Category Archives: Non-Profits

The Application of Sarbanes-Oxley to Non-Profits

Non-Profits: The Sarbanes-Oxley Act is a United States law that was enacted on July 30, 2002 in response to several major, high-profile corporate accounting scandals, such as those involving Enron, WorldCom and Tyco International. Although most provisions of the Act apply only to publicly traded, for-profit corporations, there are a few provisions that also apply to non-profit organizations.

The first of these provisions provides protections for “whistle-blowers” (employees who report suspected illegal activity within the organization). The whistle-blower protections contained in Section 1107 of the Act impose criminal penalties for any actions taken in retaliation against those employees who risk their careers to report corporate wrongdoing. Violation of this provision could subject the violator to substantial fines or even imprisonment for up to 10 years. Clearly, the law wants to encourage employees to report wrongdoing.

In order to avoid violations of the whistle-blower provision, non-profit organizations should develop and adopt a formal procedure for dealing with complaints. These procedures should encourage individuals in the organization to come forward with a problem at an early stage so that it is more likely to be easily resolved. Protocols should also dictate an appropriate response and reporting by the person to whom the complaint is made.

Non-profit organizations should also establish and enforce strict policies to eliminate irresponsible accounting practices, unethical behavior and other misconduct by members of the organization. In addition, it is generally recommended that non-profit organizations conduct periodic internal audits by an independent party to identify any potential problem areas.

Two other provisions of Sarbanes-Oxley that are applicable to non-profit organizations address the intentional destruction of documents. Section 807 and Section 1102 of the Act make it a crime to alter, destroy, mutilate, conceal, cover up falsify or make a false entry in any document as an effort to impede an investigation or to prevent the production or use of that document in an official proceeding. In the modern business environment, if an official proceeding is commenced or threatened, the organization will generally be put into a “litigation hold,” during which the destruction of any document is strictly prohibited. If the organization purges any documents during this hold, it may be subject to criminal obstruction charges. Any party who violates the document destruction provisions is subject to substantial fines or imprisonment for up to 20 years.

Accordingly, non-profit organizations should generally have a written, mandatory document retention and periodic destruction policy in place. Such a policy should include specific, detailed guidelines for back-up procedures and archiving of documents, and should also address the procedure for handling and destroying electronic files and voicemail. It should be clearly explained to employees and the company should undertake efforts to be sure that the protocols are being complied with. In addition, the organization should conduct internal audits to ensure that its system is adequate and that its policy is being effectively enforced.

In light of the potentially significant criminal and financial consequences of non-compliance with the Sarbanes-Oxley Act, non-profit organizations should use careful consideration in structuring their whistle-blowing and document retention policies. The best practice is to consult legal counsel to ensure that all the necessary precautions are in place.

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