Akers, Michael D.

Naples, Gregory

English

epublications@Marquette

Marquette Universitye-Publications@MarquetteAccounting Faculty Research and Publications Accounting, Department of7-1-2004The Application of Sarbanes-Oxley toIntercollegiate AthleticsGregory NaplesMarquette University, gregory.naples@marquette.eduMichael D. AkersMarquette University, michael.akers@marquette.eduPublished version. College & University Auditor, Vol. 49, No. 2 (Summer 2004): 11-13. Permalink. ©2004 The Association of College and University Auditors. The Association of College and UniversityAuditors assumes sole copyright of any article published in College and University Auditor. Articlespublished elsewhere are generally not acceptable. Requests for reprinting an article must be directedin writing to the publisher or editor.SUMMER 2004 / 11The Application of Sarbanes-Oxleyto Intercollegiate AthleticsBy Gregory Naples, J.D., LL.M. and Michael D. Akers, Ph.D., CIA, CPA, CMA, CFEWidely perpetuated in recent years hasbeen an almost axiomatic belief thatcollege and university presidents haveexercised and determined initiative toreclaim institutional control of intercol-legiate athletics, in order to eradicateperceived abuses and to reassert aca-demic integrity. The degree to whichthat initiative has been successful, andthe extent to which there has been broad-based commitmentis subject to serious conjecture given the tawdry scenariosexperienced at far too many institutions. Recent publicity aboutproblems at the University of Colorado and University ofGeorgia illustrate the point. While the president of an institu-tion ultimately must answer for the institution’s activities, allinvolved parties (i.e., board of trustees, athletic director, andfaculty) are, to some degree,responsible for the problemsassociated with intercolle-giate athletics. Attempts toaddress such problems haveoccurred through federal leg-islation (The Equity in Ath-letics Disclosure Act of1994), legislation by theNational Collegiate AthleticAssociation, the NCAAcertification program for Di-vision I athletic departmentsand required audits where guidelines were established by theNCAA and the American Institute of Certified Public Ac-countants. Although some of these efforts have been success-ful, problems continue to exist with intercollegiate athletics.Perhaps it is time for the debate on intercollegiate athleticsissues to consider some of the evaluation and assessment toolsrecently crafted (i.e., Sarbanes-Oxley Act of 2002) by re-form-minded legislators who were forced into action by inter-nal control failures in the corporate sector.While it might be argued that theSarbanes-Oxley Act of 2002 does notapply to nonprofit organizations such ascolleges and universities, the media’sscrutiny of an institution’s activities,specifically intercollegiate athletics, de-mands a review of the Act. There isalso evidence that nonprofits might even-tually be affected by requirements simi-lar to the Sarbanes-Oxley Act. New York attorney generalEliot Spitzer has proposed requirements for nonprofits similarto those of the Sarbanes-Oxley Act. The purpose of thispaper is to discuss how selected aspects of the Sarbanes-Oxley Act of 2002 can be used by colleges and universities tomore effectively monitor intercollegiate athletics. We have iden-tified four key areas of the Act (i.e., financial statement cer-tification, internal control cer-tification, audit committeesand code of conduct) that webelieve are relevant to institu-tions and athletic depart-ments. For each area, we in-dicate the provision from theAct followed by a discussionof how the provision can beapplied by institutions to in-tercollegiate athletics. Thearticle concludes with somesummary comments.Financial Statement Certification byCEO and CFOProvision of the ActThe chief executive officer and chief financial officer mustissue a statement to accompany the periodic financial state-ments regarding the appropriateness of the financial state-ments and financial statement disclosures.Continued on page 12Gregory Naples Michael D. AkersWhile it might be argued that the Sarbanes-Oxley Act of 2002 does not apply to nonprofitorganizations such as colleges and universities,the media’s scrutiny of an institution’s activities,specifically intercollegiate athletics, demands areview of the Act.12 / College & University AuditorContinued on page 13The Application of Sarbanes-Oxley to Intercollegiate AthleticsContinued from page 11ApplicationWe suggest that college and university presidents, along withthe chief financial officer, attest in writing as to the appropri-ateness of the institution’s financial statements and relateddisclosures, as well as the appropriateness of the revenuesand expenditures of the athletic department. Although notrequired by the Act, CEOs and CFOs of corporations oftenrequest that others within the organization (e.g., controllersand accounting managers) provide a similar type of assertionfor their respective areas. Accordingly, we suggest that thepresident ask the athletic director to provide a written asser-tion regarding the presentation of in-tercollegiate athletics’ revenues and ex-penditures and related disclosures.Athletic directors should consider asimilar request from all coaches andstaff personnel within the athletic de-partment. We believe this recommen-dation forces additional accountabilitywithin the athletic department and pro-vides the university/college presidentand chief financial officer with addi-tional comfort regarding the revenues and expenditures asso-ciated with intercollegiate athletics.The requirement of a written assertion from both coachesand staff sends a strong signal about the importance of reli-able financial reporting.Internal Control Certification byCEO and CFOProvision of the ActThe CEO and CFO are required to provide a written asser-tion that internal controls have been reviewed for effective-ness.ApplicationAlmost every person within a college or university has someresponsibility for internal control. For example, the president,along with the board of trustees/regents, establishes the “toneat the top” and thus provides the leadership and guidance tosenior administrators such as the athletic director. The presi-dent and board are responsible for establishing the valuesand policies that demonstrate the commitment to maintaininga sound and effective internal control system. The athleticdirector has a responsibility for designing and implementingcontrol systems within the athletic department. This type ofresponsibility is consistent with the fact that more and moreathletic directors come from a business background rather thanjust an