Connections for Success



Cover-ups and Whistleblowers. Oh, My!
James Quaid

The Sarbanes-Oxley Act of 2002 (the Act) was enacted on July 30, 2002, less than one year after the first announcement of problems at Enron.

The Act applies to “Issuers”, namely publicly traded companies, as defined in the SEC Act of 1934. However, the Act includes two provisions that are applicable to all corporate entities, including not-for-profit organizations: document retention and destruction and whistleblower protection.

  • The Act makes it a crime to alter, cover up, falsify or destroy any document that may be relevant to an official investigation.
    • Organizations should adopt written document retention and destruction policy that identifies the record retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records.
  • The Act also makes it a crime for a corporation to punish whistleblowers or retaliate against any employee who reports suspected cases of fraud or abuse.
    • Organizations should adopt a written whistleblower policy that encourages staff and volunteers to report credible information on illegal practices or violations of adopted policies, specifies that the organization will protect the whistleblower from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported.

Additionally, not-for-profit organizations should be aware that the IRS Form 990 now requires disclosure about whether an organization has adopted document retention and destruction policy and a whistleblower policy as well as others such as a conflict of interest policy. Similar questions are also included on the IRS’ Governance Check Sheet which is used by IRS Exempt Organizations Examination agents to gather data about the governance practices and related internal controls of organizations being examined. In general, the IRS considers organizations that comply with these governance practices to likely also be tax compliant. As with all policies and procedures, we recommend organizations review them with legal counsel before adoption.

Many organizations also look to the Act for overall “best practices”. However, you should remember that the Act was written with the needs of investors in publicly traded companies in mind. The needs of stakeholders in not-for-profit organizations are very different. While there are some provisions of the Act that could help improve the management of your organization, there are also provisions that may not make sense for your organization, which could include:

  • Corporate governance standards, including the use of audit committees
  • Audit partner rotation

As always if you have any questions on the provisions of the Sarbanes-Oxley Act of 2002 and whether they apply to your organization, please contact us at 312.670.7444.

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