CDP Press

Are you familiar with the Sarbanes-Oxley Act, often called "SOX?" To tell the truth, Sarbanes-Oxley sounds less like something of importance to nonprofits and more like something against which you might want to be inoculated! The Sarbanes-Oxley Act of 2002 is actually more properly known as the American Competitiveness and Corporate Accountability Act. Remember Enron, WorldCom, and other nasty corporate scandals of the last decade or so? Sarbanes-Oxley was designed to make the boards of corporations keep a closer watch on the financial transactions and auditing procedures of their companies and to make these boards take responsibility for those transactions and procedures.

So how can something so obviously "corporate" as Sarbanes-Oxley possibly affect you and your nonprofit? The great majority of what makes up SOX is clearly limited to publicly-traded corporations, but there are two provisions within the Act that also apply to nonprofit organizations. Whether this is a deliberate action or a fault of ambiguity or vagueness in the writing of the document is immaterial - it's Federal law and it applies to nonprofits, so it deserves consideration by your nonprofit's Board of Directors and senior management.

Document Retention Provision: Section 802 of Sarbanes-Oxley makes it a crime to "knowingly alter, destroy, conceal or falsify any record or document with intent to impede, obstruct, or influence a federal investigation or the administration of any other federal matter." This provision is not limited to publicly-traded companies and as a result applies to nonprofits. Violations of this provision can result in fines and imprisonment for up to 20 years.

Compliance: Have a written, mandatory document retention and destruction policy. It can be very simple. Start by defining what the word "record" means in your organization, making sure that it encompasses not only written materials but also electronic materials you routinely receive or send, such as e-mails. Then define the categories of records you have (such as financial reports, personnel records, fundraising information, consultant contracts, leases, etc.) and establish timelines for maintaining each category that match up to applicable federal and state requirements. Ideally, you should also include rules requiring destruction of records at the end of their retention period. Any records "purged" at the end of their "shelf life" are then clearly seen as being destroyed in the normal course of business, rather than for some unidentified, potentially nefarious purpose.

If possible, your document retention policy should also address electronic back-up procedures, archiving of documents and periodic checks of the reliability of the back-up system. By all means, if your organization comes under investigation or if you even suspect you are being investigated, immediately cease all document destruction. You do not want to be subject to criminal obstruction charges.

There are many online resources that can help you develop your document retention and destruction policy --- such as the example found at http://www.donorsforum.org/publictrust/RecordRetentionPolicy.doc --- so make use of your favorite Internet search engine to assist you in developing a policy that is right for your organization.

Whistle Blower Provision: There are three Sarbanes-Oxley provisions designed to protect corporate whistle blowers, only one of which (Section 1107) is not limited to publicly-traded companies and therefore applicable to nonprofits. Section 1107 makes it a crime to "retaliate against an individual for providing law enforcement with truthful information relating to the commission, or possible commission, of any federal offense." Violations of this provision can result in fines or imprisonment for up to 10 years. A nonprofit example of how Section 1107 might come into play is the termination of a nonprofit employee for reporting to the IRS that the nonprofit has not complied with its tax reporting obligations.

Compliance: Again, the Board of Directors can go a long way toward protecting the organization and its employees by adopting a simple written policy that encourages employees to report potential problems as soon as they become aware of them and also ensures protection from retaliation for those employees. It would be advisable to define retaliation as more than just termination. For instance, ideally employees would also be protected from other harmful personnel actions including demotion, suspension or relocation. An excellent resource for developing a whistleblower policy, with links to samples, is available at http://www.dvg.org/knowledge/ForumBrief_Whistleblower_Aug07.pdf.

Final Thoughts: The spirit of the Sarbanes-Oxley Act seeks to apply greater honesty, transparency and responsibility to corporate governance. It only makes sense that nonprofit organizations, a place where preservation of donor and funder confidence is of paramount importance, would want to make sure their "houses" are in good order. Consider taking the time to have your Board develop some simple policies and procedures that protect the nonprofit, its records, and the people that work there. If you can, have an attorney briefly review those procedures. And last but certainly not least, remember that any policy or procedure, no matter how artfully crafted, is only effective if you follow it.

Community Development Professionals, LLC

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