Sarbanes Oxley for Private Companies
The key concepts that private companies should take away from SOX are:
1.) Good governance and tone at the top are important for public and private companies. Studies show that ethical companies perform better over the long-term. Obtaining a clear understanding of the tone at the top, and whether it is being resonated throughout the company is important, because it is the first line of defense against an employee deciding not do the right thing.
2.) Segregation of duties
Private companies should be equally concerned as public companies regarding theft of company assets and fraud. Appropriate segregation of duties can safeguard a company’s assets.
3.) Whistleblower protections
A company's top managers and owners can become divorced from the day to day activities. They may never know about a problem unless an employee within the company is willing to bring it to their attention. A system that lets employees know they can report problems without fear of retaliation can truly benefit a company.
4.) Policies and procedure documentation provide structure and a foundation to support a company's growth
As a private company grows, the need to have a more structured and disciplined approach also increases. Having documented policies and procedures provides the guidance necessary for employees to perform their functions and also serves as a means by which performance can be measured.
5.) Private companies may be affected by SOX when doing business with public companies
Many parties with whom private companies routinely deal are suggesting, and in some cases requiring, at least some level of Sarbanes-Oxley compliance. For example, some lenders are beginning to require compliance with some of Sarbanes-Oxley’s provisions prior to providing financing. Venture capital investors are also interested in Sarbanes-Oxley compliance by both companies in which they hold an interest and potential new investment targets. Insurers are looking to Sarbanes-Oxley, particularly when providing coverage to directors and officers. Some governmental entities are also requiring some level of compliance prior to awarding contracts to private companies.
6.) Private companies planning to go public should start their readiness efforts early
The most obvious private company candidate to consider Sarbanes Oxley compliance is one anticipating a public offering. Many of the Act’s provisions must be complied with as soon as a registration statement is filed with the Securities and Exchange Commission. Private companies can provide for a much smoother and less costly transition into public life by laying the groundwork for compliance well in advance of a public offering.
7.) Private companies positioning themselves as acquisition an target
If an acquisition by a public company is a viable option for a private company, Sarbanes-Oxley must be addressed as part of that transaction. Sarbanes-Oxley readiness efforts, done all at once by consultants, is time consuming and costly. As a result, a public company evaluating a private company target is likely to attribute a lower value to such target if significant time and expense will be necessary to bring the target up to Sarbanes-Oxley standards. On the other hand, a "SOX ready” private company target will make for an attractive candidate and may even call for an acquisition premium.
