provisions and document destructions. That is the calls for closes most of the loopholes in nonprofit sector in relating to documents destruction, impeding of official proceedings and whistleblower provisions.
Independent and Competent Audit Committee
The SOX Act applied criminal and civil penalties for nonprofit sector required certification of internal auditing and increased financial disclosure. Many nonprofit organizations conduct small and medium size which does not usually have separate audit committees (Persaud & Mason, 2000). Under the provisions, each member of audit committee must be independence as defines as not being part of the team of management from the nonprofit companies either directly or indirectly. The audit committees undertake the responsible to set compensation and process for complaints relating internal control standards, accounting and appoint external auditors.
The independent audit committees require meeting and reviewing with the auditor of the annual audit, and recommending to the boards of modification. At least one financial expert is served on the audit committee under the SOX act. The role of the financial expert is to analyze, assess the financial report of the boards and competency of auditing firm. That is, no general rules stated that when the sectors should perform a full audit. However, receiving funds of more than $500,000 in a nonprofit sector should have an annual audit.
Responsibilities of Auditors
Nonprofit sector is complied with the requirements of the auditing firm must rotate off in every five years under the SOX act. This is considered good practices for all nonprofit and profit companies. The rule is preventing conflict of interest from providing non-auditing services to the clients. Most nonprofit organizations are exempted from income taxes due to the natures of business: - do not attempt to make profits. The audit firm performs services like tax preparation that under the critical accounting practices and policies. The final report is presented by the audit firm to the independent audit committees. The reports are following the standard of generally accepted accounting principles, GAAP.
Certified Financial Statement
Under the provisions of SOX act, CEOs and CFOs must certify under oath that their financial statements neither contain an “untrue statement” nor omit any “material fact”. Audit committees must be comprised of totally independent outside directors. The CEO is responsibilities to read and understand the based transaction and financial position of the company, and ensure the money from public donations are properly managed and spent. In a move to bring personal accountability in nonprofit sector, the CEO and CFO must certify the full and accurate reporting of financial results in each annual or quarterly report. The Form 990 or Form 990-PF is the key document which needs signature from an authorize person. Many have suggested that, all Form should be reviwed and approved by the audit committee ensuring no error or inaccurate of informations. Survey has showed that donator’s decision making for contributions somehow based on the financial information and financial statement in nonprofit sector (Parsons, 2003; Gordon & Khumawala 1999).
Insider Transactions and Conflicts of Interest
Directors, non-executives and executives of nonprofit companies are prohibited applying personal loans to avoid conflict of interest. Problems and troubles have happened in the past; the provisions of SOX act strongly recommended that the organizations do not simply approved loans to officers. If provided, the value and terms should be documented and disclosed in financial statement however, it is not favorable. A guideline of conflict of interest policies must be standardized by the nonprofit sector.
Disclosure
The provisions of SOX require more transparent and timely financial reports, and disclosure in the areas of contingent liabilities and prevention of fraudulent financial activities in nonprofit sector. The financial statement and disclosures fairly represent in all material respects the financial condition and result of operations of the organizations. To protect from investors, the rule required nonprofit companies to disclose to the public in plain English and on a rapid and current basis. Disclosure of off balance sheet transactions, use of
GAAP or non-GAAP financial measures and material events affecting the companies are required. This is to provide public an accurate picture of their financial condition in timeliness of disclosure.
Whistle-Blower Protection and Document Destruction
The provisions of SOX imposed new accountability standards by protecting whistle-blowers who reports any suspected illegal and criminal activities in the nonprofit sector. To increase accountability, nonprofit sector are encourages to establish proper whistleblower programs to facilitate employees in concerned of reporting corporate wrongdoing without the risk of losing their jobs. The rule is suggested that the organizations should adopt a more formal way to deal with public complaints, investigate the cases and fix any problems.
Under sections of SOX also stated that it is illegal to knowingly alter, destroy, cover up, or falsify any record, and documents for use in official proceedings. The standards apply retention relevant audit evidence for at least seven years. The acts addresses the official processes must carefully monitored and administered if any intentional document destruction.
Conclusion
In order to achieve good practices and standard, public would inspire nonprofit sector to adopt regulations of the SOX (O’Hare, 2002; silk, 2002, Tate, 2002). The provision of Sarbanes-Oxley Act plays an important role in nonprofit sector in areas of corporate governance, financial reporting and audit functions. These nonprofit sectors can benefit significantly from best practices of corporate governance and increase accountability. Similar, the provisions of SOX help increase rules address the conduct of gatekeepers other than directors, management and auditors. Generally, through adopting the provisions of SOX, nonprofit sector might improve the performance of their board, manage their organization efficiently, and maintain public trust.
