No matter how much
you wish it would go away and no matter how much you complain about
the cost, Sarbanes-Oxley is here to stay. The “REAL” cost of
compliance can bring a CEO to his/her knees. However, embracing
Sarbanes makes business better and safer, and the cost shouldn’t be
staggering. It all depends on where you go to find your solution.
We shouldn’t be
surprised by the severity of the act. Corporate crime is estimated
to cost stakeholders more than a trillion dollars annually. Angered
by the financial loss of several billions of dollars resulting from
the scandals of Enron, WorldCom and other high profile companies,
the American public demanded action. And action is what we
got---Congress passed the Sarbanes-Oxley Act of 2002, the most
sweeping legislation since the Securities Act of 1934. This
legislation is beginning to have, and will continue to have far
into the future, an overwhelming impact on the way business, both
public and private as well as nonprofit is conducted in the U.S.
and globally. Now that the major compliance deadlines have
passed for the public companies, the focus of Sarbanes-Oxley has
shifted to the privately held companies and nonprofits.
The new
requirements are much more than just accounting practices. They
revolve around records retention, audit trails, and employment
issues. The intent of the act was to force reform in the areas of
financial reporting, auditing practices, independence of accounting
firms, and the responsibility of management for the integrity of
financial statements and other information provided to the public.
And, while Sarbanes-Oxley was not intended to apply directly to
private companies, directors and officers of, and investors in,
private companies need to be reminded that new legislation
targeting the public sector eventually trickles down to the rest of
us as well.
Provisions that
will flow through to not-for-profit organizations will include the
certification of financial statements, increased disclosures and
the increased role of the audit committee, and code of conduct
rules for chief financial officers (CFOs) and other senior
financial officers.
Furthermore, an increasing number of donors are
asking for financial statements and Form
990 information concerning a nonprofit organization before donating
to that organization as a result of renewed interest in
accountability. The most fundamental impact of Sarbanes-Oxley on a
private corporation will result from the tendency of shareholders
and of plaintiffs’
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lawyers to look to Sarbanes-Oxley’s detailed
pronouncements with respect to corporate governance to identify
“best practices.” From a defensive perspective, this means lawyers
will advise their private company and nonprofit clients to look to
the guidance provided by the SEC on Sarbanes-Oxley to determine
what constitutes prudent corporate governance.
Another area of
concern is in connection with the issuance of securities (public
and/or private) and the use of public funds. Although
Sarbanes-Oxley’s primary target was public companies, certain
provisions of the act apply to any transaction involving securities
and/or public funds. Potential investors, lenders and insurers
providing insurance to directors and officers are all likely to
require private companies to comply with some Sarbanes-Oxley
requirements. And, some banks have already begun to require
Sarbanes-Oxley type certificates with respect to financials from
the CEOs and CFOs of all borrowers. The act’s prohibitions on
personal loans to executives also are likely to be imposed on
private companies by some lenders and investors.
D&O insurers
have made it clear they also are heightening their scrutiny of
internal controls and corporate governance. This will provide a
powerful incentive, and in many instances a requirement, for
adoption by private companies of some of the requirements of
Sarbanes-Oxley. Further, any investor in a private company hoping
to liquidate the investment by means of an IPO should recognize the
need for compliance with many aspects of Sarbanes-Oxley well in
advance of the IPO.
In addition, any
private company contemplating potential acquisition by a publicly
held corporation should focus in advance on the likelihood that
Sarbanes-Oxley compliance will make the company a more attractive
acquisition candidate and reduce post-acquisition integration risk.
The CEO and CFO of a public company are likely to be wary of
acquiring a private company for which they will have to make
certifications as to financials and disclosure controls in SEC
reports if there previously have been no documented procedures in
place.
Finally, private companies should be aware of
proposals at the state level to adopt “little Sarbanes - Oxley”
legislation, which
may incorporate broader coverage than the federal act and specifically
apply to private companies as well as nonprofits. The states,
including Colorado, are watching the more active jurisdictions like
New York to see what will happen with the “mini
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Sarbanes”. Elliot
Spitzer, New York’s Attorney General, is determined to make the new
regulations as close as possible, if not stronger, to the Federal
statutes.
So, what has to be done? The solution is as
complicated as the problem, and it starts with the “Tone at the
Top”.
The areas requiring
change in order to be compliant have to be identified. Each
organization is unique and the Sarbanes fix is unique. The issues
are legal, accounting and IT. An expert hired to address each area
is the only way to accurately access what measures are needed to
become compliant. Along with each expert comes that outrageous
price tag that is plaguing the public sector, and generally, these
experts give conflicting advice.
The more
cost-effective option is to look for an “integrated solution”. Find
a solution provider that offers all three areas of expertise at a
single price: they are out there.
For a more detailed
discussion of the solution see Part II of this article.
To ask
questions and participate in the SOXBox E-Forum go to www.soxboxsolutions.org.
Experts are standing by to answer your questions.
You can also
subscribe to our affiliated Solely Sarbanes document libraries. The
libraries consist of extensive compilations of various Sarbanes-Oxley
resources and materials in a document library database form.
You can choose between either the "FREE Access" standard
database or, if you prefer, a subscription-based premium version.
For more information, go to
SarbOX One-Source, a "one-stop shop" portal for all your Sarbanes-Oxley
needs.
Ray Burrasca
is Managing Director of SOXBox SolutionsTM.
SOXBox Solutions™
integrated compliance program can help smaller public companies,
mid- to larger-sized private companies and large not-for-profits,
navigate the pitfalls of Sarbanes-Oxley. Mr.
Burrasca can be reached at 303-335-6058 or by e-mail at rburrasca@soxboxsolutions.com.
Tom Geissler is co-founder and President
of GT Squared, Inc., a portal solutions provider who builds and
implements productivity enhancement solutions designed to
strengthen a company’s competitive advantage and decrease it’s
operating costs. Mr. Geissler can be reached at (303) 321-4844 or
by e-mail at tgeissler@gtsquared.com.
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