Boards Advised to Prepare for More Stringent Regulations
By Janet M. O’Neill

Janet O'Neill
Although the Sarbanes-Oxley Act (SOX) is not yet law for nonprofits, incorporating certain provisions of the act into enhanced governance policies could result in best practices — and prepare the organization for the results of pending legislation in Massachusetts.

Grant Thornton’s href="" target=_blank> “2005 National Board Governance Survey for Not-for-Profit Organizations” reveals that the practices of nonprofits are shifting. In the three years since SOX was passed into law, there has been a dramatic rise in SOX awareness among nonprofit organizations. Survey results also underscore the many elements of the act that nonprofits, particularly those within Massachusetts, need to begin to consider if they haven’t already.

At the forefront of local impending change lies legislation filed by the Massachusetts Attorney General in May 2005. It is likely that this "Act to Promote Financial Integrity of Public Charities" will pass in some form during this year.

Seeking to incorporate key elements of SOX, the legislation will ultimately serve to boost the trust and confidence of donors, the public, and regulators; increase financial integrity; establish clear standards of accountability; develop rules for fiscal soundness and transparency; and provide clearer standards with respect to oversight of and by boards of directors.

So what does this mean for your organization? Can you be confident you are measuring up? Based on the national survey, 78 percent of those polled have discussed the act with their boards.

Although a higher portion of those discussing the act are from larger organizations ($20 million and up), it is important to note that discussions should entail more than just a conversation. The board should assess the need for the organization to implement best practices embodied in the act and put in place a plan for practices it would like to implement in the future.

Not surprisingly, so far the likelihood of implementing improved governance policies oftentimes hinges on budget size, with the larger organizations leading the way. To date, 65 percent of organizations reported initiating a number of corporate governance policies, all by varying degrees.

Policies adopted by nonprofits include record retention, an audit committee charter, a code of ethics statement, a whistle-blower policy, new board policies, accounting policies and procedures manual, and improved internal audit functions.

When it comes to board and audit committees, there are several key factors to consider when affirming your commitment to best practices and ensuring the board is fulfilling its fiduciary responsibilities — not the least of which concerns board size. Bigger is not always better.

Boards that are too large can make oversight and decision-making cumbersome, while boards that are too small are unable to provide diverse perspectives and expertise. Of those polled by Grant Thornton’s survey, the majority have appropriate board sizes, with 39 percent responding that they have six to 15 board members, while 41 percent have 15 to 30 board members.

Experience shows that boards with less than five members are considered too small and boards with more than 30 members are too large to be effective. When board members depart, organizations should assess the need for a replacement, given the current board size and expertise. This due diligence will ensure the board has the membership and the experience necessary to be effective.

The roles and responsibilities of board members are diverse and are often best managed through the development of committees that are focused on specific activities and functions deemed critical to the organization’s success.

Eighty-nine percent of respondents reported having an executive committee; 83 percent reported having a finance committee; 65 percent reported a development/fundraising committee.

Surprisingly, only 60 percent confirmed the existence of an audit committee. The role of the audit committee is essential in ensuring the financial integrity of a not-for-profit organization.

While pending legislation could alter the dynamics and functions of the audit committee, currently nonprofits are not held to the same standards as public companies. Those standards stipulate that at least one financial expert, preferably a professional auditor, be included on public company audit committees. Only two thirds of nonprofits, however, disclosed having a certified public accountant on their audit committee. This statistic could soon change in Massachusetts if nonprofits are forced to comply with regulation changes.

Practical and statistical evidence leads industry professionals to believe that the state of the nonprofit industry is strong as it pertains to bracing for impending regulations.

Incorporating provisions of the act into your corporate governance, board, and audit committee policies can not only mitigate potential risks for your organization, but also shows your supporters and the public your dedication to ensuring strong governance policies.

The policies can act as a roadmap for nonprofits, clearly documenting the organization’s adherence to good governance.

Janet O’Neill, CPA, is a senior business advisory services manager at Grant Thornton in Boston. She specializes in serving and advising nonprofit human service organizations, health care providers, and educational institutions within New England on regulatory compliance, risk management, corporate governance, and internal control issues.

Reprinted with permission from the March 1, 2006, issue of Women’s Business Boston.