When the Sarbanes-Oxley Act was signed into law on July 30, 2002, it overhauled corporate governance practices for publicly traded companies, with a significant emphasis on the role of the board of directors. In the years following, many of the governance policies and practices mandated for public companies were also adopted by nonprofit organizations as their board members began to question their own responsibility for the governance and oversight of their organizations. In 2005, according to a GuideStar survey of nonprofit organizations, 61 percent of of the participants said their organization had made changes in response to Sarbanes-Oxley.

Nonprofit boards had begun to change their focus, but not enough to stop the continued reports of fraud, misuse of assets, and excessive compensation for top executives.  The result was increased public scrutiny, new legislation, and the most significant changes to Form 990 in over 25 years. Those changes effectively required the board of directors to take responsibility for the oversight and governance of their organizations.

Although the fundamental principles of governance have not changed, governance practices have been completely redefined as boards have become more proactive in protecting the mission of their organizations by ensuring compliance with legal, financial, and ethical standards, and monitoring the progress and overall performance of their organizations. Time will tell if the “new” governance paradigm will protect nonprofit organizations from even more burdensome regulation that will divert already limited resources from the mission.

Peggy M. Jackson, DPA, CPCU and Toni E. Fogarty, Ph.D., MPH, have written a wonderful book for nonprofits. It is called Sarbanes-Oxley for Nonprofits. Now I know that most people involved in nonprofits are “people dedicated.” Most do not spend their time reading accounting rules. This book shows why it is important for the nonprofit’s management and board members to have a basic understanding of financial statements and how to analyze them. This information shows a picture of the financial health of the nonprofit. The healthier the exempt organization, the more people that can be helped. Isn’t that something we all want?

In my next few articles I will give some very basic information about the four financial statements and some financial ratios to help evaluate them. Don’t worry. This will be simple and valuable information. Who knows? You might even find it interesting and fun. Be careful. You might be an accountant in the making.