Sarbanes-Oxley and Social Clubs and Other Tax-Exempt Organizations

By Reilly, James J. | The CPA Journal, March 2005 | Go to article overview

Sarbanes-Oxley and Social Clubs and Other Tax-Exempt Organizations


Reilly, James J., The CPA Journal


The Sarbanes-Oxley Act of 2002 (SOA) established the Public Company Accounting Oversight Board (PCAOB) "to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports for companies the securities of which are sold to, and held by and for, public investors." Even though the emphasis of SOA is on investor protection, there has been speculation and discussion about the applicability of SOA to tax-exempt organizations, including tax-exempt social clubs.

Why Sarbanes-Oxley?

The accounting irregularities at companies like Enron, Adelphia, and WorldCom appear to have been at least partially prompted by greed. Executives typically receive stock options as part of a compensation package and profit handsomely if the company's stock appreciates. But the profit motive can create enormous pressure on executives to report good financial results, thus increasing the company's share price and providing them with handsome financial rewards. Because compensation is not based on the appreciation of an organization's stock price, this motivation simply does not exist for the executives of taxexempt organizations, including social clubs. And with the exception of whistleblower protection and record-retention rules, the mandate of the SOA does not extend to organizations that are not subject to securities laws, including tax-exempt social clubs.

How SOA does or might affect tax-exempt organizations has been much discussed. Officers and directors of tax-exempt social clubs, who typically serve in a voluntary capacity, are often officers, directors, or professional advisors to publicly traded companies, where SOA compliance is essential. Because SOA is central to the management of publicly traded companies, it is reasonable for such officers and directors to consider its application to social clubs. Second, certain articles, speeches, and continuing education programs have confusingly discussed SOA and tax-exempt organizations. Third, some commentators believe that certain provisions of SOA should apply to not-for-profits, including social clubs.

SOA Influence on Social Clubs

Not only does SOA generally not apply to tax-exempt organizations, forcing many SOA provisions upon them is simply impossible. For example, many SOA provisions, including those related to insider trading, disclosures of management stock transactions, analyst conflicts of interest, and appearances before the sec, are not meaningful to tax-exempt organizations. Yet, some important SOA provisions could be modified for the corporate governance of tax-exempt organizations, including social clubs, such as the following:

Audit committee. SOA requires that public companies establish an audit committee. An audit committee can serve a useful role in the governance of a tax-exempt organization. This concept was widely discussed many years before SOA. Typically, audit committee members at clubs are uncompensated volunteers, and it is advisable for audit committee members to receive no consulting or advisory fees from the social club. The audit committee's responsibilities include acting as the liaison to the club's external auditing firm, in which capacity the committee would review the social club's audited financial statements with the auditors to determine whether the statements are consistent with the audit committee's understanding of the club's financial position. The audit committee should also ensure that proper internal controls are in place, and review the management letter issued by the auditing firm. An audit committee may undertake other functions, and should be empowered to study or investigate any matter of interest that the audit committee believes may affect the quality of the financial statements.

In many small not-for-profits, including social clubs, the board of directors may be limited in size and the entire board may, in effect, function as the audit committee. …

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