When the Sarbanes Oxley Act of
2002 (SOX) was passed, it was
intended to address systemic and structural weaknesses affecting the capital
markets, ultimately for the purpose of protecting investors by improving the reliability and accuracy of corporate financial
reporting and disclosures made by public
companies pursuant to the securities laws.
However, the SOX act simply raised a
host of questions and concerns, leaving
companies wondering what to do, when to
do it, and how to do it, not only among the
public companies required to adhere to the
provisions of the Act, but also among private companies who wondered whether
SOX could or should apply to them.
“While a few provisions of SOX do affect
private and nonprofit organizations, such as
the provisions related to criminal liability
for document destruction and protection
for whistleblowers, other provisions only
apply to public companies,” says Laura
Freudenberger, an audit principal with
Briggs & Veselka Co. “Still, there is no doubt
that SOX is having an increasingly significant spillover impact on the private sector. ”
Smart Business learned more from
Freudenberger about SOX and its affects
on corporate governance for private and
nonprofit organizations.
Why would a nonpublic company consider
adopting corporate governance provisions
similar to that of a public company?
Many nonpublic companies are starting to
voluntarily adopt certain key provisions of
SOX that are geared toward oversight of
internal controls and the financial reporting
process. They feel pressure from those outside the organization, such as donors,
lenders, investors and insurers who evaluate corporate governance in assessing the
cost and availability of capital, as well as
pressure from independent auditors, who
evaluate the quality of corporate governance in their client acceptance procedures. Plus, they face pressures within the
organization.
In many cases, board members of nonprofit companies frequently serve on boards
of public companies and, as such, view a
SOX-like audit committee as being best practice for all companies and organizations, public and private alike. Not to mention that many states have adopted or are
considering adopting SOX-like requirements for nonprofit organizations.
Should all private companies and organizations seek to implement SOX-like corporate
governance?
The cost of assessing and adopting provisions of SOX can be formidable. For a
small organization that doesn’t have the
resources or the expertise, implementing
SOX would probably not be very cost beneficial. Additionally, an organization that
expends resources it does not have on
implementing SOX-like controls and
processes could lose credibility and suffer
financially. Also, an organization that is
unsuccessful in implementation or fails to
adhere to its audit committee charter
exposes itself to certain risk.
How should an organization assess which
aspects of SOX should be adopted?
SOX contains a number of provisions
designed to strengthen financial reporting, internal controls and audit committee oversight of the financial reporting process,
including management and the internal and
external auditors. Assessing which provisions, if any, should be adopted by a private
or not-for-profit organization in an attempt
to transition to more SOX-like corporate
governance is a significant undertaking, but
it can reap large benefits. It’s certainly not a
one-size-fits-all approach.
An organization will want to look at the
provisions of SOX and assess the cost and
benefits by considering what external or
internal pressures will be mitigated by
implementing SOX-like provisions; whether
the board and/or audit committee members
possess the skills, time and commitment to
carry out the provisions; what improvements to financial reporting and/or internal
control processes are sought; and what
resources may be required to achieve the
desired objectives.
What are the benefits of implementing SOX-like provisions?
Successfully implementing procedures
that improve oversight of financial reporting and internal control processes should
gain efficiencies along with greater credibility with access to the organization’s
donors, lenders, investors and others in the
capital markets. It may put the organization ahead of its competitors in terms of
quality of financial reporting and corporate
governance, and in readiness for state
SOX-like regulations, should they ultimately be mandated.
What resources are available to assist companies?
The AICPA has created an Audit
Committee Effectiveness Center through
its Web site, www.aicpa.org/audcommctr,
where it offers guidance and tools to
audit committees. The tool kits are available for corporate public companies,
nonprofit organizations and governmental entities.
LAURA FREUDENBERGER is an audit principal with Briggs & Veselka Co. Reach her at [email protected] or (713) 667-9147.
