Streetsmart Financial Basics for Nonprofit Managers

Chapter 23Scrutiny Intensifies

Nonprofit organizations have always been expected to adhere to a high standard of ethical behavior, but in recent years, the bar has been raised two notches. This bump up was caused by three factors. One was the Sarbanes-Oxley law; the second factor was the less-well-known rules published by the GAO; and the third is the rise of charity watchers. The central paradox is that the Sarbanes-Oxley law quickly melded into accountants' fiscal DNA and is rarely referenced directly now even though its impact on the for-profit world was considerable. Because it was also designed primarily for publicly held companies it has mostly secondary effects on this sector, while the nearly invisible GAO regulations and the charity watchers have a primary effect. We'll sort this out later in the chapter.

Sarbanes-Oxley (also known as SOX and SarbOx) was passed in direct response to the wave of corporate accounting scandals and questionable financial practices of the Enron era. Ironically, the GAO revisions had been in the works long before that time. Philosophically, they owe their roots to the concerns about auditor independence that Arthur Levitt, a past chair of the Securities and Exchange Commission (SEC), had raised in the late 1990s. Both trace their origin to the same policy question: What is the best way to ensure that the audit function will remain truly independent?

Auditor independence is important for obvious reasons, and it can be compromised in less obvious ...