IMPACT OF SARBANES-OXLEY ACT ON COLLEGES/UNIVERSITIES

Congress passed Public Law 107-204, the “Sarbanes-Oxley Act of 2002,” on July 24 of the very year. The Act was passed in response to corporate accounting scandals and addresses issues of confidence in the governance of public traded corporations. While the Act does not specifically apply to non-profit organizations, many issues addressed will probably have an impact on auditing at the college and university level. Some college and university boards or audit committees have started to adopt aspects of Sarbanes-Oxley, wanting to mirror its best practice governance as much as possible, irrespective of their non-inclusion as private entities.

BACKGROUND

Sarbanes-Oxley was passed to help ensure the accuracy of financial reporting by public traded corporations. In the wake of investors losing millions of dollars when they relied on financial reporting by companies that did not present accurately the financial condition of the company, Sarbanes-Oxley was a reaction to the public’s cry for reform in this area. Sarbanes-Oxley seeks to improve the accuracy of financial reporting of public traded corporations. The Act:

• Mandates corporate governance reforms. Requires corporations to establish audit committees, precludes publicly audited clients from engaging an accounting firm that audits financial statements for non-audit services, and requires corporations to disclose all material off-balance sheet transactions.
• Enhances the role and independence of audit committees. The Act requires that audit committees pre-approve all audit and non-audit services, receive regular reports from the auditor on accounting treatments, be responsible for oversight of the auditor, and be independent of the company who registers and sells securities.
• Creates public accounting firm restrictions. The Act creates a new Accounting Oversight Board to set standards and supervise accounting firms, requires all audit or review working papers to be retained for 7 years that support conclusions in audit reports, requires the rotation of audit partners every 5 years, and requires audit team members to wait a year before accepting employment with a client in key financial positions.

WHAT DOES SARBANES-OXLEY MEAN TO THE AUDITOR?

The Act does not promote any great new principle of accounting, but does mandate steps that must be taken to make sure that financial reporting of public traded corporations is accurate and can be relied on by the investor and others. In terms of the public accountant that audits public traded corporations, Sarbanes-Oxley sets standards and restricts the actions of the accounting firm and its employees. Sarbanes-Oxley challenges the auditor, and other financial managers, to look at all accounting treatments, not from the standpoint of determining an appropriate legal or standards-compliant posture, but whether such treatment results in the accurate reporting of the financial condition of the organization. Sarbanes-Oxley asks the question: Is a particular accounting treatment not only permitted by standards, regulations, and laws, but is it ethical and does it result in accurate financial reporting?

WHAT IMPACT MIGHT THE ACT HAVE ON COLLEGES AND UNIVERSITIES?

Sarbanes-Oxley, with limited exceptions, applies only to publicly traded companies, their executives, and to public accounting firms who audit public trading companies. Colleges and universities, however, may be impacted indirectly in the following ways:

• Closer scrutiny and questioning of institutional transactions and relationships by board members sensitized to a new environment of corporate responsibility in general, as well as the obligations of trustees in particular;
• More vigilant enforcement and oversight by state agencies, the Internal Revenue Service, and other regulatory entities with jurisdiction over financial integrity and other aspects of non-profit organizations;
• Increased citation of Sarbanes-Oxley provisions as models for future non-profit legislation and for standards of fiduciary conduct; and
• More rigorous review of transactions and financial statements by institutional auditors, and heightened oversight of and restrictions on auditors themselves.

For further details on Sarbanes-Oxley, see the following:

http://news.findlaw.com/hdocs/docs/gwbush/sarbanesoxley072302.pdf
http://www.aicpa.org/info/sarbanes_oxley_summary.htm