June 18, 2009 David J. Edquist, Esq. 414.287.1372 or dedquist@vonbriesen

1. The Law and Intent of Sarbanes-Oxley on Board Accountability2009 Wisconsin Rural Health Conference June 18, 2009 David J. Edquist, Esq. 414.287.1372 or dedquist@vonbriesen.com

2. Corporate Integrity Under Siege • Enormous healthcare recoveries by government • Management scandals • United Way • NYSE • Accounting/financial scandals • Enron etc. • HealthSouth Corp. • Tenet Healthcare • Focus on nonprofit corporate governance • IRS • Senate Finance Committee

3. Director’s Role is Increasingly Important • Law looks to institution of the board of directors to be part of solution • State law on board accountability • Sarbanes-Oxley • IRS – Good Governance Guidelines

4. Nonprofit Boards:Basic Elements • Duty of good faith • Best interests of the organization • Care exercised by ordinarily prudent person under similar circumstances

5. Director’s Duty of Care • Corporate directors must exercise the proper amount of care when making decisions. Decisions should be made: • in “good faith” • with the level of care that an ordinarily prudent person would exercise in a similar situation • with the best interest of the Corporation in mind

6. Duty of Loyalty • Conflicts of interest • Written policies • Loans • Charitable trusts • Corporate opportunity

7. Duty of Obedience • State and federal law • Filing requirements • Governing documents

8. Beyond the Basics:Emerging Consensus onBest Practices in Governance • More formality • More diligence • More documentation • More disclosure

9. Where Does Sarbanes-OxleyFit in this Mix? • Financial focus • Roles of: • Auditors • Management • Board • 2002 law

10. SOX and Related Reforms • Corporate governance and related reforms directly enacted by Sarbanes-Oxley • Reforms mandated by Sarbanes-Oxley and implemented by other regulatory bodies • Reforms not mandated by Sarbanes-Oxley, but required by stock exchange listing standards

11. Reforms Mandated by SOX • Accounting Oversight Board • Auditor Independence • Corporate Responsibility • Enhanced Financial Disclosures • Analyst Conflict of Interest

12. Reforms Implemented by Other Regulatory Bodies • Accounting Oversight Board • Audit Committee “Financial Experts” • Certifications on Financial Controls

13. NYSE, NASDAQ and Amex Reforms • Director Independence • Executive Sessions • Committee Requirements • Nominating/Governance Committee • Compensation Committee • Audit Committee • Corporate Governance Guidelines • Code of Ethics

14. Application of SOX to Nonprofit Organizations • Most SOX provisions do not apply to NFPs • NFPs generally not “issuers” subject to SOX • Obstruction of justice provisions apply to NFPs: • Whistleblower • Destruction of documents • External pressures • Voluntary adherence

15. NFP Pressure to Adopt SOX • “Governmental agencies and public companies, including insurers, will be interested in the extent to which hospital boards have adopted the provisions of accounting reform laws like those introduced by the Sarbanes-Oxley Act.” • International Journal of Environmental Research and Public Health (2/26/09)

16. NFP Pressure to Adopt SOX • Public accounting firms looking for SOX governance model, whether required or not • Public awareness has created spillover effect into NFP realm • Moody’s credit ratings may take governance policies into account • NFP boards are adopting SOX reforms on a “best practices” basis

17. NFP Acceptance of SOX • Nonprofit Governance in the United States (Urban Institute): • Substantial percentage of nonprofit board members are not actively engaged in basic governance activities such as fundraising, monitoring programs, and community relations • Policy makers such as Senate Finance Committee believe that one way to prevent future scandals is to strengthen governance • IRS believes that good governance practices may lead nonprofits to comply more fully with tax laws and better achieve their charitable purposes

18. NFP Acceptance of SOX • Nonprofit Governance in the United States (Urban Institute): • Many nonprofits are voluntarily adopting Sarbanes-Oxley provisions such as external audits, independent audit committees, and conflict of interest policies • Compliance is particularly likely with nonprofits that include board members who also serve on corporate boards, and who bring Sarbanes compliance perspectives to nonprofits

19. NFP Acceptance of SOX • Expected that hospitals and healthcare systems would embrace financial accountability and reporting requirements of SOX. • Current pressures for better performance and accountability. • Adoption of SOX provisions on financial reporting should strengthen governance.