QUESTION 2
How can the management restore confidence and improve corporate governance? (10 Marks)
Public Trust in Non-Profit Sector
The primary objectives of non-profit sector must serve the public good and not benefit a private shareholder or individual. The managing and monitoring their activities in corporate governance of non-profit sector is very crucial because sometimes their objectives can conflict. For examples in a hospital may find that it can not simultaneously deliver the highest performance on patient care and medical standards, financial effectiveness, staff welfare, and community approval. Many problems and issues arise on the importance for the non-profit sector like charities to keep their trust with the American people according to Senator Chuck Grassley. The lack of public confidence in nonprofit sectors is getting very serious; and to gain public confidence, nonprofit need improve their governance (William H. Donaldson, 2004).
The Toronto Star has reported a series of mismanagement and corruption in Canada’s charities which spend more on their actual budget funds (Donovan 2002). Whence, the management should focus on the organization’s purpose and on outcomes for citizens and service users. Management will perform effectively in clearly defined functions and roles to restore confidence and improve corporate governance. That with the management should promote values for the whole organization and demonstrating values of good governance through their behaviour. The sectors should not simply avoiding unwanted legislation, yet rather regime of self-regulation that produces better results. Senator Grassley further argues that the Committee must concentrate on “more general reforms to address recurrent problems in the nonprofit sector” (U.S Senate Committee on Finance, 2004).
Restoring Public Confidence in Non-Profit Sector
Recent surveys reporting after the attacks on New York and Washington D.C. that public confidence in nonprofit sector were shaken (Brooking scholar Paul Light). To restore public confidence, management should demonstrate their integrity, honesty, ethics, and
transparency in nonprofit sector. Therefore, nonprofit sector should educate their board about the importance of effective corporate governance such as financial expertise for audit committee members and establish a set of best practices of corporate governance as a minimum eligibility requirement for tax exemption. Emerging corporate reforms, rules, and regulations are having significant implications for the governance and accountability of nonprofit sector such as higher education institutions, charities, and churches.
The provisions of Sarbanes-Oxley Act are applicable to nonprofit, although these provision were intended for public companies; many nonprofit sector have benefits from the act. To see the growth of corporate accountability, recent survey from Grant Thornton LLP, reported that over 300 nonprofit officers determine their interests and knowledge’s in SOX. The survey have pointed out that 20% of nonprofit sector have adopted their policies (Grant Thornton 2003). Many positive feedbacks that the aspects of Sarbanes-Oxley Act will give a new standard of best corporate governance practices to nonprofit (McDowell, 2004, 8)
Performance in non-profit sector is often difficult to measure. They have multiple bottom lines rather than a single financial profitability measure. However, in order to make financial information more reliable in non-profit sector, some states such as California now require report in charities organizations of between $250,000 and $1 million profit need to have audit committees and maintain an audit committee with gross revenue of &2 million. (Panel on noonprofit sector, 2005). Organizations like charitable have under extensive scrutiny regarding their governance and financial integrity. California’s Non-profit Integrity Act was effective as 1st January 2005, requires that they must register and file their Articles of Incorporation with the Attorney General’s Register of Charitable Trust within 30 days.
Performance Evaluation System for Non-profit sector
An award program, Donner Canadian Foundation Awards is established in 1998 to select and reward the excellence non-profit organizations likes child care canters, education institutions, hospitals and many others. Non-profit sectors are participating to fill in detailed applications which include areas of all financial reports and statements, structure of the
board, board members, outcome monitoring of funds, and etc. The data provided from the organizations are then ranked between other agencies and measures on the quality of social programs (Sylvia, 2003). That is, to help and strengthen within the non-profit sector about how they good used of their staff, funds and volunteers. Overall, the award programs have increase accountability in non-profit sector and restore public confidence.
Panel Recommendations to the Non-Profit Sector
The panel in the non-profit sector was organized, in 2005 to demonstrate the role of charitable organizations in American life. The panel focuses on strengthen non-profit’ accountability, transparency and governance. The panel makes recommendations calling for improvement within the non-profit sector. “Charitable organizations make contributions to every community,” by the chief executive officer of the American Heart Association and Panel co-convener, M. Cass Wheeler. Wide ranging of solutions is offered by non-profit sector, experts and leaders around the world to ensure that the public enjoy the trust and support from them (M Cass Wheeler, 2005). The main principle of the panel is vital for strong America in nonprofit sector. The nonprofit sectors depend on its independence, integrity and all informatins must be aviable to the public.
