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| Governmental Regulations |
| The Sarbones-Oxley Act of 2002 |
Two years after President George W. Bush signed the Sarbanes-Oxley Act of 2002 into law, Accounting professionals are still attempting to assess the impact. Experts agree that the new regulations have succeeded in increasing management’s knowledge about the accounting process and internal-control structures. It is also clear, however, that the new legislation has increased expenses—particularly audit fees.
There’s a troll under the bridge
One of the unintentional impacts of Sarbanes-Oxley legislation has been the curious effect on smaller companies on both sides of the “public domain bridge.” Figures indicate that independent audit costs have increased between 15% and 40% for smaller companies. Costs of directors’ and officers’ insurance have also soared. Increases have topped 400% by some estimates. These prohibitive expenses are keeping smaller companies from going public, and on the other side of the equation, have forced many small and microcap companies back into the private domain. It’s as if there’s a troll under the bridge keeping all but the larger, more established firms out of the public markets.
Benefits of Sarbanes-Oxley for Private Companies
While Sarbanes-Oxley has increased regulations and exchange requirements for public companies, private companies will be affected indirectly as well. Savvy, proactive managers have realized that voluntary compliance with the regulations could prove to be highly beneficial for privately-held companies who hope for significant growth, who expect to go public in the future, or who anticipate being acquired. Experts anticipate that investors will be willing to pay a premium to invest in or buy companies with sound financial practices. For this reason, many smaller private companies have already begun to comply with Sarbanes-Oxley legislation because they expect that the future benefits will outweigh current administrative costs.
Sources: Mark Cecil. “Sarbanes-Oxley Propels More Small Companies to Go Private.” Securities Data Publishing Mergers and Acquisitions Report. http://www.usbx.com/experience/docs/MAReport-SarbanesMay03.pdf
Journal of Accountancy. “Accounting Experts Assess the Impact of Sarbanes-Oxley.” www.bowne.com/newsletters.asp?storyID=880&src=BFPfeature
Amy Seidel. “Sarbanes-Oxley Compliance: Impact on Private Companies.” Faegre and Benson. http://www.faegre.com/articles/article_1235.aspx
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