How will Sarbanes-Oxley affect privately held companies? In other words, what would motivate these companies to spend to upgrade their systems for these compliances?
Private companies will need to comply with Sarbanes-Oxley requirements if they anticipate becoming a public company in the future -- or being acquired by a public company. Sarbanes-Oxley requirements will also raise the bar for corporate controls and governance among stakeholders of private companies.
1. Private companies that anticipate acquisition by public companies will need to comply with Sarbanes-Oxley's requirements on internal controls -- several quarters before the acquisition -- to make sure the acquiring company's CEO and CFO will be willing to certify the consolidated financials. CEO/CFO certifications in post-acquisition reports filed with the SEC will cover pre-acquisition periods. If proper controls are not in place before the acquisition, a potential acquiring company may consider the acquisition too risky.
2. Private companies that anticipate a public stock offering will also need to comply with Sarbanes-Oxley well in advance of the IPO filing, to ensure that auditors and investment bankers can complete due diligence and issue positive opinions. CEO/CFO certifications in post-IPO reports filed with the SEC will cover pre-IPO periods, and corporate officers will face personal liability if controls and reporting are non-compliant for those periods.
3. Sarbanes-Oxley will raise the bar, in terms of expectations regarding internal controls and corporate governance. Outside auditors and legal counsel will look for comparable assurances from private companies, and compliance will improve credibility with many stakeholders.
A private company's board of directors will also want the assurance provided by compliance with these standards.
Private companies will be motivated to invest in infrastructure for compliance, to reduce risk and increase stakeholder confidence -- and to increase their valuation in the event of acquisition or IPO.
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