Question

You have just joined a large nonprofit board of directors in your community. As you complete your board training and attend a few meetings you begin to question the management's adherence to best practices in finance and the Sarbanes Oxley policies. What would you do about your uneasiness? Explain your reasoning.

Answer 1

A nonprofit organization is a business that is not driven by profit but works towards a particular cause. It serves the public in some way i.e. by offering some good or service or both. It comprises of charities, trusts, non-governmental organizations, private voluntary organizations etc. As these organizations work towards the achievement of a particular cause, it is of utmost importance that it uses the resources entrusted to it appropriately and follow all legal and ethical standards. It is the responsibility of the board of directors and the management to see that the best practices in finance are being followed.​​​​​

An overview of Sarbanes Oxley Policy -

The Sarbanes-Oxley Act (SOX) was drafted by Congressmen Paul Sarbanes and Michael Oxley. It was passed in 2002. It contains accounting laws and procedures and disclosure requirements that all organizations must follow. It was implemented to improve financial disclosure policies followed by corporations and to prevent accounting fraud. The main aim was to protect the shareholders from accounting errors and fraudulent practices in organizations. All public companies must comply with SOX. Non compliance may result in fines and penalties, removal from stock exchange listings etc.

If at any point of time, we question the management's adherence to best practices in finance and the Sarbanes Oxley policies​​​​​​​ we should look into the following aspects of the organization to ease our uneasiness -

1. Most of the time funding is an issue for the non profit organization. It relies on external sources of funding like donations. Do a thorough background check on the donors of the organization. Look for the source of funds. The fundraising plan must be detailed and transparent.
2. Accountability is another factor which needs to be considered. Mismanaged funds could result in loss of funding from public.
3. Review and monitor the financial statements and budgets regularly.
4. Check whether the organization has formal internal controls with regards to financial operations like depositing checks, purchasing some equipment etc.
5. The organization must prepare an annual report like Income Statement, Balance Sheet etc. Ensure that an annual audit of these reports are conducted by a third party.
6. Check whether all the board members are financially contributing to the nonprofit or not. It is the moral obligation of the board members to contribute financially along with their time.
7. Check whether minutes of the meetings is maintained or not. Do a thorough check of all the minutes of the meeting. Ensure that the board complies with the outcome mentioned in the minutes.
8. The board should regularly examine the financial statements and take responsibility for the current financial condition of the organization.
9. Monitor whether each board member operates within Nonprofit Articles and By-laws.
10. Check the cash flow status from the Income Statements of the organization. It should have enough reserves in cash and cash equivalents to carry on the operating activities of the organization.