Sarbanes-Oxley raises red flag for not-for-profits - Business - impact of Sarbanes-Oxley Act on nonprofit organizations

Healthcare Financial Management, Oct, 2002 by Patrick K. O'Hare

Code of conduct for CFOs. Sarbanes-Oxley also directs the SEC to promulgate rules requiring that corporations subject to the act disclose whether they have adopted a code of ethics for senior financial executives, and if not, why not. Like the certification provision, this provision may become the "gold standard." As a result, not-for-profit corporations that choose not to comply with the standard may be seen in a negative light by their constituencies, the media, their directors' and officers' liability insurers, and, possibly credit-rating agencies.

Powers to remove unfit directors. Sarbanes-Oxley gives the SEC power to remove directors for "unfitness" (as opposed to the previous standard of "substantial unfitness"). In the past, states' attorneys general occasionally have sought the removal of certain directors of a not-for-profit corporation in proceedings brought to enforce charitable trusts. The Sarbanes-Oxley provision may influence them to scrutinize not-for-profit boards more closely and, thus, seek this remedy more frequently.

Conclusion

Boards of not-for-profit hospitals and health systems should become familiar with the governance provisions of Sarbanes-Oxley and consider voluntarily complying with some or all of these provisions. It may not be long before they are forced to do so by the marketplace, regulators, insurers, or negative publicity directed at noncompliant not-for-profit organizations. Not-for-profit providers that do not hold themselves to the same standard as their for-profit peers risk being perceived as having betrayed the trust of their communities.

RELATED ARTICLE: SARBANES-OXLEY AT A GLANCE

In the near future, not-for-profits likely will feel the effects of these Sarbanes-Oxley directives:

* Establish audit committees with independent membership (precluding senior managers from being members) and make corresponding changes to corporate bylaws.

* Meet a higher standard for financial reporting, including increased disclosure and system certification representations as part of annual audits.

* Adopt a code of ethics for senior financial officers.

* Avoid senior executive compensation packages involving personal loans from the corporation.

* Ensure that board members are appropriately qualified and free of conflicts of interest.

Patrick K. O'Hare, JD, is a shareholder of Ober/Kaler, Washington, D.C., and a member of HFMA's Washington Metropolitan chapter.

Questions or comments regarding this article may be sent to the author at pkohare@ober.com.