Most private businesses have not paid much attention to Sarbanes-Oxley. After all, the intention of this legislation was to create accountability and transparency for publicly traded companies. The goal was to protect employees, little old ladies, and other unsuspecting types who own stock in public companies from getting misled and losing their nest eggs.
But Sarbanes has turned into a major growth segment for the accounting and legal industries, so be prepared to start to feel the pinch even if you are a small private business that has no plans to go public. (As an example, visit this site which is for "Sarbanes-Oxley compliance practitioners" -- it has 30,000 subscribers according to their promotional materials).
One myth is that you can avoid the costly impact of Sarbanes by planning to sell your business rather than pursue an IPO. But if you ever hope to sell to a public company, you will need to be Sarbanes-Oxley compliant, which will cost you tens and even hundreds of thousands of dollars in transaction costs.
And Sarbanes-Oxley may spread like kudzu across all private companies. For example, here is a quote from a law practice's web site:
Most of the corporate governance reforms inspired by Sarbanes-Oxley do not expressly apply to private companies. However, these reforms are becoming the benchmark against which financial reporting and corporate governance practices are measured. Thus, private company board members with public company backgrounds are starting to require Sarbanes-Oxley type corporate governance practices. Furthermore, as lenders and insurers encounter more stringent corporate governance practices in public companies, they may start imposing analogous standards on private companies. Private companies interested in adopting "best practices" may consider establishing audit committees, adding or increasing the number of independent directors on their boards of directors, adopting conflict of interest policies and taking other steps to bring them more in line with the corporate governance standards inspired by Sarbanes-Oxley.
So, alright, this is just a bunch of lawyers trying to stir up business. Perhaps this is true to a point, but remember who is behind much of the growth of Sarbanes-Oxley: lawyers and accountants. And as this becomes perceived as "best practices" you know that bankers and insurance companies will start to require these higher standards as a means of reducing risk.
Here is what "experts" recommended to private small businesses regarding Sarbanes-Oxley compliance at msn.com small business center.
- Work with two accounting firms -- not just one.
They recommend that you use one firm for tax and one for audit/review if you are required to have your statements audited or reviewed by your banker. You may think you will get a better deal by using one firm for both services, but trust me, accounting firms don't generally offer deals. Hours and hours and they bill them to make a living. This is probably not a bad idea.
- Have an audit committee.
This is a little confusing to me, as in most private small businesses the owners, board, and top management are all the same people. But, wait......
- Make your independent board truly independent.
That's right, they recommend that you create an independent board for your own private small business and make it truly independent -- OF YOU. And the only way that you will ever get outside board members these days is if they are fully insured, and guess what, that requires insurance from the same companies that are now pushing you to follow Sarbanes-Oxley. What an incestuous little system they have created.
- Institute whistleblower protections.
In your own private business? Yes. NFIB offers a good summary of what small businesses need to do under their new exposure under Sarbanes-Oxley to whistleblower protections:
- Handle whistleblowing claims in the same way sexual harassment and discrimination claims are handled – seriously and immediately- Establish a strict nonretaliation policy
- Appoint an ethics officer to investigate whistleblowing claims
- Consider employing an ethics hotline service
-Make employees aware of your company's whistleblowing procedures
-Keep careful documentation of all whistleblowing claims in case there are disputes later
-If an employee involved in a whistleblowing claim must be terminated, keep thorough documentation of the grounds for their termination to avoid potential disputes later.
And if you don't? Here are the possible consequences:
- Damages to the employee who was retaliated against- Back pay with interest if the employee was terminated
- Maximum fine - $250,000
- Maximum prison time -- 10 years
Thank God that Americans have such a strong entrepreneurial spirit. Because if they didn't, attacks on free enterprise like some of the provisions of Sarbanes-Oxley and like the recent Kelo Decision by the Supreme Court would surely dampen our enthusiasm. I just wish the politicians would remember who is creating the jobs in this country!
