Private Companies Feeling Effects of SOX

As you know, private companies aren’t currently required to comply with provisions of the Sarbanes-Oxley (SOX) Act of 2002. CEOs from 17 percent of the nation’s fastest-growing private companies say SOX has already had impact on their business and another 13 percent believe they will be impacted in the near future, according to a survey conducted by PricewaterhouseCoopers.

“It is clear that many aspects of the Sarbanes-Oxley Act are, or will be impacting private companies even though they aren’t currently required to comply,” says Jay Mattie, a PricewaterhouseCoopers partner and national assurance leader for its Private Company Services practice.

Among the ways the CEOs of 341 privately-held product and service companies participating in PricewaterhouseCoopers’ Trendsetter Barometer survey say SOX has impacted their firms are:

  • Improving control documentation and testing (64%)
  • Updating governance procedures (53%)
  • Strengthening code of conduct/ethics (50%)
  • Adopting public company “best practices” (35%)
  • Updating/creating “whistleblower” policies (22%)
  • Creating an independent audit committee (21%)
  • Creating an independent board of directors (21%)
  • Other (14%)

Over the next year or two, 54 percent of private companies with SOX initiatives don’t see any change in spending levels. Seven percent expect spending to decrease and 36 percent anticipate their spending will increase. Nearly half expect to see some benefit from their spending. Twenty-six percent of companies expect the benefits will exceed the costs of their SOX initiatives while 22 percent view it as a breakeven proposition. A slightly lesser percentage, 43 percent, believe costs will exceed benefits.

“Measures within the Sarbanes-Oxley Act hold potential benefit for some private companies, but not equally, to the same extent, or in the same way,” says Mattie. “As with any significant organizational decision, the merits of adopting certain provision of the Act – entirely or in part – must be evaluated in light of the related costs and their relationship to a company’s overall strategies, objectives and goals.”

If companies don’t see the benefits as outweighing the costs, what is driving their SOX initiatives? According to the survey there are many reasons including:

  • A “best business practice” (60%)
  • To address future or potential problems (59%)
  • Recommended by an outside constituent such as a lender, stockholder, advisor or vender (43%)
  • Considering future sale of business to another company (26%)
  • To resolve present business problems (19%)
  • Considering going public/IPO (17%)
  • Other (14%)

“Many private companies have something to gain by embracing the spirit, if not the letter of the Act,” said Mattie. “In certain cases, buyers might be willing to pay a premium for companies that have brought their system of internal controls into line with standards in the Act’s Section 404. Likewise, private companies that are on a path toward an IPO must be prepared to meet Section 404 and 302 requirements soon after becoming a public company.”


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