Sarbanes-Oxley Act Of 2002 And Non-Profit Organizations

Abstract

The United States (US) has the unique record of having the largest sector of Non-Profit Organizations (NPO) in the world, comprising of over one million NPOs.  The participation of Americans in philanthropic activities is unparalleled in the world.  In recent years, NPOs received over $1.5 trillion in revenues as reported by the Internal Revenue Service. These charitable organizations contribute immensely towards improving the lives of disadvantageous people.  However, the huge NPO sector of our economy has been plagued recently with a deluge of corporate financial scandals similar to the scandals in corporations in the for-profit sector, such as Enron, WorldCom and Tyco. The misappropriations of funds involved over 150 NPOs, including world renowned organizations such as Red Cross and United Way.  The embezzled funds amounted to over $1 billion.  The US Congress reacted quickly and vehemently to such scandals in the for-profit corporations with the enactment of Sarbanes-Oxley Act of 2002 (SOX), with far reaching consequences to the American business organizations.  The rigorous provisions of SOX did not extend to Non-Profit Organizations except in two specific areas – whistleblower protection and retention of documents for verification.  However, the present flood of NPO scandals triggered a bevy of SOX-like proposals for laws for Non-Profit Organizations as well, in the US Congress and in many state legislatures.  Some states have already passed such laws.  This paper presents a brief description of the NPO scandals, the ongoing proposals of SOX-like laws for NPOs in several states and their impact on the future governance of the NPOs.