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JANUARY 2004 - UPDATE ON SARBANES-OXLEY REFORMS |
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Over the past few years there have been several high-profile corporate and accounting scandals in the news. Some of these have involved the health care industry; some of these have involved not-for-profit corporations. Efforts to reduce the likelihood of further corporate abuse have taken many forms. The most dramatic of these efforts was the passage in July 2002 of the Sarbanes-Oxley Act (the “SOX Act”). The fundamental purpose of the SOX Act is to rebuild public trust in corporations and accounting firms. Although the SOX Act applies primarily to publicly-traded companies, it is expected to significantly impact what is considered “best practices” for all types of organizations. In addition, new SEC rules, other legislative action and recent case law have also contributed to the renewed scrutiny of corporate practices, in many instances expressly the practices of not-for-profits. For example, revisions to Form 990 reporting requirements have been proposed. Massachusetts and New York have already proposed laws similar to the SOX Act that would be applicable to non-profits and their auditors. There has also been private action to impose stricter requirements on all entities, such as through provisions in director and officer liability insurance policies and covenants in bond documents. Finally, there is an increasing number of lawsuits that allege director or officer breaches of fiduciary duties. The SOX Act includes eleven parts addressing public company oversight boards, auditor independence, corporate responsibility, enhanced financial disclosures, analysis of conflicts of interest, SEC resources and authority, studies and reports, corporate and criminal fraud accountabilities, white collar crime penalty enhancements, corporate tax returns and corporate fraud accountabilities. The primary reforms initiated by the SOX Act that have relevance to entities that are not publicly traded are as follows:
Unlike the provisions described above, the following two provisions of the SOX Act apply to all entities and every entity should ensure compliance with these requirements:
On January 22, 2004, the Internal Revenue Service announced that it intends to release a set of best practices for nonprofit organization governing boards. Marvin R. Friedlander, Chief of Technical Group, IRS said the best practices to be released as art of the IRS’ 2004 work plan only indirectly relate to the governance obligations imposed on public companies under the SOX Act. This guidance will be a set of "do's and don'ts" focusing primarily on educating boards on their members' corporate compliance oversight obligations. The IRS has indicated that the guidance is designed to give board members insight into how the service views their audit and compensation review responsibilities and to encourage proactive corporate governance. Since the SOX Act and the SEC rules apply only to publicly-traded entities (with the exception of the two provisions described above), whether any or all of the reforms should be implemented in a private or non-profit corporation depends on the particular facts and circumstances of the organization. The anticipated IRS guidance as well as other legislative and case law developments over the next few months will also affect an organization’s position on implementing reforms. We will be monitoring all these developments. Please contact us if you would like to discuss the impact of the SOX Act and other reforms on your organization. |