The overriding objective of the Sarbanes-Oxley Act is to strengthen the public securities market by holding management accountable for material information filed with the Securities and Exchange Commission and released to investors. To help achieve this overall goal, Sarbanes-Oxley includes several underlying objectives, specifically improving corporate governance, promoting ethical business practices, enhancing the transparency of financial statements and disclosures, and ensuring that company executives are aware of material information emanating from their business.Sarbanes-Oxley is not law for nonprofit organizations, but its guidelines for achieving its underlying objectives can be applied to all organizations, including nonprofits. By adopting the principles and best practices promoted by Sarbanes-Oxley - customized to meet an organization's unique nature and needs - a nonprofit organization can better realize its mission and meet the expectations of its key stakeholders.
This feature follows the case of the Philadelphia Zoo, which provides insight into how implementation can be the key to improved governance for nonprofit organizations.
Welcome to the zoo
The Philadelphia Zoo - America's first - was chartered in 1859 and opened its gates to the public in 1874. Over the course of its 131-year history, it has maintained its position as one of the country's leading zoos, and is the second-largest ticketed attraction in the Philadelphia region.
With yearly visitation of 1.2 million guests, annual spending in excess of $40 million, and the responsibility of caring for a collection of more than 1,500 mostly endangered animals, the Philadelphia Zoo is continuously in the public spotlight.
With these responsibilities in mind, the zoo's board of directors has for several years placed governance at the forefront of its goals. In fact, the board agreed that the passage of the Sarbanes-Oxley legislation in 2002 was an opportunity to revisit the zoo's corporate governance standards. Recent actions have ranged from the pragmatic appointment of a chief governance officer to the board, to a time-consuming increase in the number of committee meetings. The board has used Sarbanes-Oxley to generate discussion and resulting activism to adopt SOX-like principles that have moved the Philadelphia Zoo into the forefront of nonprofit governance.
Best practice considerations
For CPAs appointed to a nonprofit board, as well as those CPAs working for, performing the audit of or otherwise having a vested interest in the governance of a nonprofit organization, the following are best-practice considerations based on the direction of SOX. The nature, size and complexity of a nonprofit organization, however, will affect how these best practices are most appropriately and effectively implemented.
* Board of directors. The board of directors or trustees of a nonprofit plays a critical role in defining and monitoring the nonprofit's mission, providing oversight to the management team, and ensuring effective governance on behalf of key stakeholders. Thus, the board should be actively involved and should have significant influence over the organization.
* Board charter. The board should clearly define its purpose, duties and responsibilities in an overarching board charter, and then approve individual charters for each board committee. These charters should be reviewed at least annually, and should be amended as deemed necessary.
* Board members. Directors should have sufficient knowledge, experience and time to serve the nonprofit organization effectively. The Philadelphia Zoo assists its board members in this regard as best as it can. For example, each board member annually receives a binder that contains copies of all critical documents: the organization's mission, bylaws, committee work plans, board policies, a calendar with key events, and other governance-related materials.
Board members also must be able to understand the nonprofit's business operations and effectively present alternate views as needed, especially with regard to strategic initiatives and major investments. Each board member is periodically required to attend "Zoo School," a full-day workshop that provides a working knowledge of all aspects of the zoo's day-to-day operations.
To ensure that board directors are qualified, there should be an effective process for nominating and approving new members and for evaluating the performance of existing members. The board should consist of an appropriately diverse group of members, but not so many as to become unruly and ineffective. The Philadelphia Zoo's nominating process is rigorous. Board candidates are generally solicited by existing members and reviewed by a nominating committee. Candidates meet several times with the nominating committee, board officers and key management. All nominees are voted on by the entire board, upon recommendation by the nominating committee.
* Board committees. The board should create committees based on the need for in-depth attention or focus into specific matters. Many larger nonprofits have standing audit, finance and compensation committees, as well as ad hoc committees as needed. Each committee should have an appropriate number of qualified members, and report the results of its efforts back to the board.
Due to the size and operational complexity of the Philadelphia Zoo, board committees play a key governance role. Each standing committee has a distinct approved mission and annually develops a specific work plan, priority areas of focus, and an 18-month meeting schedule. Committee composition is reviewed each year to ensure that member backgrounds and experience match the committee's needs.
* Conflict-of-interest policy. To avoid conflicts of interest, the board should create and ensure that its members uphold a conflict-of-interest policy. The board and its key committees also should consist of a sufficient number of independent directors. To be independent, a director must not accept consulting, advisory or other compensatory fees or be an affiliated person of the organization, except for board-related compensation. The Philadelphia Zoo requires all board members to sign a conflict-of-interest policy. In addition, management and select staff are required to annually complete an employee conflict-of-interest statement that discloses any transactions with board members or other related parties.
* Board policies. The board should determine the organization's major policies, including those that address significant business control issues, financial and operational risk management, and delegation of authority.
