Sarbanes-Oxley Act of 2002
By Steve Wagner, CPA
The Sarbanes-Oxley Act of 2002 (Sarbox) set new or enhanced standards for all U.S. public company boards, management and public accounting firms. The Act was in response to the financial scandals committed by Enron, Worldcom, and others. While originally intended to affect public companies, the provisions of the act have continually trickled down to encompass non-profit entities in several ways.
Sarbox affects non-profit auditing rules in two principal areas (so far). The first area concerns non-profit board members. Under the act, board members assume more liabilities and responsibilities. This area will be covered more in depth in a future newsletter.
The second area concerns bookkeeping, before Sarbox, your auditor was able to “clean-up” areas in your bookkeeping by recording journal entries. The auditing standards are evolving towards considering every adjusting entry to be an act of bookkeeping and therefore a potential step across the line that defines independence. Independence, both actual and apparent, is a requirement to issue an audit report.
HUD’s approach is that every adjusting entry the auditor proposes is a finding reportable to HUD. I disagree with this approach and choose to analyze the materiality of each adjustment and the materiality of all adjustments together. However, the pressure to abandon my approach is mounting from both HUD and U.S. auditing standards.
In summary, it is both a good idea and a requirement of an audit to have someone within the organization with the responsibility of understanding the audit process and the contents of the financial statements. This person can be anyone in your organization, including board members, or a financial professional hired from the outside.
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