Applying Sarbanes-Oxley Principles to Colleges and Universities

By Goins, Sean; Giacomino, Don E. et al. | The CPA Journal, April 2009 | Go to article overview

Applying Sarbanes-Oxley Principles to Colleges and Universities

Goins, Sean, Giacomino, Don E., Akers, Michael D., The CPA Journal

In the wake of the financial scandals that have occurred in the corporate sector, the public is demanding more accountability not only from corporations but also from nonprofit organizations such as universities. Boards of trustees report more concerns about the proper accounting for the use of resources. Institutions can enhance corporate governance by implementing some of the principles and procedures the Sarbanes-Oxley Act of 2002 (SOX) have mandated for public companies. Because public accounting firms audit universities, the firms can provide a valuable service to such clients by recommending ways in which universities can implement SOX practices that are appropriate and applicable.


Since the passage of SOX more man six years ago, much of the press and research have focused on the challenges and costs of implementing the act. Even with the difficulties, as of 2008 many large public companies have successfully complied with the requirements of SOX and now, along with investors and regulators, are becoming better acquainted with its benefits. SOX was once widely regarded as a compliance burden for public companies. Today, both public and private companies are increasingly viewing SOX compliance as a corporate governance best practice, with a quantifiable return on investment. As yet, many smaller private businesses and not-for-profit organizations have taken a backseat approach, letting larger public companies work out the kinks in implementation. Now that the challenges of implementation have been refined, smaller organizations are considering implementing SOX.

The National Association of College and University Business Officers (NACUBO) released an advisory report, 'Consideration of Sarbanes-Oxley Guidelines and Applicability at Colleges and Universities" (2003). The report suggests that colleges and universities consider SOX "as a framework to help evaluate overall financial risks and not simply comply with accountability concepts that stem from structures and circumstances that differ fundamentally from the stewardship responsibilities and public obligations they face." The format suggested in the NACUBO report is illustrated in the following example:

Section Title: 20. Services outside the scope of practice of auditors.

Description: Makes it unlawful for a registered public accounting firm to contemporaneously perform both audit and non-audit services.

Recommended Actions: Draft a Charter for the Audit Committee (AC). AC charter will indicate ACs role to ensure prohibited non-audit services are not performed by external auditor.

Benefits for Colleges and Universities

PricewaterhouseCoopers has stated that private companies' motivation to embrace SOX principles may be to show the public that they are forward-looking. "By voluntarily embracing aspects of mandated behavior for public companies, they are using regdation and oversight as a means to an end, better positioning themselves for a future IPO or to be acquired by a public company," said Michael Petrecca, a PricewaterhouseCoopers private company services partner. If this is the reasoning for larger private companies, then what are the benefits for colleges and universities that will never go public? For starters, many colleges and universities, along with other nonprofits, have established best practices which they adopt when they think they will derive some benefit. For instance, a college or university may decide that a whistleblowing policy is of high benefit with low costs; thus, it may comply with section 806 of SOX. A forthcoming article ("An Empirical Examination of Whistle-blowing Policies and Mechanisms at Universities," in the Journal of Forensic Accounting) finds that 48% of the responding universities had developed both a whistleblower policy and reporting mechanisms. An increasing number of nonpublic companies and nonprofit organizations are implementing sections of SOX because they believe it will benefit their organizations without dramatically increasing their costs. …

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