I know that corporate governance and financial reporting reform is the ideal way to start the week…so fun, so light, so intriguing. But sarcasm aside, there are good reasons to be at least marginally aware of the seismic shifts in what the federal government requires of public (and soon nonprofit) corporations.
First, a bit of recent history: Way, way back in July 2002, Congress passed the Sarbanes-Oxley Act into law, which applied to publicly traded corporations. According to this on-line forum on the legislation (or, if you are desperately bored, you can download the actual law here):
The Sarbanes-Oxley Act…introduced highly significant legislative changes to financial practice and corporate governance regulation. It introduced stringent new rules with the stated objective: “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws”.
On the heels of Enron and other corporate scandals, Congress was eager to set new standards of public disclosure, and — according to President Bush — “deter and punish corporate and accounting fraud and corruption, ensure justice for wrongdoers, and protect the interests of workers and shareholders.”
As the law’s requirements have oozed through publicly traded corporations — keeping many a CPA happily busy — Congress has shifted its focus to nonprofits, wondering if similar legislation might be necessary for that fishy world of charity and philanthropy. The fun began in June of last year, with hearings in both the House Ways and Means Committee and the Senate Finance Committee (which also held a hearing this past April).
From these discussions, stricter financial and corporate reporting standards have been suggested for nonprofits, and a few senators have suggested caution in wandering down that road. Just this month, Independent Sector released a report to Congress and the rest of us with their recommendations for reform.
As is required of such public conversations, a few poster children of nonprofit decadence and questionable accounting have been floated in the media. One recent example is Iowa Senator Charles E. Grassley’s dressing-down of the Getty and its lavish executive compensation package:
“Charities shouldn’t be funding their executives’ gold-plated lifestyles….I’m concerned that the Getty board has been spending more time watching old episodes of ‘Lifestyles of the Rich and Famous’ than doing its job of protecting Getty’s assets for charitable purposes,” he said.
Even if you don’t have $5 billion in assets, like the Getty Trust, it’s best to keep one eye on these discussions. The upshot will likely be more paperwork, more auditing, more hoops for donors to jump through (leading some to decide not to jump at all), and more headaches for small and midsized nonprofits.
The balance between accounting for your actions and actually taking action is about to be shifted.
Today’s announcement of Sandra Day O’Conner’s retirement from the Supreme Court gives non-profits even more concern. The Bush administration may have the opportunity to replace up to 3 SC justices. If so, I will not be surprised if we nonprofits are presented with new laws that tax our earnings and donations. We may see fewer small nonprofits.