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Private Companies Struggle With The Sarbanes Oxley Act

1984 words - 8 pages

Samuel Smiles, an 18th century Scottish, writer once said, "It is possible that the scrupulously honest man may not grow rich so fast as the unscrupulous and dishonest one; but, the success will be of a truer kind, earned without fraud or injustice. And even though a man should for a time be unsuccessful, still he must be honest: better lose all and save character. For character is itself a fortune…" (Zaadz, 2005). Major corporate scandals such as Enron and WorldCom shook the business world at the turn of the century in a powerful way. The level of deception that seeped out of these scandals shocked and amazed Americans and the world. As a result, investor confidence began to decline ...view middle of the document...

The survey found that companies with $4 billion or more in revenues are spending an average of $35 million to comply with the act (Henry et. al, p. 28). In a separate survey, Financial Executives International found $3.1 million in additional costs for companies with average revenues of $2.5 billion. According to Koehn and Del Vecchio (2004), significant increases in salaries may be attributed to the cost of compliance (p. 36). In 2003, a 6% increase in finance and a 10% increase in management salaries were noted (Koehn & Del Vecchio, p.36). Audit fees assigned by the top four auditing companies climbed by 25% to 33% since the enactment of Sarbanes-Oxley. A May 2003 survey by Financial Executives International forecasted an additional 35% increase in audit fees by mid-2004. There should be no doubt about why private companies are dodging SOX. The expense of compliance is becoming astronomical. For a private company that is trying to keep its head above water, compliance may be the factor that sinks the ship.

Section 404 of Sarbanes-Oxley
One of the major requirements that emerged from the Act is section 404. Section 404 requires each annual report of an issuer to contain an "internal control report," which shows the following:
(1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and
(2) contain an assessment, as of the end of the issuer's fiscal year, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting (AICPA, 2005).
Koehn and Del Vecchio summarize section 404 as "[the requirement of] management to organize and assess internal control systems and the independent auditor to assess their effectiveness" (p.36). They continue their discussion of section 404 by stating that some companies have estimated a 1% decrease in earnings to comply with this provision of SOX alone. It should be noted that these are not one-time cost. Internal control systems must be evaluated every year. Can a private company stand to take a chance on section 404 alone?
Currently, private companies have the option to choose to comply with Sarbanes-Oxley or not. Some companies have decided to implement only certain aspects of SOX. For example, according to Katz (2003), Cargill Inc., a Minneapolis-based private firm, has decided not to comply with section 404 (p.105). Cargill does not see the value in this provision, stating "…it's a lot of work, it's costly, and we don't really see the benefits" (Katz, 2003, p.105). Again, private companies are exonerated in their defiance to submit to compliance.

Pressure to Comply
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. Currently requirements of the act that apply to private companies include the following:
1) Criminal...

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