The Spirit Of Sarbanes-Oxley And Accreditation

The spirit of Sarbanes-Oxley may soon visit higher education, part of a general focus on governance and finance in the nonprofit sector. The Senate Committee on Finance, chaired by Senator Charles Grassley (R-IA), has been considering reform proposals that could result in considerable additional scrutiny of nonprofit organizations. As you may recall, the Sarbanes-Oxley legislation of 2002 called for more rigorous oversight of finance and governance in publicly-held corporations. And, the media reported considerable turnover of high-profile corporate executives, including connection with criminal convictions and imprisonment of such executives.

The Senate proposals could include establishing specific requirements for board size and composition. They could address board compensation and call for increasing the penalties for board misconduct. They could call for significant additional financial reporting in areas such as administrative expenses. The Finance Committee’s efforts are also intertwined with recent events at American University in Washington, DC. The committee, through an October 27, 2005 letter to the Board of Trustees, is seeking extensive information about board governance and finance as this relates to the former president’s contract, other senior administrative contracts, transparency of board business, compensation of trustees, the university’s filings to the Internal Revenue Service (IRS) and various university audits.

Why is the move toward expanded federal scrutiny of nonprofit governance and finance the business of Inside Accreditation? Because these proposals challenge the effectiveness of the system of self-regulation on which accreditation is based. Some proposals are also mirrored in the accreditation provisions of the House of Representatives' bill to reauthorize the Higher Education Act (HR 609). The bill calls for increased scrutiny of institutional board governance through accreditation as well as more publicly disclosed information about volunteers serving on accreditation teams. Might such requirements lead to diminution of the volunteerism that is essential to the functioning of accreditation?

Specifically, the Finance Committee pointedly questions the role of higher education boards of trustees and the longstanding and successful self-regulatory governance tradition of higher education where trustees – not government – have primary responsibility for the stewardship of our colleges and universities. The committee deliberations suggest serious doubts about the effectiveness of self-regulation, casting a pall over all similar activities of higher education. Challenging the effectiveness of self-regulation in governance can easily be extended to self-regulation of academic quality – the core responsibility of accreditation.

The non-profit reform proposals also include discussion of creating accrediting organizations that would establish best practices and accredit members who meet these expectations. The IRS would have the authority to base charitable status on whether an organization is accredited. These bodies could be private or government-maintained and funded. In this context, “accreditation” would be government regulation. In contrast, higher education accrediting organizations – as a form of self-regulation – are created and funded by colleges, universities and educational programs, not government.

All of this might cause a would-be volunteer to pause and ask, “Do I want to donate my time and talent to an organization under these conditions?” Just as the governance of higher education is carried out primarily through dedicated volunteers on boards of trustees, accreditation of higher education routinely relies on the work of thousands of volunteer faculty and administrators who annually make our system of peer review “work.” Based on the data provided to CHEA by recognized accrediting organizations, some 16,000 individuals volunteered their time in 2004-2005 to participate on teams that evaluate institutions and programs and serve on accreditation decision-making bodies. Even a small loss of their involvement would be a decisive blow to the effectiveness of accreditation efforts.

With regard to the reauthorization connection, HR 609 would require accrediting organizations to respond to a new federal mandate to scrutinize board governance practices of institutions as part of eligibility for Title IV. While some in higher education see the House bill as an alternative to the nonprofit reform proposals, it might also be used as an additional avenue for federal oversight of higher education governance, reinforcing, not replacing, those proposals. The same bill would also require accrediting organizations to publicize annual lists of all volunteers on accreditation teams – names and affiliations – and the process for selecting, keeping and evaluating such volunteers. What purpose is served by such disclosure? How might it be used by the U.S. Department of Education?

The Senate nonprofit reform proposals have been accompanied by newspaper headlines that offer up the drama of investigations, audits and inquiries into the legitimacy of the financial decisions of chief executive officers, perhaps reinforcing the need for federal action in the eyes of the public. Reminiscent of the corporate experience, the heavily publicized saga of American University or The New York Times’ detailing of events at the Getty Trust may be just the beginning. Difficult and delicate matters between a president and a board that once might have been discreetly resolved in privacy are now the stuff of editorials, op-ed pieces and lead news stories in papers, on television and on the Web.

Perhaps even more significant, The Chronicle of Higher Education’s November 18 issue provided extensive coverage of executive compensation, pointing out that the nonprofit sector should expect “harsh scrutiny” from the Senate and the Internal Revenue Service. Add to this the ongoing publicizing of votes of no confidence from faculty and presidential firings based on alleged questionable judgment – in contrast to out-and-out wrongdoing – in financial matters. Consider the increasing frequency of press reports of presidential style as “arrogant” and reflecting a sense of “entitlement” with regard to decisions about expenditure of college or university funds.

Both the heavily personalized scrutiny of presidential leadership and skepticism about presidential judgment in matters of finance fuel the challenge to self-regulation and volunteerism. And this, too, is a challenge to accreditation: Accrediting organizations have standards that address sound fiscal management and call for fiscal stability and reliability. In light of the current criticism of the performance of some presidents, how long will it be before accreditation’s commitment to assuring sound fiscal management is called into question, perhaps in order to justify additional regulation and oversight here as well?

The Senate is expected to take up board governance and finance reform proposals early in 2006 as part of a more robust nonprofit governance reform bill. Presidents, boards of trustees and higher education associations, including accrediting organizations, would agree that accountability and transparency in the nonprofit sector are vital to serving the public interest. It is imperative that all of us in higher education and accreditation come to these issues with clean hands. At the same time, however, the Senate proposals should be viewed with concern and even alarm. These efforts go to the heart of key higher education self-regulatory practices to protect the effectiveness and integrity of what we do, including accreditation and its vital role in assuring academic quality.