Due to the discovery of the illegal accounting practices of companies such as Enron and WorldCom, Congress passed Public Law 107-204, also known as the Sarbanes-Oxley Act in July 2002. The purpose of the act was to put safeguards and controls into place which would restore public trust in the integrity of the financial reporting and auditing process for publicly traded companies. (United States Congress, 2002).
Sarbanes-Oxley asks the question: Is a particular accounting treatment not only permitted by standards, regulations, and laws, but is it ethical and does it results in accurate financial reporting? (United States Sentencing Commission, 2003).
The act requires corporations to establish audit committees, prohibits publicly audited clients from engaging an accounting firm that audits financial statements for non-audit services, and requires corporations to disclose all material off-balance sheet transactions. .
While not regulated by the Sarbanes-Oxley Act, non-profit entities will also be impacted by the climate of scrutiny. There is no question that non-profit organizations will be subject to increased public attention regarding their financial controls and ethical management. Mission-driven organizations want to avoid the spotlight on anything that would tarnish their reputations.
Some non-profits have started to adopt aspects of The Sarbanes-Oxley Act, wanting to mirror its best practice governance as much as possible, irrespective of their non-inclusion as private entities. (Jeter, 2003) .
Many of them believe however, that there should be special provisions in regards to their accounting practices. (Jeter, 2003) In most non-profit organizations, the Board of Directors is directly responsible for overseeing the financial reporting and audit process. In most situations, this responsibility is carried out through the audit committee. .
Some of the actions proposed items to be considered by the Board include:.