Filling of Form
The panel’s recommendations are effective oversight requires vigorous enforcement of federal and state law. The government implements enforcement of the law and the regulations with high standards of ethical conduct in the organizations. The regulations also emphasize deter abuse without discouraging legaitime charitable activities. To strengthen accountability within the nonprofit sector, reveal on Form 990 is proper in filed, and certified the accuracy of organizations’ informations. This applied particular to tax-exampt sectors in potentially abusive tax shelter. Its urgues that the panel have more effective oversight, and changes in the law within the nonprofit sector to restore public confidence and trust by providing more details of their operations and performance to the public.
Disclosure of Compresations
The congress should tighten the rules for the appraisals of taxplayers improper claims of tax deductions on their donations. That is, clearer rules for estimating of property donated donor funds to nonprofit and charitable sectors. In addition, nonprofit and charitable organizations are discouraged to provide compensation to their board memebers, if do so, fully disclosed of amount and reasons must determined. They must clearly disclose the compensations paid to their CEO. The organizations should establish appropriate travel expense policies to pay for board memebers, volunteers or other officers whom conducting their jobs to the sectors.
Code of Ethics
Ethical crises occur throughout the history of humankind and will continue to occur particularly when there is conflict of interest. The provisions of SOX and the panel have recommended that the more ethical work environment is need within the nonprofit sector. As the result, a code of ethic practice encourages “honest and ethical conduct, involving the ethical handling of actual or conflict of interest” (Public Law 107-204 Section 406). Strong message is developed through the code of ethics in nonprofit organizations. The code of ethics’ is set to shaping governance in nonprofit organizations and establishes moral structure for the entire organizations.
Independent Rules
Auditor independent is the cornerstones of the auditing profession and one of the fundamental aspects in nonprofit sector. The provisions of SOX address two concepts of independent rules in auditors: - Independence in facts and independence in appearance. The acts prohibit who CEO, CFO or officers to perform an audit to the sector during the one year period under Section 206. The section also requires a second partner to review and approve each audit report in every 5 years.
Conclusion
In passing provisions of Sarbanes-Oxley Act and the panel was organized, intend to bring more accountability to the financial reporting process in nonprofit sector and to restore public confidence. Nonprofit sector can applicate more vigilant and independent directors on the board of trustees that can improve board effectiveness. It is expected that nonprofit sector establish an independent audit committee and independent financial expertise to oversee their financial performances. The result is to increase more transparent financial reports and prevent fraudulent financial activities within the nonprofit sector. Being part of the independent management, audit committees provide an additional and objective censorship on the information provided. It will eventually increase public confidence in the financial reporting process in non-profit sector. Public is more likely to get confidence where the framework in nonprofit sector are well structures with good regulations, and code of practices.
QUESTION 3
Discuss the above statement in relation to the unethical behaviors of managers engaged in embezzlement, fraud, theft, conspiracy, misappropriation of funds and corporate corruption? (10 Marks)
Accountability in Non-Profit Sector
Non-Profit organizations have a fundamental different with other profit organizations which their receive grants, or called funds from their constituencies and to provide services to the community. In non-profit sector, that is different with for-profit sector, the budget authorizes and limits the amount they need to be expended for charitable and specified purposes. They are given tax benefits, and funded for purpose of supporting the community values such as welfare, art, education and so on; as consequences, they honor the public faith placed in them (Arthur Gross Schaefer & Anthony J. Zaller ). Volunteers, officers and board members favorably they participate in the nonprofit sector, believe that they hold the same values and missions as to serve the community. However, numerous scandals within the nonprofit sector reported in the press during the period 1992 through 2000 (Gibelman and Gelman 2001). Nevertheless, the performances appraisals in non-profit organizations have result the effects of destroying profit creditability and public trust
Fraud happens in every organization, profits or nonprofits associated with unethical behavior by a few individuals who misconducts in business. Hence, the aspect of fraud become a serious issue particular in nonprofit sector. Public become disappointed and frustrated when they found out they money is used inappropriately. In addition to loss of public trust and confidence because contributors discover that their time, effort and goodwill have been abused when lacks of trustworthiness of nonprofit sector. Public start to question the objectives of governance practices, fiscal managements, and ethical climates in nonprofit sector after the United Way of America scandals. In order for nonprofit sectors carry out their functions and provide their benefits to community; the problems of frauds and misappropriation of funds must be solved.
