Fiscal Management
Articles
“Navigating Ethics and Byway Accounting,”
America’s Byways Resource Center; Vistas, September/October 2005
Fiscal Management: Navigating Ethics and Byway Accounting
…You find a lost wallet.
…Your spouse’s company could win a bid with information you have from your byway.
…You’re the first to notice that your co-worker’s review is accidentally posted on the office Intranet.
What’s the right thing to do in each situation? Most people grow up learning the basic differences between right and wrong, according to the society’s definitions. As adults, they know what to do when ethical issues pop up. They proceed day to day with an inherent ethical consciousness that supports their actions, even for routine decisions—such as returning a pen to the rightful owner.
As a member of leader of a byway organization, you are exposed to many ethical considerations that are important to you and your group—especially in the financial arena.
Specifically, you need to be aware of current and pending legislation that may very well affect the way you administer accounting procedures for your nonprofit organization or your nonprofit partners.
This article won’t turn you into an accountant and it doesn’t provide legal or professional advice. However, it should help you to consider that many decisions you make relating to your byway organization have ethical implications.
SOX and Ethical Accounting Procedures
America’s legal system attempts to reinforce the difference between right and wrong by granting the government the authority to enforce laws created by elected legislators. (Of course, you can debate the extent to which government should mandate ethics.)
In recent years, insider trading and information sharing, asset over-valuation, underhanded board member activity and inappropriate distribution and use of corporate stock options are just a few of the activities that have focused attention on ethical issues.
Similarly, and perhaps even more reprehensible, are the fiscal scandals that have surfaced in the nonprofit world. Many good organizations suffered damaged reputations because of unethical individuals. In response, Congress, State legislators and other leaders have engaged in serious ethical debates, many resulting in initiatives directed at improving accounting procedures and governance.
The Sarbanes-Oxley Act of 2002 (commonly referred to as SOX), created and enforces many new accounting procedures intended to strengthen public confidence in the shaken world of corporate governance and securities trading. SOX requires that the boards of publicly traded companies broaden their role in overseeing financial transactions and accounting procedures. SOX is divided into eleven sections, each with a different focus, such as:
- Instilling a sense of corporate responsibility
- Establishing auditor independence from the organization
- Enhancing financial disclosures
- Limiting conflict-of-interest situations
- Imposing criminal penalties for corporate fraud and white collar crime
Of the eleven sections, only Title 8: Corporate and Criminal Fraud Accountability directly applies to nonprofit organizations (and any formal organization). Title 8 addresses retaliation and document destruction. (See “What Does This Mean To Your Byway?” section below.)
Legislation directed specifically at nonprofits is probably not far behind. In fact, the U.S. Senate Finance Committee is expected to begin legislation on nonprofit accountability similar to SOX, during 2005. The Committee held an April 2005 hearing entitled “Charities and Charitable Giving: Proposal for Reform,” aiming toward improved nonprofit governance and stopping fiscal tax evasion and abuse. The Panel on the Nonprofit Sector, convened by the Independent Sector, completed a June 2005 report to Congress entitled, Strengthening Transparency Governance Accountability of Charitable Organizations (www.nonprofitpanel.org/final/), which may provide the framework for new national nonprofit accountability legislation.
Beyond the impending national legislation, several States are also considering mandates aimed at nonprofit governance. Some States have already passed such legislation, and nonprofits in those States are scrambling to react. Governor Arnold Schwarzenegger signed California’s Nonprofit Integrity Act (NIA) which will affect any nonprofit required to register with the Attorney General’s Registry of Charitable Trusts. While the economic impact to small nonprofits from this legislation is still undetermined, the NIA has undoubtedly changed the way they perform their services.
State and Federal legislators have tossed around the nonprofit governance topic for some time now, making it difficult to predict if and when new mandates will be signed into law.
What Does This Mean To Your Byway?
Two provisions of SOX directly affect all organizations, including nonprofits, both stemming from Title 8: Corporate and Criminal Fraud Accountability:
- Retaliation: It is illegal for an organization to take retaliatory measures against any of its members or employees who provide truthful information.
- Document Destruction: It is illegal for an organization to knowingly alter, cover-up or destroy entries in accounting records with the intent of obstructing a Federal investigation.
