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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowFew topics might kill a cocktail conversation faster than the Sarbanes-Oxley Act, unless the dinner party includes hospital administrators, university presidents or other not-for-profit leaders.
A desire to boost credibility-coupled with prodding from bond-rating ratings agencies-has broadened interest in the 4-year-old federal law far beyond the public companies it actually targets.
Sarbanes-Oxley-passed by Congress in the wake of high-profile scandals at Enron, WorldCom and elsewhere-was intended to enhance financial disclosure and eliminate arrangements that could undermine the independence of auditors.
Nearly every Indianapolis hospital in the past year has at least considered adopting some of the act’s provisions, and they’ve also drawn interest from other not-for-profit sectors like colleges and charities, experts say.
“They want transparency in their financials, and they want to make sure they’re doing the right thing every day,” said Derek Bang, an executive in the health care services group with the Indianapolis office of Crowe Chizek and Co.
That transparency, however, can come with a six-figure audit bill that might make adoption impractical for many notfor-profits.
“You have to be pretty large for this all to make sense,” Ice Miller health care attorney Gregory Pemberton said.
The Sarbanes-Oxley Act, which took effect in 2003, includes provisions that require top executives to certify financial statements. It also mandates that outside auditors confirm a company has valid safeguards to curb fraud and ensure the accuracy of its financial statements.
The latter provision, spelled out in Section 404 of the act, sends a message to outsiders that they can rely on a company’s numbers as much as they rely on its products, said Eric Johnson, an associate professor of accounting at Indiana University’s Kelley School of Business.
Not-for-profits have no requirement to comply with Sarbanes-Oxley provisions, but have started considering them, anyway.
Interest in the act spread to the not-forprofit sector partly because public company executives often serve on those boards. For instance, Pemberton said banking executives brought up compliance at a United Way of Central Indiana finance committee meeting.
“The conversation just naturally gyrated to, ‘Well, we’re doing it in our day jobs. Shouldn’t we be thinking about it in our amateur work or our volunteer work?'” he said, adding that United Way hasn’t committed to any provisions yet.
Hospitals see an additional motivation. Ratings agencies like Moody’s and Fitch said last summer that they plan to start asking about compliance when they review bond applications.
That grabbed the attention of hospitals that rely on bonds to finance construction projects, Crowe Chizek’s Bang said.
Local systems considering implementing at least parts of the act include St. Vincent Health and Clarian Health Partners, which has issued bonds to pay for several multimillion-dollar construction projects in recent years.
St. Vincent started asking its top executives to sign off on income statements in 2003, based on a recommendation from its parent, St. Louis-based Ascension Health. The parent also is working on a more detailed compliance program, said Mark Ellison, St. Vincent director of finance.
“Ascension Health looked at it from the perspective that, if it’s good for the publicly traded entities, let’s see what we can glean out of it to improve our operations,” he said.
Clarian spokesman Jon Mills wouldn’t say which provisions of the act his system might implement, or whether it already has adopted any. Clarian includes Riley Hospital for Children, Methodist and Indiana University hospitals and two recently opened suburban locations.
The cost of compliance might make some not-for-profit leaders gulp, however. For a hospital system, outside audits can run from $25,000 to more than $1 million, depending on the system’s size and the scope of the audit, Bang said.
Even so, it’s a price some organizations might have to pay just to maintain credibility as a fund-raiser or tax-exempt bond issuer, Pemberton said.
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