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January 13, 2005
Another Cash Cow for the Accounting Industry
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.
Posted January 13, 2005 05:28 AM
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Comments
How do you think most small to mid-sized public companies will handle Sarbanes-Oxley compliance issues, via in-house personnel or through consultants?
Posted by: Patrick Fuller at January 17, 2005 03:49 PM
I don't see how they could possibly do it in-house at this point. It is too complex and there is too much risk if you get it wrong. That is one of the major issues with this new law.
Posted by: Jeff at January 18, 2005 12:16 PM
Who in the marketplace right now, is providing the type of compliance services that these smaller public companies need?
Posted by: Patrick Fuller at January 18, 2005 12:56 PM
The best fit for small and medium businesses are the stronger local and regional firms that have full audit teams.
Posted by: Jeff at January 18, 2005 04:16 PM
at Belmont University in Nashville, Tennessee. He consults with a variety of businesses on start-up and growth related issues, and with larger corporations on re-establishing entrepreneurial cultures within their organizations. Dr. Cornwall's current research interests include entrepreneurial finance and entrepreneurial ethics. He has authored or co-authored four books.