Recently, the Philadelphia Zoo's board of directors adopted a series of statements and policies on financial and operational risk management. Boards historically have adopted financial policies, but it is only recently that they have delved into operational risks. The zoo's board views oversight of all risk as its responsibility. It has adopted statements and supporting policies governing employee and volunteer welfare, behavior to guests, safety of the animal collection, and legal and regulatory compliance.
The board should clearly define its key governance principles and periodically perform board-effectiveness self-audits and refine its policies, procedures and structure as appropriate. The Philadelphia Zoo's board, directed in this effort by its officers, recognizes that an annual performance evaluation is both a healthy and a necessary exercise. It ranges from the basic - such as annually reviewing, revising and approving key board policies - to the bold - such as limiting board members to no more than three consecutive three-year terms.
* The audit committee. The audit committee plays a critical role in governance. Its key responsibility is oversight, particularly oversight of an organization's financial statements and disclosures, risk management activities, compliance efforts, and internal and external audit functions.
The audit committee should document its purpose, duties and responsibilities in a formal audit committee charter. The charter should be reviewed at least annually and amended as appropriate. The Philadelphia Zoo has had an audit committee for many years, but it was a subcommittee of the finance committee. After SOX, the committee was separated from the finance committee, and now stands alone. Its scope was expanded to include the monitoring of operational risk in addition to financial risk; its name was changed to the Audit & Compliance Committee; and its size was increased to include two attorneys. The zoo's audit committee now has a published charter, annual work plan and four prescheduled meetings per year.
* Financial experts. All audit committee members should be financially literate. In addition, either the audit committee chair or other members of the committee should have accounting- or finance-related management expertise. All members of the Philadelphia Zoo's audit committee are financially literate, and there are three financial experts, including a CPA, retired chief financial officer and chief executive.
The audit committee should be responsible for engaging and providing oversight to the organization's external auditor, having direct responsibility for appointing, evaluating and terminating the auditor. To provide appropriate oversight, the audit committee should formally meet with the external auditor at least twice per year: once to review the auditor's annual work plan, and again to discuss the final audit report.
The Philadelphia Zoo's Audit & Compliance Committee engages the organization's auditors, meets with them at least twice each year, and requires an annual management letter. In addition, the committee reviews its auditor relationship every three years, and does not employ its auditor to perform any nonaudit services except tax return preparation.
* Whistleblower hotline. The audit committee should establish procedures that enable employees and others to confidentially and anonymously submit concerns regarding questionable accounting or auditing matters. All reported issues must be investigated and resolved in a timely fashion, with appropriate disciplinary action taken if needed. The Philadelphia Zoo has a published whistleblower policy that has been presented and distributed to all current employees and reviewed with new employees during orientation.
The culture of a nonprofit, ethical or otherwise, is a reflection of the collective behaviors and values of the organization's leaders, managers and other associates. As such, management should set the appropriate "tone at the top," including specific moral guidance regarding what is right and wrong. Management should effectively communicate its commitment to integrity and ethics, both in words and deeds. Finally, staff should feel pressure to do what is right.
* Codes of conduct. Management should maintain a code of conduct, as well as other policies that outline acceptable business practices, expected ethical and moral standards, and conflicts of interest, among others. Staff must understand these policies and know what to do if improper behavior is encountered.
* Internal controls assessment. Adequate internal control over financial reporting and disclosure, including an appropriate level of documentation, is a must. To effectively assess that internal controls are working as expected, management should consider implementing a control self-assessment program.
Following SOX guidelines, the zoo's financial team evaluated its internal control structure and the supporting level of documentation. It established an organizational tone that a strong control environment is necessary and expected.
The finance team prefers to center its focus on preventive, rather than detective, controls. The most critical question that they ask is, "Are key people receiving the information they require on a timely basis?" This led the zoo to introduce an accelerated closing schedule, requiring the complete financial reporting package to be in the hands of the board's finance committee no later than the tenth workday of each month.
* Internal audit function. Management should consider an internal audit department. At the zoo, this is not practical. Budget constraints prohibit a full-time internal audit function. However, the board's increased awareness of governance has led management to continuously evaluate the organization's internal controls and perform an ongoing review of policies and procedures.
By adopting the principles of Sarbanes-Oxley and implementing best practices related to corporate governance, a nonprofit will operate in an environment of solid internal controls, and will be in a better position to realize its mission, meet the expectations of its key stakeholders and preserve the public's trust.
J. Stephen McNally, CPA, is director of finance for Campbell Soup Co.'s Campbell U.S.A. Division, and chair of the Pennsylvania CPA Journal Editorial Board. Reach him at firstname.lastname@example.org. Joseph T. Steuer, CPA, is executive vice president and chief financial officer for the Philadelphia Zoo. He can be reached at email@example.com. Reprinted with permission from the Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of CPAs.
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