Sarbanes-Oxley Five Years Later
Dr. Scott Miller
Dr. Marylouise Fennell
Council of Independent Colleges
Can you remember a time before “transparency” and “accountability” became household words?
In fact, it’s already been five years since Congress passed the Sarbanes-Oxley Act of 2002 in the wake of the Enron and related corporate financial scandals, and although that legislation does not apply directly to colleges, universities and other nonprofits, it has profoundly influenced—some would say “transformed”— he way we now conduct business. Presidents and CFOs of more than 30 institutions nationwide have been a part of several focus/pilot groups working to adapt the 2002 corporate accountability law to higher education. Many other institutions have voluntarily implemented some of its provisions, particularly with regard to governance.
Many of these changes have been for the better. As former UNC President Molly Broad emphasized, “Colleges and universities cannot continue to hide behind our not-for-profit status.” Dr. Broad was a convener, with former NACUBO President Jay Morley and John Mattie, of NACUBO’s “Sarbanes Summit” in June 2005 to discuss and develop recommendations about governance, internal controls, certification and enterprise risk management. The summit brought together presidents and business officers to jointly discuss each area, including current practices, Sarbanes-like proposals, recommended actions, and implementation barriers. The monograph, “Sarbanes Summit: Taking the Right Path,” was released in May 2006.
As many CEOs have learned, “doing the right thing,” that is, institutionalizing ethical procedures as a best practice is also good business. A healthy bottom line is dependent on consumer confidence, and public perception of favoritism, nepotism, insider trading or any deviation from the standard of fair play will hurt the not-for-profit and for-profit sectors alike. For example, the time-honored practice of awarding no-bid contracts for college business to major donors was often a “wash,” resulting in the institution repaying the vendor-donor as much or more in fees as he or she was donating in major gifts. That’s one of many instances in which good stewardship of college funds has actually improved the institution’s credibility among current and prospective donors. As has often been noted, just because a board is nonprofit doesn’t mean nobody’s watching. When it comes to good governance, it behooves all of us to consistently follow best practice.
Many colleges, of course, were practicing some of the Sarbanes Summit’s recommendations long before 2002. Measures such as Board orientation and training, internal audits and the like have been around for a long time.
But today’s ethical climate requires that we go well beyond the letter of the law, to its spirit, in areas such as conflicts of interest among board members, to avoid even the appearance of impropriety. Our constituents demand it, and overall, most of these changes have made us stronger, more viable institutions, better positioned for the future and more responsive to our key stakeholders.
Many higher education administrators are concerned, though, that well intended though this vigilance may be, some is counter- productive in a small university setting, resulting in a waste of both time and money. Consider the example of Drexel University, which instituted an anonymous “tip line” to identify cases of ethical misconduct. An expenditure of $30,000 yielded just two complaints, while staff spent an inordinate amount of time monitoring the line. In trying to voluntarily meet SOX requirements intended for publicly traded for-profit companies, college administrators are spending time on completing and filing reports that could be better spent.
Drexel’s President, Constantine Papadakis, has been in the forefront of adapting SOX best practices to higher education.After reviewing the Act in a process that began in November 2002, Drexel worked with a Board committee to study a variety of governance, compliance and audit issues to determine which were appropriate for higher education. His words perhaps best summarize the debate: “Some best practices were appropriate, but some were not. Drexel took what was best.”
Five years down the road from the corporate scandals that shook the securities industry to its foundation, small business and not-for-profits including colleges and universities are still responding to the evolving changes emanating from SOX. It is heartening to note that the SEC has recently recommended scaling back some of its provisions to take into account the size and complexity of both corporate and other structures. We applaud this move, which will not diminish the transparent financial reporting that is critical for shareholder, takeholder and consumer confidence. As we continue to manage these changes, let us take “what is best.”