I had thought that Sarbanes-Oxley only applied to publicly traded corporations, but your previous writing and personal communication seems to imply that it also applies to closely-held ones. Is that right? Can you point me to a URL or other easy to find reference that explains just what SOx requires of small companies?
Ah, there’s little that’s generated more trouble and discussion in the world of business – particularly business finance – than Sarbanes-Oxley, a rigorous new accounting standard that requires corporations to track and report their financial results in new and, frankly, more complex ways. I’ve written about Sarbanes-Oxley before, for background reading.
So if Sarbanes-Oxley is targeted to public, publicly traded companies, why does it affect privately held companies or even startups?
A good question and one that can be answered with two words near and dear to any investors heart: exit event.
Now that we’re no longer in the 1999-2000 bubble that let even the most idiotic internet-based business, businesses without even a strategy to generate actual revenue, go public and raise millions (until it all tanked anyway when investors woke up and said “where’s the business here?”) the most common way that small companies and startups become major successes and achieve a “liquidity event” is by being acquired. And typically the acquiring company is a publicly traded firm.
You can see the writing on the wall, I bet.
If a large, public company that must live within the constraints and rules of Sarbanes-Oxley comes a’courting, then the chances of them being interested in acquiring you are often significantly influenced by the quality of your books. If you have a professional financial officer with meaningful experience who is managing the P&L properly and acting in a manner that’s at least pretty darn compliant with Sarbanes-Oxley, your chances of being acquired can increase significantly, to the point where you might be acquired even over more successful competitors if you’re the company most easily assimilated into the new parent structure.
So my answer to you regarding small businesses and Sarbanes-Oxley is that learning more about it and ensuring that you move towards greater and greater compliance with its rules is a smart business strategy, it’s what Devo called “duty now for the future.”
Learn more about Sarbanes-Oxley at the Securities and Exchange Commission. Start with the Sarbanes-Oxley FAQ, then check out an excellent (PDF) report on Sarbanes-Oxley and non-profits, then read the Sarbanes-Oxley FAQ from the Information Systems Audit and Control Association. There are also tons of commercial businesses offering SOx compliance help: simply search on Google for Sarbanes-Oxley and check out the ads thereon.
There’s no question that Sarbanes-Oxley is tough on businesses, but with the never-ending scandals and questionable accounting, insider “independent” audit firms and appalling private loans to executives, it’s a rule whose time has come, and whether you are legally required to comply or not, knowing about what’s involved and taking steps in that direction is a smart move for any company, public or private, large or small.