Ellen P. Aprill (Loyola Law School Los Angeles) has posted What Critiques of Sarbanes-Oxley Can Teach about Regulation of Nonprofit Governance (Fordham Law Review, Forthcoming) on SSRN. Here is the abstract:
With limited exceptions, Congress applied the American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act, only to American publicly traded companies. Nonetheless invocation of SOX quickly reverberated across the nonprofit landscape, and nonprofits have been voluntarily adopting provisions like those in SOX. At the same time, however, SOX itself has been the subject of withering criticism. Some of these criticisms accept the purpose of SOX, but question the efficacy of particular provisions. Much of the criticism, however, is far more fundamental, that SOX's governance provisions represent a misplaced and unwarranted federalization, upsetting the proper balance between state and federal regulation by intruding into matters of corporate governance that have been and should remain the province of the states.
The basic question raised by SOX, the proper allocation and coordination of power between a federal agency, the SEC, and state law regarding corporate governance by public companies applies equally to the allocation and coordination of power between the IRS and state law for nonprofit governance. This parallel makes recent extensive critiques of SOX useful for examining similar issues, both specific and more general, that arise in regulation of nonprofits.
This piece discusses some, albeit not all, of the areas for which SOX has received so much criticism. The first set of criticisms goes to ways that SOX could be improved: loosening the required independence of the audit committee, establishing special small firm rules for both certification of financial statements and disclosure of internal controls, and eliminating the prohibition of executive loans. The second set of criticisms attack the premise of SOX, its so-called federalization of corporate governance: the inadequacy of federal judicial enforcement, the fear of federal regulatory overreaching, and alternatives to federal regulation. The article considers the implications of each of these criticisms for regulation of nonprofit governance.
The article concludes that the critique of SOX, when applied to the nonprofit world, in fact supports some expanded federal presence regarding corporate governance. If the arguments of even the most ardent opponents of federalization of corporate governance founder when considered in the context of the nonprofit sector, then the position of those who favor federal regulation is vindicated and strengthened. The piece makes several suggestions to that end, in particular federal incentives for education of nonprofit boards and a form of “cooperative federalism,” in which federal law sets a floor for state regulatory programs.