Nonprofits, Sarbanes-Oxley, and the States

Enacted in response to corporate accounting and oversight scandals in 2001 and 2002, the American Competitiveness and Corporate Accountability Act of 2002 became law on July 30, 2002. Known popularly as Sarbanes-Oxley, the act introduced significant new governance standards, requiring the boards of publicly traded companies to oversee closely financial transactions and auditing procedures.Sarbanes-Oxley affects nonprofits as well; the provisions of the act that govern whistle-blower protection and document destruction apply to charities. In addition, many state governments have passed or are considering legislation that addresses nonprofits’ accounting and auditing procedures.California’s Nonprofit Integrity Act of 2004 (SB 1262) went into effect on January 1, 2005. Under the act, all nonprofits with annual revenues of at least $2 million must have an audit prepared by an “independent” CPA, as defined by the federal government. The audit must be overseen by an audit committee, whose members must not constitute more than half of a nonprofit’s finance committee. The nonprofit must also make the audit available to the public and the attorney general on the same basis as its IRS Form 990.The Massachusetts legislature is slated to vote later this year on the Act to Promote the Financial Integrity of Public Charities, a bill similar to California’s Nonprofit Integrity Act. Like many other states, Massachusetts has recently changed audit thresholds and requirements for nonprofits. HB 4234 became effective in October 2004; it requires nonprofits with annual revenues of at least $500,000 to submit to the Division of Public Charities a full audit performed by an independent CPA. In addition, charities with revenues between $100,000 and $500,000 must submit a financial review conducted by an independent CPA.New Hampshire’s HB 1408, passed last year, requires every nonprofit with an annual revenue of at least $500,000 to submit an audited financial report along with its IRS Form 990. Under Maine LD 1691, also enacted in 2004, every nonprofit renewing its registration as a charitable organization must submit an audited financial statement and IRS Form 990.In June 2005, Connecticut passed SB 946/HB 6515 requiring charities to submit a financial report annually to the Department of Consumer Protection. A nonprofit whose gross revenues exceed $200,000 must also file an audited financial statement. Under Kansas SB 121, passed in May 2005, all charities must submit a tax return to the secretary of state before soliciting funds, and those whose contributions total $500,000 or more must submit an audited financial statement.In the wake of Sarbanes-Oxley, some state governments are holding nonprofits to higher accounting standards. More states are addressing these issues, and a federal act regulating nonprofits is possible. Links to additional resources on Sarbanes-Oxley and the legislation mentioned in this article are listed below.