Rites of Privacy

Picking and Choosing
As of now, Sarbox compliance is largely voluntary for private companies. And even those that choose to comply, such as Cargill, can always pick which rules to obey.

For example, Cargill's governance processes, which were reviewed and updated a year ago, are "a hybrid between public and private," notes Lumpkins. So unlike public companies, Cargill limits Web access to detailed financial data. And it has decided not to comply with Section 404. "We don't think it's a valuable exercise," says Lumpkins. "We just think it's a lot of work, it's costly, and we don't really see the benefits."

Nonprofits fall into a similarly gray area. Because of the public-service role many of them play, they bear a responsibility to the public for their governance practices. Some Sarbox provisions, such as those requiring audit-committee members to be independent, "make sense in a not-for-profit world," says Kim Schwartz, vice president of corporate finance for the American Red Cross. "You have the same inherent conflict of interest you could have in a for-profit world."

However, there might not be much gain, however, in requiring a not-for-profit to separately disclose that it has a financial expert on its audit committee, she says, since many already disclose that information in their annual report. For its part, although the Red Cross is likely to adopt some provisions of the act—its executives are currently analyzing Sarbox's long-term effects on its 1,000 operating units and observing how things shake out in the public sector. "Our mantra here is: proceed with caution," adds Schwartz.

Opting Out
Of course, flexibility in adopting Sarbox's provisions could be behind the sudden rush to go private. As of July, 95 U.S. public companies had gone private in 2003, according to Thomson Financial—the biggest number in the past five years.

The costs of Sarbox could also be a factor. In fact, private-equity investors "are saying there is a larger pool of small-cap public companies willing to explore the merits of going private" because of compliance expenses, says William Koehler, a managing director of Cleveland-based KeyBanc Capital Markets.

Once there, however, newly private companies quickly realize that when it comes to Sarbox, they can run, but they can't hide.

David M. Katz is deputy editor of CFO.com.

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