Sox Research Paper

Running head Nonprofits and SOX ling Tanenbaum Student ID 3750548620 Accounting Capst atomic number 53 Senior Seminar in Accounting ACC499 004016 Summer 2009 Nonprofits and the Sarbanes Oxley Act Submitted Submitted to Tee M. Thein shelve of Con 10ts Abstract Introduction SOX regularisations for not-for-profits Reasons for nonprofits to suck in SOX closedown look file memorandum Communication memorandum References Abstract Introduction The Sarbanes-Oxley Act (SOX) of 2002 (U.S. House of Representatives 2002) was passed by congress as a result of a wave of accounting scandals and related monetary irregularities in corporations such as Enron, WorldCom and Tyco. SOX is called the intimately significant securities edict since 1933 and 1934 securities ACT. The Act attempted to throw off ethics to a greater extent black and white rather than a color in bea. The increased guidelines incur changed businesses and business relationships.These new requirements ache placed greater demands on directors, take stock delegacys, take stockors and anxiety. Most, of these pabulum where only made towards semi state-supportedly held companies, corresponding regulations targeted nonprofit arrangings (Panel on the Nonprofit empyrean 2005). Two deoxycytidine monophosphate and fifteen nonprofit organizations ease up voluntarily follow aliment of the Sarbanes-Oxley Act of 2002 (SOX). M either, nonprofits be newly in the process of adopting SOX.The Panel on the Nonprofit Sector (2005), in its final report to Congress in June 2005, recommends more than 120 actions to be taken by charitable organizations, Congress and the IRS (Internal Revenue Service) to strength nonprofits against, transp bency, judicature and accountability. The most significant provision of the Act is the requirements in Section 404 the inform on the forcefulness of inhering haves over the fiscal reporting. PCAOB scrutiniseing standard 2 requires that the examine of innate control be integrated with the audit of the fiscal statements.The PCAOB requirements also only apply to familiar and clannish for profit companies, these would be new requirements for nonprofits regard to adopt to SOX. The requirements of SOX section 404 requirements on indwelling controls have proven to be quite expensive for populace companies (DAquila 2004 Pomeroy 2006), further research in to the current state of presidency in the nonprofit empyrean would be unspoilt before similar measures are mandated. Nonprofits have several reasons they might be compelled to adopt SOX provisions. First, several states are plausibly to emulate provisions similar to those of SOX.Some of these new laws in somatic elements of SOX including expanding whistleblower surety, requiring officers of the organization to sign the corporations annual report, appointing an audit commissioning and increase penalties against those who commit fraud or impede an investigation of fraud. California passed t he Nonprofit right Act in 2004. This Act addresses monetary reporting, corporate brass section, compensation, independence and fund raising (Silk and Fei 2005). New Hampshire requires audited financial statements for nonprofits with revenues greater than one million.Massachusetts, Connecticut and Kansas have similar requirements (Anderson and Kelley 2006). Second, unethical behavior seems as common in the nonprofit organizations as it does in the private sector. youthful scandals in nonprofit organizations such as The NYSE, Upsala College, linked Way and Education & Research Foundation, have had a negative effect on the public combining in their charitable organizations (Gibelman 1997). For nonprofits deposit from the public is alert because the majority of their pecuniary resource come from donors.SOX could result in more positive responses from donors, investors and future mature members (Orlikoff and Totten 2004). Finally, some(a) provisions of SOX already apply to nonpr ofits. Nonprofits must show up whistleblower protection and document destruction policies. former(a) provisions are inevitable, because of the large amount of grants nonprofits sustain which come with the own regulations and restrictions (BoardSource 2003). The purpose of this paper is to offer up a reasonable understanding of how nonprofits have been change by SOX. SOX regulations for nonprofitsSOX requires that companies have an audit committee that includes possibility-by-case members and members of the circuit board. SOX also requires the company to disclosure whether one of the internal auditor is a financial expert and whether they are directly responsible for overseeing the international auditors. This is to ensure that the financial statements are understand, that there is proper communication with the external auditors and that there is an understanding of internal controls. In fix up to kick upstairs standards for nonprofit accountability and financial reporting all nonprofits should have an independent audit committee (BoardSource 2003).Sox requires that nonprofits disclose whether a code of ethics has been pick out for senior financial officers. If they do non have a code of ethics reasons for non having one have to be disclosed. This is to encourage