Others Embrace SOX Spirit

January 30, 2006
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GRAND RAPIDS — As a private company, Cascade Engineering didn’t have to adopt any of the standards created for publicly traded companies by the Sarbanes-Oxley Act of 2002. But it did anyway.

“We adopted these policies for reasons that would be applicable to any company,” said DiAnna Stephens, the company’s corporate compliance officer.

Cascade’s management wanted a code of ethics to match its corporate philosophy. It wanted all managers and employees to know and understand these values, and to assure them that management follows the same standard. Also, the company needed a mechanism to root out fraud.

“Private companies are being held more and more to these standards,” said Mike Goldman, vice president of business services.

Financial institutions now expect private companies to adhere to many of the SOX standards, he explained. Lenders expect transparency, a code of ethics, internal controls and accountability for management and directors. Cascade Engineering might not be a public company, but it is no less concerned about conflicts of interest, kickbacks and even, when involving a publicly traded partner or supplier, insider trading.

Plus, as Goldman pointed out, the U.S. Sentencing Commission Guidelines apply to every type of organization.

“A lot of us in the health care industry are struggling with how far to go,” said Michael Freed, CFO of Spectrum Health. “We haven’t gone as far as Section 404 compliance, but we’re doing a lot of the other things.”

Freed is speaking of the burdensome testing and documentation portion of the act as it applies to publicly traded companies: Section 404. This set of procedures has proven very costly.

“The question is: If you want us to go that far, how are we going to pay for it?” Freed asked, rhetorically.

There is widespread concern that Sarbanes-Oxley, or a similar initiative at either the state of federal level, will soon be forced upon hospitals and nonprofits.

For this reason, and as a simple matter of governance, savvy health care administrators have been mimicking their corporate counterparts. Spectrum Health publishes its financial statements, an annual report, documents all conflicts of interest and has worked diligently to strengthen its internal controls over the past three years.

“We’ve tightened it up,” said President and CEO Richard Breon. “We’re looking at things a little bit differently, and I think the board is looking at things a little differently.”

Breon is an example of those governance concerns. For a time, he sat on the board of Fifth Third Bank, which presented a conflict of interest to the hospital’s investment portfolio.

“I found myself leaving the room 80 percent of the time,” Breon said. “There were just too many conflicts.”

Freed has worked to prepare the hospital for rapid Section 404 compliance, if necessary.

“I think we try to behave like a publicly traded company,” he said. “If we have to become compliant, I don’t want to be far away.”

On one level, Spectrum Health, like many nonprofit health care providers, actually is a publicly traded entity. The hospital’s bonds are traded on the secondary market. Like its corporate peers, it is profiled by Moody’s, Standard & Poor’s and Hoovers.

The bulk of nonprofits have little in common with Spectrum Health outside of the designation, but they have come under equal scrutiny.

The Dorothy A. Johnson Center for Philanthropy and Nonprofit Leadership at Grand Valley State University trains and educates nonprofit boards and administrators to be more effective and efficient. In recent years, much of that work has concentrated on the same governance issues plaguing the for-profit sector.

“There is a trust relationship that you enter into when you become a director or trustee of a nonprofit organization,” said interim director Joel Orosz. “There is a growing skepticism on the part of the public that nonprofits are behaving well and earning trust. There is some Sarbanes-Oxley spillover.”

The classic example is the Red Cross response to the Sept. 11 terrorist attacks. The then CEO took in billions of dollars of donations earmarked for 9-11 victims. When she discovered that there were not enough survivors to distribute the funds to, she made what Orosz feels was a prudent decision to put the money into a reserve fund for the next disaster.

“What was actually a sound decision financially got her into so much trouble that she lost her job,” Orosz said. “You need to make adjustments to public perception as well as demonstrable need.”

Even more so perhaps than the corporate world, nonprofits need SOX-like standards, if only to encourage favorable public perception.

“Most boards are now demanding audits that are more extensive, and stronger controls,” Orosz said. “But this gets you into a fascinating argument. We all believe nonprofits should be squeaky clean, run honestly and above board, and yet, what it takes to prove that in terms of management and accounting costs money that could be spent on their mission.”

The United Way completed its own reform last year.

“A number of us in the field felt that we needed to improve our standards or, honestly, someone was going to do so for us,” said Robert Haight, president of Heart of West Michigan United Way.

Not altogether different in principle than the efforts of Cascade Engineering, the resulting model has become a standard for nonprofit governance. A smaller board of directors was adopted, which meets independently with auditors. Like the corporate world, the CEO and board chair certify internal control procedures. Conflicts of interest are documented, a code of ethics was written and the organization follows Better Business Bureau guidelines.

“A lot of people don’t realize they have a fiduciary responsibility to do the best they can when they sit on a nonprofit board,” said Colleen Boland, principal of My NonProfit CPA, an accounting firm specializing in small charities and associations.

“They might be there for the mission, but (also) to provide governance.”

Similar to the corporate world, Boland cited governance, financial statements, insider trading and conflicts of interest as primary concerns.

“As far as governance goes, you are looking for what the corporate world calls insider trading, areas that look like excessive compensation, sweetheart deals,” she said. “You need to document anywhere that there is a potential for a conflict of interest.”    

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