By Michael T. O'Neil, Esq.
Many of our private company clients only know the Sarbanes-Oxley Act of 2002 as the legislative knee-jerk reaction to the unforeseen collapse of Enron. Although the aim of Sarbanes-Oxley was primarily to force directors and officers of public companies to implement financial control procedures in order to make the financial condition of public companies transparent to the investing public, what most private companies (i.e., closely held companies and family owned companies) do not realize is the effect of Sarbanes-Oxley on non-publicly traded companies.
Firstly, there are some provisions of Sarbanes-Oxley directly applicable to private companies:
The Act provides for criminal penalties for adverse actions taken by private companies against whistle blowers. For purposes of the Act, a whistle blower is defined broadly and may be considered any employee who provides any law enforcement agency with any information that might implicate that his or her employer, supervisor, or another employee is engaged in illegal activity.
The Act imposes criminal penalties ranging from fines to 20-year prison terms for any person who destroys, falsifies, alters or conceals documents to impede, obstruct or influence a federal investigation.
The provisions above are the only material provisions that are expressly directly applicable to private companies, however, more and more private companies are becoming Sarbanes-Oxley compliant as a result of the trickle down effect. Why would a private company become Sarbanes-Oxley compliant if they didn't have to? Basically, there are 3 main reasons why a private company would voluntarily become compliant:
Private companies that are Sarbanes-Oxley compliant are more likely to attract professional investors because of the transparency of the financial condition of the company.
A public company that acquires a private company will ultimately be faced with the task of bringing the private company into compliance with Sarbanes-Oxley and therefore a potential target that is already Sarbanes-Oxley compliant will be seen as additional value to an acquirer.
Clients that are ultimately looking to become publicly traded companies often times like to fast track their path to the IPO by becoming Sarbanes-Oxley compliant prior to its actual applicability.
Getting compliant, however, is a very expensive and time-consuming process. Outside consultants are available to assess how long and how costly the process would be as well as guide you through the process.
Additionally, keep in mind that if you are on the board of a non-profit organization, then you may have personal liability exposure pursuant to the high Sarbanes-Oxley standards for directors. Prior to accepting a position on a non-profit board, ask if they carry a Director and Officer insurance policy.