Risk & Compliance

Are Private Companies Embracing Sarbox?

Buyers may be willing to pay a premium for companies that have voluntarily brought their internal controls into compliance with Section 404, sugges...
Stephen TaubJune 23, 2005

Nearly one-third of fast-growing private companies plan to benefit from provisions of Sarbanes-Oxley even though they are not required to comply with the act, according to a new survey from PricewaterhouseCoopers.

PwC interviewed the chief executive officers of 341 private companies, ranging in revenue from about $5 million to $150 million, that it identified as the fastest-growing U.S. businesses over the last five years. The CEOs from 30 percent of these companies reported that Sarbanes-Oxley has affected their business within the past two years or will do so in the near future.

Within that group, 64 percent, are improving their controls documentation and testing, 53 percent are updating governance procedures, and 50 percent say they are strengthening their code of conduct or ethics. Technology companies are particularly focused on that last issue, PwC pointed out.

Why would these companies comply with Sarbanes-Oxley if they don’t have to, especially in light of the costs and challenges associated with Section 404 ?

The private companies surveyed by PwC said they see the Sarbanes-Oxley requirements as a “best business practice” and a way to address future or potential problems.

“Many private companies have something to gain by embracing the spirit, if not the letter of the act,” said Jay Mattie, a PwC partner. “In certain cases, buyers might be willing to pay a premium for companies that have brought their system of internal controls into line with standards in the Act’s Section 404. Likewise, private companies that are on a path toward an IPO must be prepared to meet Section 404 and 302 requirements soon after becoming a public company.”

Within the survey group, the companies embracing Sarbanes-Oxley are typically larger ($46.2 million in revenue, on average) than companies that aren’t ($28.8 million); 64 percent of those CEOs say they have invested only a limited amount of time and effort toward achieving their Sarbanes-Oxley objectives; and 26 percent believe that the benefits of Sarbox compliance will exceed the costs.