Unintended? The effects of adoption of the Sarbanes‐Oxley Act on nonprofit organizations

Abstract

This article investigates the benefits and costs to nonprofit organizations emanating from the adoption of the Sarbanes‐Oxley Act (2002). The act was intended to stem financial malfeasance in the for‐profit sector; nevertheless the article finds that about half the surveyed nonprofits adopted provisions of the act and experienced effects in proportion to the level of adoption. About one in four of the nonprofits attributed benefits of better financial controls and reduced risk of accounting fraud to the adoption of the Sarbanes‐Oxley Act. More than one‐third of the nonprofit organizations reported increased fees for external audit, and about 15 percent cited “reallocation of resources from program to administrative expenses.” This article discusses the unintended positive and negative effects of public policy on nonprofit organizations.

What Encourages Nonprofits' Adoption of Good Governance Policies?

“…This, in turn, may affect the organization's likelihood of adopting good governance policies. In addition, the availability of human and financial resources in large organizations may help them afford the adoption of policies for good governance, which require a significant investment of both human and financial resources (Nezhina and Brudney ). An organization's larger size also means that it will be involved in bigger financial transactions in general and that the damages of fraud will be more critical.…”

Fraud and Corruption in U.S. Nonprofit Entities

“…Many nonprofit organizations, despite not being subject to the SOX corporate governance requirements, have taken a cue from the for-profit sector, and have voluntarily adopted many SOX best practices related to internal controls (Iyer & Watkins, 2008). 17 Nezhina and Brudney (2012) note that nonprofits voluntarily implementing SOX-type provisions benefited from better controls and reduced fraud risk, but at the cost of higher audit fees and more administrative expenses.…”

“…17. Nezhina and Brudney (2012) note that two Sarbanes-Oxley Act (SOX) provisions (whistleblower protection and record retention) apply to nonprofit organizations. Other corporate governance requirements of SOX (e.g., audit committee requirements, audits of internal controls) apply only to publicly traded companies.…”

Thematic Symposium: Accounting Ethics and Regulation: SOX 15 Years Later

“…Particular provisions of SOX apply to all private organizations in the USA including not-for-profits which have devoted considerable effort to implementing SOX mandated provisions to their operations (Nezhina and Brudney 2012). Consequently, SOX required policies have influenced the operations of nonprofits, and, as with the for profit sector, at considerable additional cost including higher audit and administrative costs (Nezhina and Brudney 2012).…”

“…Particular provisions of SOX apply to all private organizations in the USA including not-for-profits which have devoted considerable effort to implementing SOX mandated provisions to their operations (Nezhina and Brudney 2012). Consequently, SOX required policies have influenced the operations of nonprofits, and, as with the for profit sector, at considerable additional cost including higher audit and administrative costs (Nezhina and Brudney 2012). Saxton and Neely (2018) examine the impact of SOX on the nonprofit sector by considering three key policies that are explicitly applicable to charities: (1) conflict-of-interest policies, (2) records retention policies, and (3) whistleblower policies.…”