The Sarbanes-Oxley Act has demanded some pretty tough adapting by the directors of the mightiest corporations. Now, imagine the impact of a similar law applied to the volunteer, non-professional boards of community-scale not-for-profits.
There's no such law yet - Sarbanes-Oxley applies only to publicly traded companies - but the Senate Finance Committee has held a roundtable discussion on the issue, apparently recognizing that there's a problem to be solved. At the same time, state boards of accountancy are leaning toward stiffer requirements for not-for-profits, a la SOX.
At the typical not-for-profit, more demanding responsibilities for directors could lead to a crisis in leadership. Unsure of their duties, unprepared for their responsibilities, uneducated in the basics of finance, many directors may simply bail out of their positions on the board. Whole organizations, especially the smaller ones, may collapse.
Chris A. Lauder, CPA, owner of a small firm in South Bend, Ind., said that not-for-profit boards often sign up for the coffee and donuts without realizing what their obligations are.
"So many people get together with a good idea and a good cause, and it starts off with a cigar box to collect money for coffee," Lauder said. "Soon, they decide that maybe they should incorporate and get formal. They just kind of grow up. But unless there's somebody familiar with not-for-profits, nobody brings the organizational concepts in until the accountant shows up three years later because they've gotten a letter from the Internal Revenue Service."
PCPS, the section of the American Institute of CPAs that helps small CPA firms survive and succeed, has been keeping tabs on this impending problem. It has in the works a program that it may be able to roll out in the near future with the intention of helping not only not-for-profits but small accounting firms as well.
The program under consideration is an educational tool, a PowerPoint presentation that delves into corporate governance, the responsibilities of a board of directors, financial reports and management effectiveness.
Tentatively titled the "Not-for-Profit Board Member Orientation," the presentation is being designed to help CPA firms educate their not-for-profit clients about their responsibilities as directors.
Too often, these boards are well-intentioned citizens who want to make the world a better place, but are not necessarily qualified to oversee a business organization.
"Most not-for-profit boards, at least the smaller ones, have no idea what an audit committee is," Lauder said. "They're lucky if they have somebody on the board who is financially literate and serves on the PCPS executive committee."
Lauder likes the program not only because it will help her firm help its clients, but because it helps her community. Her firm has two dozen local do-good clients, including AIDS Ministries/AIDS Assist, Reins of Life, and Christmas in April.
"In so many organizations, board members come on board because they really want to, say, stamp out leprosy, and that's why they're there," Lauder said. "They don't really understand that they're also caretakers of the funds, that if they collect funds for leprosy, they have to spend the funds on leprosy. They come for the cause but don't understand the responsibilities. That doesn't make them bad people, just bad businesspeople. I'm sorry, but a not-for-profit is a business. It just isn't profit-oriented."
The PCPS program should be of help to small CPA firms, too. As PCPS members tend not to handle big, public companies, few have had to deal with Sarbanes-Oxley requirements on corporate governance. "Not-for-Profit Board Member Orientation" will to some extent bring them up to speed on the stiffer and more comprehensive requirements that seem to be inevitable for private companies and not-for-profits. Among other things, Sarbanes-Oxley requires at least one member of a board's audit committee to be competent in the area of finance.
"Public companies are not the purview of small firm services," Lauder said. "Sarbanes-Oxley is going to come around and come in the side door."
In the current state of the program's development, the first part of the program deals with the differences between for-profit and not-for-profit organizations. The former are oriented toward a bottom line and often serve a group of investors. The latter exist for the purpose of a mission and serve a community that needs some kind of assistance. That mission and that community determine how the not-for-profit is organized and managed.
The second topic is on the duties of the board. This topic leads into the third topic, financial literacy, which explains, among other things, books and records, what a not-for-profit financial statement looks like, what a CPA firm does and how one should be hired.
The fourth topic of the presentation is on performance measurement. As they have no bottom line, not-for-profits must recognize, measure and report on their "efforts and accomplishments" - that is, the extent to which they are pursuing their mission from financial and non-financial perspectives.
That, said Lauder, is the important stuff.
"This isn't a financial statement, but it is something that a board should do," Lauder said. "If nothing else, it makes great material for fundraising, but of course that's not the primary reason for doing it."
Lauder noted that there are no standards on reporting efforts and accomplishments. In order to have meaningful audits of such efforts, not-for-profits will have to develop generally recognized principles.
Profiting from nonprofits
Stiffer requirements for not-for-profit boards of directors may open opportunities for small firms, Lauder said. When boards need financial competence, they may look to their audit firms.
That, however, brings up the question of independence. "We are having a heck of a time finding out where the white line of independence is," Lauder said. "It's getting crazy. The world of the big boys and the world of the little kids are very different. Small organizations can't afford to have four CPA firms. It's crazy. To me personally, the question of independence is the question of whether I have something to gain from a situation. I think we've moved beyond that into something else."
Also discussed are legal and regulatory issues and how to mitigate organizational risk.
Lauder pointed out that the program does not discuss independence, only that independence could become an issue when boards of directors become educated enough to realize that they need help with something besides audits. The first place that they are likely to turn is their audit firm.
Though the PowerPoint program is not meant to be a sales tool, it could be used for such a purpose, Lauder said. She said that it could be used very effectively for seminars given not just to clients, but to a whole community of interested organizations. The board of directors that never heard of an audit committee might then realize that it needs an audit firm to avoid financial problems.
At press time, PCPS had not announced a launch date for the program.
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