Sarbanes-Oxley: The Private Sector's Struggle

In 2001 and 2002, major corporate scandals such as Enron and WorldCom shocked and amazed Americans and the world. The level of deception that was revealed from these scandals, hurt investor confidence, and raised suspicions about the credibility of businesses in America. The public's eyes were opened to the fraudulent business practices of some of the country's wealthiest companies. In 2002, Congress passed the Sarbanes-Oxley Act (SOX). Representative Michael G. Oxley, and Senator Paul Sarbanes, believed that this act would help to restore investor confidence and deter fraud. The Sarbanes-Oxley Act has been the most aggressive legislation targeted to U.S. Securities Law since 1934. Public companies have been scrambling to shape up their acts in order to align with Sarbanes-Oxley compliance. On the other hand, private companies have flown under the radar screen trying to avoid compliance altogether. Sox compliance is costly for smaller businesses to implement, however analysts believe that the benefits will outweigh the cost, in the long-run for private companies.

Companies, who have set out to comply with the Sarbanes-Oxley Act, have found that there is a heavy price to pay for compliance. A survey conducted by RHR International, for Dictatorship Magazine, found that companies with $4billion in revenue, or more will spend an average of $35million, to comply with the act (Henry, 2005). In a second survey, Financial Executives International found that $3.1 million of additional costs incurred when revenues averaged $2.5billion (Henry, 2005). Audit fees assigned by the top four auditing companies increased by 25% to 33% since the enactment of Sarbanes-Oxley (Koehn& Del Vecchio, 2004). SOX compliance is expensive, and private companies who are dodging compliance may very well have a good reason. Currently, private companies do have the choice whether to follow SOX compliance or not.

The impact of Sarbanes-Oxley on small businesses is relatively expensive, and time consuming. Implementation costs are a serious issue for small companies, with limited cash flow and staff. Research shows the average compliance cost for small companies is about $1million dollars (Koehn & Del Vecchio, 2004). Since the implementation of the SOX Act, many companies are opting to go private or list their companies on an international stock exchange.

The requirements for Sarbanes-Oxley were designed for large companies. The basis for the guidelines and rules resulted from reviewing large companies such as Enron and WorldCom. Small companies cannot be compared in the same category as a Wal-Mart. Republican Senator Jim DeMint, from South Carolina states (Zaadz, 2005), "Sarbanes-Oxley was well intended, but it is actually crippling businesses across America. The penalizing of U.S. companies will have a negative effect on our companies and our economies."

In the days following the Enron and WorldCom scandals, private companies are starting to feel the pressure of complying with the Sarbanes-Oxley Act of 2002. Requirements of the Act that apply to private companies include criminal liability for document destruction, increased penalties for securities fraud, increased liabilities for white collar crimes, liability for retaliation of whistle blowers, and notice of defined benefit blackout periods (Titus, 2003). Private companies are being pressured by potential acquirers and investors, to show compliance with internal control documentation and processes, because of the financial liability they could inherit from private companies they acquire. The banking industry is also applying pressure on private companies as well. A bank in Chicago is now requiring CFOs and CEOs to certify financial statements in their loan agreements with private companies. Other banks are considering similar measures such as requiring internal control sign offs. Pressures for private companies to comply are reaching state and federal levels also. In New York the state attorney general is proposing for all non-profit organizations to verify annual reports. The U.S. general Accounting