In addition the U.S. Senate’s proposed legislation for nonprofits holds a notable provision that may directly impact byway organizations. Many byways rely on land easements to preserve viewsheds and environmentally sensitive areas along the scenic byway. The current version of the Federal proposal could make land easement donations less attractive for charitable givers by reducing the amount that givers could claim for tax deduction. Follow the outcome of this pending legislation closely if your byway depends on land donations.
Of course, future State and Federal legislation directed at nonprofits can’t be predicted. As such, the wise action may be to voluntarily comply with several aspects of Federal and State laws that generally address nonprofit governance legal and ethical issues.
These actions can be grouped into three areas:
Increased Awareness
Nonprofit boards should become award of SOX. You don’t have to be experts on governance and related financial matters. However, basic training and discussions on being accountable during budgeting and financial matters is imperative for board members. Further, the executive director, board, chair or financial committee chair, as appropriate, should certify all financial documents. This requires these individuals to attain a complete understanding of their financial statements.
Policy and Structural Changes
Nonprofit boards should enact simple policies stating their ethical intentions. These policies should include the following topics:
- Minimizing or prohibiting loans to board members or staff
- Code of Ethics policy
- Whistleblower protection policy
- Records-retention policy
The National Council of Nonprofit Association offers a sample code of ethics for nonprofits on its website. Additionally nonprofits should consider increasing the number of independent members on their boards, especially those with some financial and accounting experience.
Audit Committee
If your organization is required to have an audit, consider establishing an audit committee whose main responsibilities would be appointing, compensating and overseeing the work of its auditor. The audit committee should be independent of the financial committee that creates the financial statements for the organization.
The Situation Summary
The Sarbanes-Oxley Act of 2002 (SOX) has raised awareness of the need for organizations to be held accountable. While SOX is directly aimed at publicly traded corporation, nonprofits need to be aware of its potential implications as well as pending nonprofit governance and accounting standards legislation. Nonprofits should begin voluntary compliance with key provisions of SOX and pending legislation, including possible new laws in their respective States.
Byway organizations tend to be relatively small with annual profits below $100,000. Understandably, many compliance measures such as audits will be difficult to implement. Small organizations often cannot afford professional and independent audits. They rely on “expert” advice from members or simply go without an audit. Proposed legislation is hinting that small nonprofits will be exempt from many of the costly and difficult-to-implement requirements, which are mainly aimed at larger nonprofits such as universities, hospitals and nation-wide charities.
Conversely, other measures such as code of ethics, whistleblower policies and financial training for board members are inexpensive and relatively easy to implement. Pursuing these voluntary compliance measure ahead of pending legislation will:
- Give organizations a head start dealing with future accountability legislation.
- Mitigate legal responsibility to organizations and their members.
- Legitimize fundraising efforts by being able to tout voluntarily compliance with governance and accounting laws.
Most important, however, a nonprofit organization is, by its very nature, trying to better society. Nonprofits have an ethical responsibility to take care of the money that the public generously donates to their cause. This ethical reason alone is enough for you to consider voluntary compliance with accounting and governance laws.
As a leader of a nonprofit, you should be aware of what is happening at both the national level and within your State. The National Council of Nonprofit Associations (http://www.ncra.org) has a very helpful website that lists current State proposals intended to change the way nonprofits administer accounting procedures: http://www.ncna.org/_uploads/documents/live/2005_State_Governance-Updated_6-20-2005.doc.
Tools and Resources
Please see the following websites for further information on nonprofit accountability standards.
Strengthening Transparency Governance Accountability of Charitable Organizations (Report to Congress by the Panel on the Nonprofit Sector, June 2005), Independent Sector
http://www.nonprofitpanel.org/final
Checklist of Sarbanes-Oxley Implications to Nonprofits, Independent Sector
http://www.independentsecton.org/issues/sarbanesoxley.html
Model Code of Ethics, Independent Sector
http://www.independsector.org/issues/accountability.html
Checklist for Accountability, Independent Sector
http://www.independtsector.org/issues/accountability/Checklist/Checklist_Full.pdf
State by State Listing of Nonprofit Accounting Legislative Proposals
National Council of Nonprofit Associations
http://www.ncna.org/_uploads/documents/live/2005_State_Governance-Updated_6-20-2005.doc