Sarbanes-Oxley affects Hawaii nonprofits big time
As CEO of the University of Hawaii Foundation, one of the largest nonprofit organizations in Hawaii, Donna Vuchinich gets to rub shoulders with high-powered venture capitalists, real estate tycoons and other well-to-do donors. However, it's not all about cultivating the rich and famous. In addition to poring over spreadsheets and communicating with her large board of trustees, Vuchinich is helping to oversee the Centennial campaign, the largest fund drive in the foundation's history.
As if Hawaii managers of nonprofits don't have enough on their plates. On top of running their kuleana and dealing with everything from diminished state and federal funding to sorting out personnel squabbles, they now must also comply with Sarbanes-Oxley (or SOX).
The Sarbanes-Oxley Act was passed on July 30, 2002, in response to the corporate and accounting scandals of Enron, Tyco and others. The purpose of the law is to restore public trust in America's corporate sector. The law requires that publicly traded companies adhere to stricter governance standards that both broaden board members' roles in overseeing financial transactions and auditing procedures.
Although most provisions of Sarbanes-Oxley apply only to public companies, at least two criminal provisions apply to nonprofit organizations: provisions prohibiting retaliation against whistleblowers and prohibiting the destruction, alteration or concealment of certain documents or the impediment of investigations. Despite the law's spotlight on the for-profit sector, Sarbanes-Oxley casts a long shadow over the nonprofit community around the nation and in the Aloha State.
"Sarbanes has definitely helped put the issue of good governance on the radar screens of nonprofit managers. Many of Hawaii's larger nonprofits have adopted many of the governance principles embodied in Sarbanes," said Jeff Piper, an attorney at Schlack Ito Lockwood Piper & Elkind, who serves as outside counsel for the University of Hawaii Foundation and other Hawaii charities.
While SOX states that nonprofits need only comply with whistle-blower protection and document destruction provisions, all nonprofits in Hawaii "should comply with the spirit of Sarbanes-Oxley and other sound corporate governance practices as if they were a for-profit company," says Henry Montgomery, founder of MontPac Outsourcing and a director who heads the audit committees of three public companies and serves on the boards of the Honolulu Symphony and several private companies.
This entails procedures such as setting up audit committees, ensuring availability of timely financial information, establishing policies for addressing, among others, conflicts of interest, loans to directors, officers and executives, and making information about the organization's financial condition and other pertinent information available to appropriate parties.
Complying with SOX costs money, takes time and adds more responsibilities to already overstretched nonprofits. To say that many nonprofits are not happy about the added costs is an understatement. "My colleagues in the nonprofit community tell me that auditing expenses have gone up 50-100 percent," says Norm Baker, vice president of community building for Aloha United Way.
Despite the expense, many of the larger nonprofits and sometimes even smaller organizations bite the bullet and conform to most if not all of the SOX requirements.
"It's just common sense," says Henry Montgomery, whose company outsources accounting and financial services. "Having solid internal controls and corporate governance procedures in place may limit your organization's exposure to lawsuits or other claims by creditors, the IRS, or other stakeholders, to say nothing of potential damage to the reputation of the organization, its directors and management."
Montgomery suggests that some of the recent, highly publicized scandals involving nonprofits, including the saga of a former Oahu Salvation Army official fired last year after stealing money and property from elderly donors, might have been prevented with better oversight.
What can a small nonprofit do to adhere to SOX?
Montgomery believes small nonprofits, like their larger brethren, must have good financial systems in place.
"A small nonprofit without the resources to set up good internal controls risks not having the safeguards to prevent fraud or other malfeasance," says Montgomery. He believes a nonprofit that can't afford good governance should consider combining with a larger nonprofit that has the wherewithal to comply with SOX or outsource aspects of accounting or financial management to make those activities more affordable.
Although compliance with SOX is cumbersome for many nonprofits, Dwight Kealoha, CEO of the Better Business Bureau puts a positive spin on it. "Donors want to do the right thing," says Kealoha, "and SOX provides a way for them to get a level of comfort with regard to the effective use of their money."
Montgomery agrees. "It's true that audits, corporate governance and SOX can drive up costs, but nonprofits must always be beyond reproach."
Rob Kay is a Honolulu-based freelance writer and public relations practitioner.
Discussion open to the public
Former U.S. Rep. Michael Oxley (R, Ohio) will join Hawaii panel members Henry Montgomery, Shirley Daniel, Barry Weinman and Tom Wellman for a discussion on the effect of the Sarbanes-Oxley Act. The event will be held at 5 p.m. Wednesday in room 205 of the School of Architecture auditorium, University of Hawaii-Manoa. Free. Call 956-5570.