Whistleblowing and Good Governance
Eaton, Tim V., Akers, Michael D., The CPA Journal
Policies for Universities, Government Entities, and Nonprofit Organizations
The Sarbanes-Oxley Act of 2002 (SOX) has forever changed corporate governance for publicly held corporations. Recent data suggest that the costs of compliance with the provisions of SOX can be very significant. Because these mandated requirements apply almost exclusively to publicly held corporations, some companies have cited the high costs of SOX compliance as a rationale for going private. After all, SOX was developed in response to high-profile corporate scandals that included Enron, WorldCom, and Tyco, and was not designed to address problems in other sectors. Unfortunately, problems in corporate governance are not unique to public corporations.
Problems in the Government and Nonprofit Sectors
Problems exist in the government and nonprofit sectors just as they do in the corporate sector. Recent alleged problems at the World Bank (reported in U.S. News and World Report) include kickbacks, payoffs, bribery, embezzlement (a midlevel manager took over $2 million), and collusive bidding.
According to EthicsPoint, a leading provider of technology-based governance, risk, and compliance services, more than 20 separate states' attorneys general have launched 30 investigations into nonprofits all over the United States. In 2002, the United Way scandal (where a director took funds through questionable payments and other executives charged the organization for personal expenses) came to the public's attention. Its aftermath has had a dramatic impact on fundraising. The Washington Post reported that the United Way's fall fundraising drive had dropped from a high of $90 million in 2001 to $19 million in 2004. Other notable nonprofit organizations such as the American Red Cross and the Nature Conservancy have also had to deal with scandals and the resulting negative impacts. The Red Cross had funds stolen and additional bonuses taken because of poor internal controls. The Nature Conservancy encountered problems when the organization engaged in inappropriate business and real estate transactions with its trustees.
Even universities are not immune from scandals. Scandals such as that involving presidential spending at American University often relate to the misuse of athletic, research, or university funds. As part of the termination decision, American University's board of trustees asked its former president to reimburse the institution $125,000 for personal expenses as well as authorize the audit committee to disclose $398,000 in unreported taxable income. Because of the increasing prevalence and publicizing of these incidents, many government and nonprofit entities are not only more aware of SOX, but have already begun the process of implementing certain provisions of SOX within their organizations.
According to a 2004 Grant Thornton study, nearly half of nonprofits have made corporate governance policy changes in the wake of SOX. The study highlights the following statement from Grant Thornton's Larry Ladd: "Many not-forprofits believed that Sarbanes-Oxley was a passing fad or bubble. Today, however, awareness of the act and actions based on the provisions of Sarbanes-Oxley are on the rise. Board members and regulators are now pressing for reform."
While the costs of implementing the provisions of SOX are unquestionably high, certain provisions do have significant benefits. These beneficial components can be selectively applied by noncorporate entities to provide good organizational governance and reduce the potential for fraudulent activity. Additionally, all organizations should consider that failure to respond appropriately today could lead to potential disaster in the future. The consequences may include not only the loss of funds but also the high-profile negative publicity that can severely damage an organization's reputation.
One specific component of SOX that is particularly applicable to noncorporate organizations is whistleblowing, the act of reporting wrongdoing to another party. …