Sarbanes-Oxley Act

In response to the 2001 and 2002 corporate and accounting scandals of Enron, Arthur Andersen and other corporations, Congress passed the American Competitiveness and Corporate Accountability Act of 2002 on July 30, 2002. It is more commonly known as the Sarbanes-Oxley Act. The law is designed to restore public trust in corporations in the United States. Principally, it requires that publicly traded companies adhere to significant new governance standards that broaden board members’ roles in overseeing financial transactions and auditing procedures.

While nearly all of the provisions of the bill apply only to publicly traded companies, the passage of the bill acts as a clarion to the nonprofit sector. It urges nonprofit organizations to ensure that their governance practices are ethical, effective, and comprehensive. It suggests that, if this isn’t the case, the government could take action to regulate nonprofit governance as well.

In fact, some state attorneys general are already proposing that elements of the Sarbanes-Oxley Act be applied to nonprofit organizations.

In relation to publicly traded organizations, the Act:

  • Regulates what boards must do to ensure auditors’ independence from its clients; Creates and defines the role of the Public Company Accounting Oversight Board, a new entity empowered to enforce standards for audits of public companies.
  • Explains processes for electing competent audit committee members and for ensuring that adequate reporting procedures are in place.
  • Calls for regulations, and closes most of the loopholes, for all enterprises (for-profit and nonprofit) relating to document destruction and whistle-blower protection.