According by the United Way and Red Cross, several of scandals involving fiscal management, whereas poor governance or failure to put up with the best practices in nonprofit sector in America. A traditional case in related fraud was the William Aramony
scandal within the United Way (Kolb 1999). United Way of America, UWA, was one of the established fund raising organizations that rise over $3 billion years with over 2,000 local entities (Babcock, 1992). A report had set up to investigate the chief executive officer, William Aramony who had breach of honest and loyalty in abusing charitable funds for personal living expenses and luxury lifestyles (Shepard, 1992; Simross 1992). In deed, indicated to William Aramony after investigation was Mr. Aramony attempting to file false tax return of unauthorized funds (Shepard & Miller, 1994; Weiner, 1994). To address and minimize the event of scandals, the more attention in the era of security on financial reporting is needed. Several forms of governmental regulations and oversight of non-profit sector have developed to prevent fraud, theft, conspiracy and other kinds of corporate misconduct and what weaknesses have permitted major corporate scandals to maximize accountability to public (Austin, 2003; Hodgson, 2004)
Ethical Climates
The ethical climate is a powerful concept. According by Sims (1992), ethical climate in an organizations, profit or nonprofit, shares set of value of a structured set of relationships with accompanying rights behaviors and role obligations. A role obligation is simply that people in certain positions have responsibilities to their duties. As the result, corporations are increasingly playing attention to ethics in the conduct of employees of the organizations. Corporate ethics need to guide individual decision making and to develop an ethical workplace environment. However, it also suggests that make hard to measure ethical climate in non-profit organizations because they do not act in opportunistic fashion behaviors (Rosario 2010). The Harvard business review concluded that unethical behaviors are seldom due to lone rogue employee but usually result from factors in the organization (Lynn Sharp Paine, 1994, pp.106).
Vidaver-Cohen (1998) has also advised that moral conduct in most organizations influences by ethical climate, especially by board of directors. Ethical climates are potentially an individual’s organizations behaviors (Malloy and Agarwal, 2003, pp.39). The management of ethic should act effectively in situations that have an ethical aspect. Acting ethically is important, both for individual success and organizational effectiveness. Major scandals in the
news, people face less momentous ethical dilemmas in the ordinary course rather of their work such as an unethical or illegal act or commit in fraud. However, many nonprofit do not hold accountable, fiduciary duty to the community at large (Gardner, 1987, pp. 7-8). The consequences of the incident might have been far worse if the nonprofit organizations that do not attempt to implement ethic principles.
According by Rasmussen (2003), ethical climates studying in non-profit sector is less likely to be concerned compare with for-profit sector. Five of the most relevant articles have deeply studying and exploring the importance of ethical climate in nonprofit sector: - Malloy and Agarwal (2008); Rasussen et al. (2003); Brower and Shrader (2000); Agarwal and Malloy (1999); and Desphande (1996). In addition to the studies, the importance of ethical climate may not work the same in nonprofit, profit and government sectors. Therefore, the nonprofits’ ethical climate need for implementing and enforcing so that it will be effective in preventing and detecting criminal conduct. An effective ethical climate can enforce in nonprofit organizations as provides employees with a tool for resisting pressure to perform unethical or illegal actions.
Code of Ethics
Code of ethics vary widely, most common is a statement of specific rules or standards for a variety of situations. Often the common called the codes of conduct of business standards and practices. Secondly, another code of ethic emphasis of core values or the vision on organizations, most called mission statement. These statements usually include affirmations of the commitments of a company to key stakeholders. Lastly the code of corporate philosophies where describe the beliefs guiding the organizations. Lioyod (2005) indicated the results and benefits of adopting the code of ethics in the nonprofit sector especially nonprofit sector need for maintaining public confident and code of ethics set good practices to all employees (Antonio 2009). A code of ethics may enable employees to do what they believe to be right.
Even well-written codes of ethics have limitations; a bad one may have some unintended consequences. Some codes focus primarily on employee misconduct that can harm the organizations. Hence, studies showed these might occurs advantages and
disadvantages which organizations adopt code of ethics. A first recognized code was Code of conduct for the International Red Cross and Red Crescent Movement and Nonprofit organization in disaster relief (). Many codes are basically statement of principle. The one trait of all successful codes of ethics has clear support to top-level management. A success code is imposed from the top down. Ideally, everyone in the organizations have ownership of the code.
Conclusions
Where if corporate accountability and ethical in nonprofit sector was properly increase, then fraud and other kinds of financial wrongdoing would be difficult to commit, and detection would be easy. The task of corporate ethics must be practices by all members include auditors and directors in the nonprofit organizations. There is a danger in giving so much independence power to managers; but, respect and enjoy their specialized knowledge. Hence, the sector must hold accountable in result that members do not engage in fraud or other wrongdoings. Adopt of code of ethics in response to serious scandals, or to prevent scandals before they occur. The standards of ethics presented in a code of professional for the self-regulation. Most scandals cause of the unethical behaviors of people within the organization, a code of ethics is not an option but something that is required by the nature of professionalism itself.
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