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Should charities wear SOX?
By Lauren | January 14, 2008
By now, it’s old news that a wave of corporate scandals a few years ago (of which the spectacular failure of Enron is probably the most famous example) led both lawmakers and business leaders to decide that tighter controls were needed to protect shareholders, employees, and customers from shoddy business practices. Not surprisingly in an age where almost religious deference to the market is the hallmark of most economists’ theories, shareholder protection became a top priority.
In 2002, Congress passed the Sarbanes-Oxley Act, popularly referred to as “SOX”, putting into place an elaborate structure of auditing and governance requirements for publicly traded companies. In other words, companies that are big enough for their stock to trade on one of the major stock exchanges have to meet the requirements of SOX. Privately-held companies, sole proprietorships and not-for-profit entities do not.
Compliance with SOX can be expensive and difficult. One friend who’s an executive in a publicly traded company that enjoys a great reputation for integrity complained to me recently that he had to personally sign off on more than 150 decision points on each of his company’s financial statements. That’s a lot to ask even of huge, publicly-traded corporations with lots of resources.
It’s a bit alarming, then, when well-meaning pundits suggest that SOX should be extended to small businesses and not-for-profits. With due respect, I have to disagree. There’s no question that small businesses and, in particular, charitable organizations that accept private contributions and enjoy tax-exempt status should operate ethically and be subject to appropriate auditing standards. To ask those companies to comply with SOX, however, would divert a significant amount of their already limited resources to generating more elaborate financial data and governance reports than they need.
Transparency, accountability and honesty are essential to good business of any kind, and the not-for-profit community would undoubtedly benefit from taking a more businesslike approach to governance and accountability. But SOX is too much. Leave it on Wall Street.
Topics: Business Ethics, corporate responsibility |