20. NFP Acceptance of SOX • Adoption of SOX may soon be seen as the standard for hospital governance effectiveness. • “Building an Exceptional Board: Effective Practices for Health Care Governance.” Report of the Blue Ribbon Panel on Health Care Governance (2007)

21. Key SOX areas for Hospitals • Independent Audit Committee • Issuance of financial statements and mechanisms for internal controls • Ethics code for management and executive compensation

22. SOX and Audit Committees • Centralizes audit function • Responsible for hiring outside auditors, which report directly to audit committee • Minimize overlap among audit, financial and investment committees

23. SOX and Audit Committees • Assures that boards have access to findings • Allows boards to focus on oversight responsibilities • Holds management accountable for results

24. Audit Committee Membership • Audit Committee must be comprised of “independent” board members • One member should be a “financial expert” • A person who through education or experience has expertise in GAAP, and • preparation of financial statements, accounting principles, internal controls, and audit committee functions

25. Financial Expert • Enhances understanding of audit process • Increases board accountability

26. Audit Committee Role • Appointment, compensation and oversight of auditor • Auditor reports directly to audit committee • Approval of all audit and permitted non-audit services • Handles complaints about auditing and internal controls

27. Auditor Responsibilities • Rotate audit partner every five years • Auditor must attest to and report on management’s assessment of internal control structures and procedures • “Cooling off” period of one year between hiring of audit staff as senior executive and next audit by same firm

28. Restrictions on Auditor Activities • Bookkeeping or similar services • Financial information system design and implementation • Appraisal or valuation services, fairness opinions • Actuarial services

29. Restrictions on Auditor Activities • Internal audit outsourcing services • Management functions or HR • Broker-dealer, investment advisor, or investment banking services • Legal services and expert services unrelated to the audit • Any other services that the board deems impermissible

30. SOX: Disclosure and Integrityof Institutional Information • Disclosures by nonprofit organizations • Executive certifications

31. Financial Statements andInternal Controls • CEO and CFO must • certify quarterly and annual financial reports • establish and maintain appropriate internal controls • disclose to the auditor and audit committee any fraud or deficiencies in internal controls

32. Financial Statements • Must be prepared in accordance with GAAP • Each periodic report must disclose all material off-balance sheet transactions and other relationships with unconsolidated entities

33. Other Disclosures • Material changes in financial condition or operations must be disclosed on a rapid and current basis • Entity must disclose whether • there is a code of ethics • audit committee has at least one “financial expert”

34. Codes of Conduct:Ethics and Business • Conflict of interest policies • Ethics and business conduct policies

35. Whistleblower protections • Required protections for employees of public companies or audit firms • No express guidelines • Policies • Anonymity • Reporting • Retention

36. Document Retentionand Destruction • Prohibits the destruction of documents to impede any investigation whether already begun or only being contemplated • Prohibits altering or concealing of any document subject to an official proceeding

37. A Second Look at SOX • Defining Board priorities • Clinical Care • Patient Safety • Regulatory Compliance • vs. • External financial reporting • External auditing

38. A Second Look at SOX • SOX: audit and reporting focus • Stock exchange rules: governance • “the new listing requirements of the stock exchanges are broader, clearer and better prescriptions for governance reform” • “Looking at Sarbanes-Oxley isn’t enough” • “Strengthening Governance in Hospitals and Health Systems” American Governance Group (American Hospital Association 2004)

39. A Second Look at SOX • Stock exchange rules potentially appropriate for healthcare entities: • Adoption/disclosure of governance guidelines • Codes of business conduct • Separate audit, compensation and governance/nominating committees composed of independent directors • Committee charters • Executive sessions of independent directors • Executive compensation • CEO certifications of compliance with governance standards

40. A Second Look at SOX • Even as to financial issues, Boards must balance their oversight role for financial performance with the pressures of financial accountability

41. The Role of Hospital Boards: Financial Oversight • How do boards interpret their role in financial oversight and the way they use financial information to make decisions that impact hospital financial performance?

42. Core Financial Responsibilities • Set financial objectives • Review and align management’s financial plans with stated objectives • Enhance creditworthiness • Effective allocation of capital • Monitor financial performance • Verify financial statements

43. Financial Literacy • Hospital boards typically have a diverse membership • Reliance on finance committees to monitor financial performance, oversee budgeting and capital expenditures, and endowment performance • Some members of finance committee should have a business background • Recent study found no correlation between financial knowledge and higher financial performance

44. Financial Transparency • Publish financial reports for stakeholders • Internal distribution of financial reports

45. SOX: Open Questions • SOX may tend to refocus boards on overall performance • Will adoption of SOX actually improve overall financial performance?

46. SOX: Open Questions • Does making boards more accountable for financial transactions relative to financial risks push boards more toward financial performance and management rather than financial oversight? • Will the adoption of SOX principles ultimately interfere with a board’s financial oversight role?

47. SOX: Open Questions • Given increasing concerns over allocation of limited resources, will a focus on SOX principles interfere with a board’s oversight role relative to clinical and compliance functions?

48. IRS and Good Governance: Picking Up Where SOX Leaves Off?

49. IRS: Why Practice Good Governance? • Increases the likelihood that the organization will: • Comply with tax law; • Protect its charitable assets; and • Best serve its charitable beneficiaries. • Sound management practices result in more efficient operations.

50. IRS and Good Governance • IRS Code does not mandate particular management structures or governance policies. • IRS posted a draft of good governance practices on its website on Feb. 7, 2007. • After the redesign of the Form 990, the IRS removed the governance document. • Current IRS position on nonprofit governance is best reflected in the reporting required by the new Form 990.