Inc.com reports on the cost of compliance of a newly enacted (effective November 15, 2004) provision of Sarbanes-Oxley, the legislations that was passed to protect individual investors from accounting irregularities in publicly traded companies (e.g., Enron).
"The provision in contention is Section 404, which requires the creation of extensive policies and controls within public companies to secure, document, process, and verify material information dealing with financial results....(W)hile the provision is appropriate for firms of 250,000 workers, its intentions are mislaid when it comes to businesses employing just 250 people. The cost of maintaining such controls can reach a staggering $500,000 per year, according to a study by CFO magazine. The lobbying group argues the cost, which includes the retention of auditors, is beneficial to the accounting industry, but excessive for small public companies."
So even small publicly traded companies will face new audit expenses that will total hundreds of thousands of dollars a year. Where does all of this money go? Why to the same industry that created much of this mess to begin with: the accounting industry. Just as their duplicitous relationship with regulators and legislators has helped to create the mess we know as the tax code, they are now turning their illegal and unethical acts in financial reporting into another cash cow for their audit operations through Sarbanes-Oxley.
Small and medium companies should long and hard about pursuing a public offering. Entrepreneurs should even look long and hard at venture capital financing, as a public offering is often the end game of this source of funding. Debt and other tyeps of private equity financing strategies should be looked at as alternatives.
I have always cautioned entrepreneurs about the downside of going public, including loss of control and the eventual demise of the original culture of the business. This provision of Sarbanes-Oxley and its other requirements now make public offering for smaller businesses a realistic financing strategy for only the most high-growth, high-potential ventures.
