Does the Sarbanes-Oxley Act Affect Your Business?
The Sarbanes-Oxley Act of 2002 affects all public companies in the United States by requiring them to follow the provisions of the 11 sections of the act. In addition to publicly-traded companies, along with their wholly-owned subsidiaries and foreign companies that are publicly traded and do business in the U.S., Sarbanes also regulates accounting firms that perform audits for any U.S. public company. Private companies and charities aren’t required to follow all of the provisions of the Sarbanes-Oxley Act. However, private companies getting ready to go public with an IPO also need to be prepared to comply with the regulations in the Sarbanes-Oxley Act. And there also is an exception regarding non-profit companies. Sarbanes includes protection for whistle-blowers, in an effort to encourage people to come forward to report suspected fraudulent activity within their own company. The protections for whistle-blowers and the stricter punishments for officers, board members and auditors for destroying company documents are both criminal in nature and would apply to non-profit corporations as well as the publicly-traded companies targeted in Sarbanes, experts have said.
If you operate a publicly-traded company, or an accounting firm that works for a public company, then Sarbanes has a tremendous impact on your company. Sarbanes sets up new, stronger standards that companies and their auditors must employ to increase the level of oversight over the way the company is governed and operated.
Accounting firms that perform audits for public companies must be completely familiar with the Sarbanes-Oxley Act to understand their additional responsibilities and the possible discipline that awaits accounting firms or company executives that attempt to commit financial fraud. For example, auditing companies conducting annual audits for several companies and handling a number of other consulting jobs for those companies must make an immediate choice. The act mandates that accounting companies cannot be hired in other capacities by the company they audit. They also must be familiar with the Public Company Accounting Oversight Board that has the authority to inspect accounting firms and mete out discipline, if necessary, over their actions as auditors of public companies.
The changes in the Sarbanes-Oxley Act are perhaps even greater – and most costly – for publicly-traded companies. The companies are required to set up internal controls to ensure that financial reporting and other company governance actions do not cross any legal lines. The companies are then required to pay for a yearly independent audit to examine whether those internal controls remain in place. There are new requirements detailing how over the end-of-fiscal-year financial reporting should be conducted, as well as regulations on how to safeguard company assets and how to test and evaluate company management each year.
The new requirements place a burden on publicly-traded companies, particularly smaller ones, and have led to some smaller companies deciding to leave the public realm to save the costs brought on by following the Sarbanes-Oxley Act and its provisions. A number of companies have gone private to avoid the provisions of Sarbanes or have gone dark, which entails removing all shares from any public trading and deregistering the company’s securities. Other small companies burdened by the additional costs of Sarbanes have sought mergers with larger companies.