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Spitzer: Sarbanes-Oxley Shouldn't Apply to Charities

(Dec. 6, 2004) The federal law creating strict new accountability mandates for corporations should not be applied to the charitable sector, according to New York Attorney General Eliot Spitzer.

Spitzer, one of the leading forces behind the move towards greater accountability in the corporate world, has in the past called into question the actions of certain charities and pushed for reforms in the charitable sector as well. However, in his opening comments at a Nov. 29 luncheon sponsored by the AFP Western New York Chapter and the Western New York Planned Giving Consortium, he stated that simply applying the Public Company Accounting Reform and Investor Protection Act (or the Sarbanes-Oxley Act) to charities is not the way to go.

The announcement marks something of a change of heart for Spitzer, who earlier this year sponsored state legislation that would have applied many of the Sarbanes-Oxley provisions to the charitable sector. However, that bill went nowhere in the New York Assembly, and Spitzer seems to be rethinking his stance.

The federal Sarbanes-Oxley Act, passed into law in 2002, was created in response to corporate scandals such as those at Enron, Arthur Andersen, Tyco, and WorldCom, and implemented sweeping changes to corporate and public accounting. Several states, most notably California, have passed or are considering charity legislation based on Sarbanes-Oxley.

Without Shareholders, Board Participation Becomes Critical

However, Spitzer noted there were some similarities between the corporate realm and the charitable sector when it comes to the potential for accountability violations. The same ethical quandaries in the corporate world have the potential for spilling into the charitable sector. The only difference in accountability processes between nonprofits and for-profit businesses is the lack of shareholders in the charitable sector.

Because a lack of shareholders means that a key accountability 'check' does not exist for charities, Spitzer warned the audience that nonprofit organizations need to emphasize the importance of their board of directors. He stressed that vigorous board participation was vital to ensure that charities fulfill their ethical responsibilities.

At the same Spitzer recognized the potential problems that might occur if board members were more tightly regulated. Most board members of charitable organizations are acting as volunteers and have their organizations' best interests as their motivation to serve. Thus, the specter of liability and other regulations coiuld negatively affect the willingness of individuals to serve on boards.

Overall, Spitzer was enthusiastic about the efforts of nonprofits. He hoped that they would learn from the mistakes of their corporate counterparts and find ways to continue their work while maintaining a high standard of accountability.

The AFP website has information regarding the Sarbanes-Oxley Act and the new California regulations.


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