Does Mass. Law Force Sarbox on Nonprofits?

A Massachusetts health-care workers' union claims that a state law requires nonprofit organizations to adhere to the Sarbanes-Oxley Act provisions.

A Massachusetts health-care workers’ union is asking board members of Beth Israel Deaconess Medical Center to apply Sarbanes-Oxley Act disclosure rules to the nonprofit hospital’s audits.

The 1199 SEIU United Healthcare Workers East sent letters to 6 of Beth Israel’s 18 board members, who also serve as executives or sit on boards of public companies, citing state law as a precedent for the request. The SEIU acknowledges that under federal law, nonprofit organizations are not required to adhere to Sarbox provisions; however, the union says that under Massachusetts law, nonprofit directors must use their expert knowledge and experience in their role as nonprofit fiduciaries. As a result, argue union officials, any director who applies Sarbox standards to his public-company duties is required to do the same at a nonprofit.

The letters were sent to Staples director Martin Trust, Boston Properties executive director Douglas Linde, Brooks Automation CEO and director Robert Lepofsky, Massbank director Allan Bufferd, Charles River Laboratories International director Shephen Chubb, Genesee & Wyoming director Robert M. Melzer, and Beth Israel’s parent company Caregroup.

In a statement released last week, the union said it believes Beth Israel inaccurately reported its pro bono care, also known as “charity care,” in its 2005 and 2006 financial statements, and as a result, the hospital’s “audit disclosures appear to commingle bad debt and charity care, a practice currently being scrutinized by the Internal Revenue Service and Congress.”

“We’re calling on the board members in this case to recognize the deficiencies in their financial reporting and to restate their 2005 and 2006 audits in a way that meets the plain English requirements of Sarbanes Oxley in disclosing charity care and bad debt,” SEIU spokesman Jeff Hall told CFO.com. “The hospital board members need to ensure that their institutions accurately report and disclose how much charity care they provide to the community,” he added.

A spokesman for Beth Israel responded by saying that the hospital is not required to adhere to Sarbox provisions. “All our financial statements are audited annually and we believe we are in compliance with all accounting standards,” noted Beth Israel’s director of media relations Jerry Berger.

The debate over whether private companies, including tax-exempt ones, should comply with Sarbox rules is not a novel concept, says Damon Silvers, general counsel for labor union AFL-CIO. The practice of having independent directors not affiliated with management on an audit committee of a nonprofit is now widely accepted, he adds.

“For nonprofits that are big, complex, and have a lot in common with public companies, it’s best practice to have independent audit committees and apply the principles of Sarbanes Oxley,” asserts Silvers. “It is not clear why that wouldn’t be the right thing to do [for a large hospital].”

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