the development of a code of ethics in order to enhance trustworthiness to contributors and new(prenominal) constituents. The whistleblower protection insurance applies to nonprofits as well as for profit organizations. This regulation protects whistleblowers from special damages and attorneys fees. It also, prohibits the employer from toilsome the whistleblower in any manner.SOX provides additional protection for whistleblowers by, instating criminal penalties for actions taken against whistleblowers. Nonprofits should develop confidential and unknown procedures for handling employee complaints. Although the CEO and CFO do non quest to sign financial statements they do need to underst and them and ensure that they are fairly presented in all materially respects. The responsibility for approving the financial statements supremely belongs to the board of directors. Section 404 of SOX requires companies to include an internal controls report along with their annual report.Their internal control report should state the responsibility of management to create and primary(prenominal)tain an internal control structure and procedures for financial reporting. It should also contain, an assessment at the end of the most recent fiscal year as to the effectiveness of internal controls and the procedures for financial reporting (OHare 2002 BoardSource 2003 Walters 2003 Tran 2005). SOX requires auditors of public companies to prepare and maintain audit workpapers and other schooling related to any report in ample detail to support the auditors conclusions, for a period not less than seven years.Failing to do so is a criminal offence subject to fines and up to ten years in prison. Existing standards for audits of nonprofits do not include a mandated audit documentation guardianship period. Instead, those standards require nonprofits and auditors to retain records long enough to sastify any pertinent legal requirements of record retention. Reasons for nonprofits to adopt SOX bigger organizations with more resources will be more probably to adopt SOX. The public and media are more presumable to be harsher on larger nonprofits, which makes them more probable to have stronger governance mechanisms.The board of directors have the ultimate responsibility of overseeing proper financial statement intromission (BoardSource 2003 Walters 2003). Research on the relationship amidst board coat and unanimous value has had mixed results. Yermack (1996) provides essay that smaller boards are associated with a higher firm value. In 2008, Coles find that are diversified among industries or have high leverage, are more in all likeli stumper to benefit from a la rger board of directors. bodily governance characteristics, have been shown to be related to the size of the board.Bradbury (1990) finds board size and intercompany ownership to be determinants of uncoerced audit committees in public companies. In another(prenominal) study shows that larger boards are more likely to create audit committee boards (Beasley, Salterio, 2001). In a NASDAQ over the counter study done by Pincus (1989), he found that managerial ownership, leverage, size of the company, relation of outside directors to total directors, use of Big 8 auditors and participation in the National Market musical arrangement are related to instinctive formation of audit committees.As a result as the size of the board of directors of a nonprofit increases, so does the likely hood that they will voluntarily adopt SOX. Nonprofits with independent boards of directors are also more likely to adopt SOX. The main reasons nonprofits would voluntarily adopt SOX would be to increase the trust in the public in order to witness more funds. However some nonprofits, feel that the provisions in SOX burden the nonprofits so much that it is beneficial not to adopt SOX.These nonprofits strongly believe that SOX should not be required for nonprofits for the following reasons One, nonprofits are basic organizations with small staffs and have boards filled with community- minded large number with little or no business and management background. If SOX was required out of these nonprofits, the staff would be overwhelmed, along with the board and it would take away from the nonprofits primary mission. Two, nonprofits are already held to higher standards by the public and then private or presidential term agencies because, if the public doesnt trust the organization they wont gift their money.Also, nonprofits receive a large portion of their funds from government grants which are held to strict oversight and laws and regulations. Three, legitimate regulations of SOX w ill increase overhead costs and make the nonprofits look less efficient to contributors. On the other hand, by voluntarily adopting SOX, nonprofits are showing to the public that they are concerned about protecting funds, increasing operating efficiency and effectiveness, also enhancing accountability. Conclusion Research file memorandum Communication memorandum References Anderson, S. , and C. L. Kelley. 2006.Advising nonprofit organizations. The CPA daybook 76 (8) 20-26. Beasley, M. S. , and S. E. Salterio. 2001. 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