athletic background. Accordingly, we suggest that thecollege or university president, chief financial executive andathletic director provide a written assertion that the internalcontrols have been reviewed for effectiveness.Although the responsibility for the establishment of aninternal control system rests with the president, along withthe board, and the application of the internal controls is theresponsibility of other administrators and staff (i.e., athleticdirector, coaches and staff), an internal audit department canbe used to test the effectiveness of an institution’s internalcontrol system, including the controls within the athletic de-partment. Considering the large amount of resources gener-ated and expended by many colleges and universities and thepotential risks associated with NCAA fines and penalties, aswell as the public embarrassment from such problems, webelieve every institution with revenuesfrom intercollegiate athletics over aparticular amount (e.g., $50-75 mil-lion) should have an internal auditor.Prior research (Akers and Naples,1993, 2004) shows that internal au-ditors are almost never (less than 3%)denied access to the athletic depart-ment and restrictions on internal au-dits of athletic departments are minor(less than 5%). Results of internalaudit testing of controls for both the institution and the ath-letic department will assist the president and chief financialofficer with the written assertion regarding internal controlsand assist the board with its oversight responsibility.Audit CommitteesProvisions of the ActThe audit committee is responsible for the oversight of thework of the external public accounting firm. Each member ofthe audit committee is to be independent and a member ofthe board of trustees/regents. Each entity must disclosewhether one member of the audit committee is a financialexpert as defined in the Act.ApplicationThese provisions can be applied four specific ways. First,each institution should have an audit committee that is part ofthe institution’s board. The members of the audit committeeshould be independent. Second, the audit committee shouldhave at least one member who is a financial expert, using thecriteria of the Act. Third, the audit committee should have atleast one individual who is familiar with intercollegiate athlet-ics. Fourth, the audit committee should have oversight re-sponsibility for all aspects of internal control and financialreporting for the institution and the athletic department. Ac-cordingly, we recommend that a summary of all audit re-ports, internal and external, be provided to the audit commit-tee. Research (Akers and Naples, 1993, 2004) indicatesthat internal audit reports of athletic departments are oftenreceived more frequently by the athletic director than the boardThe requirement of a writtenassertion from both coaches andstaff sends a strong signal aboutthe importance of reliablefinancial reporting.SUMMER 2004 / 13The Application of Sarbanes-Oxley to Intercollegiate AthleticsContinued from page 12of trustees/regents for some institutions. The adoption of thesefour recommendations would enhance the stature of the boardby improving both the objectivity and expertise of its mem-bers.Code of ConductProvision of the ActEntities are required to disclose whether they have adopted acode of ethics for senior financial officers.ApplicationWhile many institutions and athletic departments have a con-flict of interest policy, we are not aware of any evidence thatindicates widespread use of a code of conduct for senior ad-ministrators and the athletic department. Our recommenda-tion is that each institution adopt a code of conduct for bothits senior administrators and athletic department. This codeshould address such items as the personal conduct of univer-sity representatives (i.e., administrators, coaches and staff)and use of resources generated either by the university or bythird parties. Each institution also needs to closely monitorcompliance with the code of conduct. This responsibility couldbe assigned to the compliance officer, and the internal auditdepartment could test the effectiveness of such monitoring.The adoption of a code of conduct that is closely monitoredby the institution sends a strong sig-nal to senior administrators and ath-letic department personnel regardingethical behavior.Concluding CommentsShould colleges and universities adoptthe requirements of the Sarbanes-Oxley Act of 2002? We believe thatselected aspects of the Act, as dis-cussed above, can and should beadopted by these institutions and theirrespective athletic departments. Al-though colleges and universities are notencountering the fraudulent embezzle-ment of funds at the level occurring incorporations, several institutions arefacing NCAA sanctions that affectthem financially, as well as publicembarrassment from the actions ofathletic department personnel and ath-letes. We also believe the recommen-dations are cost-effective and wouldenhance the financial reporting andinternal controls associated with inter-collegiate athletics. While we can onlyspeculate as to whether nonprofit or-ganizations will ever face the same re-quirements that the Sarbanes-Oxley Act imposed on publiccompanies, it is our opinion that institutions and their athleticdepartments should be proactive rather than reactive. Con-sidering the apparent lack of institutional control in intercolle-giate athletics at some institutions, the adoption of these rec-ommendations could enhance public perception that institu-tions are serious about regaining control of the activities asso-ciated with intercollegiate athletics.ReferencesAkers, Michael D. and Gregory J. Naples. 2004. Internal Audit, Sarbanes-Oxley and Athletic Departments: An Examination and Recommenda-tions for Reform. Unpublished article under review at the Review ofBusiness Information Systems.Akers, Michael D. and Gregory J. Naples. 1993. An Analysis of InternalAudits of Athletic Departments. Internal Auditing. Vol. 8, No. 3 (Win-ter) pp. 53-62.Sarbanes-Oxley Act of 2002. H.R. 3763.About the AuthorsGregory Naples, J.D., LL.M., is an associate professor andfaculty athletics representative at Marquette University. You maycontact him at Gregory.Naples@Marquette.edu.Michael D. Akers, Ph.D., CIA, CPA, CMA, CFE, isan associate professor and Charles T. Horngren Professor ofAccounting at Marquette University. You may contact him at:Michael.Akers@Marquette.edu.

The Application of Sarbanes-Oxley to Intercollegiate Athletics

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The Application of Sarbanes-Oxley to Intercollegiate Athletics

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