley. 2006.Advising nonprofit organizations. The CPA diary 76 (8) 20-26. Beasley, M. S. , and S. E. Salterio. 2001. The relationship between board characteristics and voluntary improvements in audit committee composition and experience. Contemporary Accounting Research 18 (Winter) 539-570. BoardSource. 2003. The Sarbanes-Oxley Act and implications for nonprofit organizations. getable at http//www. boardsource. org/clintfiles/Sarbarnes-Oxley. pdf. Bradbury, M. E. 1990. The incentives for voluntary audit committee formation. Journal of Accounting and Public Policy 9 (1) 19-36. Broude, P.D. 2006. The impact of Sarbanes-Oxley on private & nonprofit c ompanies. Foley and Lardner, LLP. Available at http//www. foley. com/publications/pub_detail. aspx? puibid=3511. Coles, J. L. , D. D. Naveen, and L. Naveen. 2008. Boards Does one size fit all? Journal of Financial Economics 87 (2) 329-356 DAquila, J. M. 2004. Tallying the cost of the Sarbanes-Oxley Act. The CPA Journal 74 (11) 6-9. Gibelman, M. , S. Gelman, and D. Pollack. 1997. The credibility of nonprofit boards A view from the 1990s and beyond. Administration in Social blend in 21 (2) 21-39. Grant Thornton LLP. 2006.Grant Thornton National Board governance survey for not-for-profit organizations. Available at http//www. granthornton. com/staticfiles/GTCom/files/Industries/NotForProfit/nfp_board1. pdf. GuideStar. 2005. Nonprofits, Sarbanes-Oxley, and the states. Available at http//www. guidestar. org/DisplayArticle. do? articleId=779. Hempel, J. , and A. Borrus. 2004. Now the nonprofits need change up Cozy boardrooms at colleges and charities face increasing government scrutiny. BusinessWeek (June 21) 107. Hymowitz, C. 2005. The Sarbanes-Oxley era, travel rapidly a nonprofit is only getting harder.Wall Street Journal (June 21) B1. OHare, P. 2002. Sarbanes-Oxley raises red flag for not-for-profits. Healthcare Financial Management 56 (10) 42-44. ORegan, K. , and S. M. Oster. 2005. Does the structure and composition of the board matter? The case of nonprofit organizations. Journal of Law Economics and Organization 21 (1) 205-227. Orlikoff, J. , and M. Totten. 2004. Applying for-profit governance reforms. Healthcare administrator 19 (3) 52. Panel in the Nonprofit Sector. 2005. Strengthening transparency, governance and accountability of charitable organizations. Available at
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