arts & business council

MetLife Foundation National Arts Forums Series

ProArts (now Greater Pittsburgh Arts Council)
Pittsburgh, Pennsylvania

The Art of Understanding Sarbanes-Oxley:
The Effect of New Compliance Rules on Arts Organizations
04/29/2004

Moderator: Timothy C. Reed, CPA, CVA, Principal, McCrory & McDowell LLC

Panelists:

• David Jobin, Managing Director, City Theatre Company
• Kenneth C. McCrory, CPA, McCrory & McDowell LLC
• Janet Sarbaugh, Director, Arts & Culture Programs, The Heinz Endowments

The American Competitiveness & Corporate Accountability Act of 2002, more commonly known as the Sarbanes-Oxley Act (after the U.S. Senator and Congressman who co-sponsored the bill) or SOX, was signed into law July 30, 2002, in response to for-profit corporate and accounting scandals that drew worldwide ire and resulted in loud calls for reform. While the Act primarily applies to publicly traded companies, many experts predict that it may affect nonprofits, and that government may step forward and call for more regulation of nonprofits.

Government scrutiny of nonprofit organizations is nothing new, and in recent years, regulation of fundraising and other activities of nonprofits has been more rigorous than ever. But lately, nonprofit bankruptcies and governance scandals in organizations such as the AHERF health system in Pennsylvania, the Allina Health System in Minnesota, and Adelphi University in New York have focused heightened attention on nonprofit boards of directors. Many experts believe that in this environment, where problems in both for-profit and nonprofit arenas have resulted in scathing headlines, legislators, donors, community leaders, and others will not distinguish between the for-profit and nonprofit sectors in their expectations of what counts as good governance.

"The Art of Understanding Sarbanes-Oxley" brought leaders of business and the arts together to discuss the relevance of the Act to nonprofit arts organizations.

Timothy C. Reed, CPA, a principal with the Pittsburgh-based McCrory & McDowell LLC, presented a summary of the provisions of SOX and recommendations that encouraged arts organizations to review the provisions of the Act, seek expert guidance, and determine whether particular governance practices should be adopted by their organizations.

Of particular interest to nonprofit arts organizations are provisions related to audits, the independence of the audit committee and the hiring and review of auditing firms’ practices, the approval of financial reports, the dangers inherent in nonprofits providing personal loans to directors, the need for strong internal controls and written policies on document retention and destruction, and whistle-blower protection.

Acknowledging that current regulations are already burdensome for arts organizations whose small staffs and budgets bear no resemblance to those for whom the Act was written, Reed shared that some states are nonetheless already considering applying elements of SOX to nonprofits, and that a proactive stance by the sector might bolster efforts to keep new regulation of nonprofits to a minimum.

Three panelists representing the arts, business, and foundation community—David Jobin, Managing Director of City Theatre Company, a respected LORT company; Kenneth C. McCrory of McCrory & McDowell, who has volunteered on numerous nonprofit boards; and Janet Sarbaugh, Director of the Arts & Culture Program of The Heinz Endowments—provided their perspectives on good governance and reaction to Reed’s presentation.

• Nonprofit arts organizations should begin reconsidering assumptions and standard operating procedures in an effort to identify guidelines, standards, and best practices in their organizations;
• The Sarbanes-Oxley Act provides a renewed realization that nonprofit organizations rely on—and must protect—the indispensable and unequivocal confidence and trust of their audiences, donors, and other constituents; and
• Self-regulation and proactive behavior with regard to sound governance will always provide more powerful than compulsory respect of laws.

The Sarbanes-Oxley Act, and its potential for having a profound effect on the operations of all corporations, underscores the symbiotic relationship of the nonprofit and for-profit sectors, and the value of sharing expertise between business and the arts.