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American Bar Association

NONPROFITS AND SARBANES-OXLEY

Overview

The American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act ("Sarbanes-Oxley"), was signed into law on July 30, 2002. The Act was passed in response to several corporate scandals and was intended to rebuild public trust in the corporate sector.

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.

Below is a description of some specifically relevant provisions of the Sarbanes-Oxley Act.

Record-keeping:
  • Section 802 of the Act makes it a crime to knowingly alter, destroy, mutilate, conceal, cover up, falsify or make a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any federal department or agency or any case filed under the federal bankruptcy code. Violators may be fined and/or imprisoned for up to 20 years. (emphasis added)

  • Section 1102 of the Act makes it a crime to "corruptly" alter, destroy, mutilate, or conceal a record, document or other object, or attempt to do so, with the intent to impair the object's integrity or availability for use in an official proceeding. The Act does not define the term "corruptly." Violators may be fined and/or imprisoned for up to 20 years. (emphasis added)

Official proceedings:
  • Section 1102 of the Act also makes it a crime to otherwise obstruct, influence or impede any official proceeding or attempt to do so. Violators may be fined and/or imprisoned for up to 20 years. (emphasis added)

Whistleblower Provisions

The statutes under which a whistleblower complaint may be made and records or investigations covered are not limited to Sarbanes-Oxley provisions. Therefore, nonprofits may want to consider voluntarily adopting the practices set forth in the rest of Sarbanes-Oxley as good business practice.

Section 1107 of the Act makes it a crime to knowingly take any action harmful to a person with the intent to retaliate against that person for providing a law enforcement officer with truthful information relating to the commission or possible commission of any federal offense. Violators are subject to fines and/or imprisonment for up to 10 years. (emphasis added)

Two obvious sources of an official proceeding or offense are an investigation by the Internal Revenue Service or the Equal Opportunity Employment Commission, but any federal matter can trigger the provisions. Although a whistle-blower procedure is not mandated for non-profits in the Act, many commentators are recommend that non-profits establish procedures. It make business sense to encourage individuals in the organization to come forward with a problem at its earliest, most solvable stage. An effective policy can avoid liability under the provisions discussed above. Finally, putting a procedure in place for employees to raise and address problems is healthy for the organization.

Resources

One resource on how Sarbanes-Oxley affects nonprofit organizations is the BoardSource and Independent Sector paper, availabe at GuideStar, The Sarbanes-Oxley Act and Implications for Nonprofit Organizations. This paper summarizes the main provisions of Sarbanes-Oxley, explains each provision's relevance to nonprofit organizations, and lists recommended actions.

The Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley, written by the ABA Coordinating Committee on Nonprofit Governance, is another source of guidance on Sarbanes-Oxley issues. This publication is written for directors of nonprofit organizations and practitioners and provides a complete overview of the major reforms enacted or triggered by the Sarbanes-Oxley Act, including governance reforms promulgated by the SEC and the Stock Exchanges. Also included are 10 key governance principles derived from such reforms and a discussion of the potential challenges and benefits of applying such principles in the nonprofit context.

Another resource is a paper prepared by Wyche Burgess Freeman & Parham, P.A., U.S. Sentencing Commission Amends Guidelines for Corporate Compliance and Ethics Plans. This paper examines changes made to the sentencing guidelines in response to Sarbanes-Oxley, and in particular examines the elements of an effective corporate compliance and ethics plan.

 

For more information or materials on nonprofits and Sarbanes-Oxley, please at the Center for Pro Bono.

 

 

 

Updated: 4/8/2013

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