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Private companies feel effects of Sarbanes-Oxley

Private companies feel effects of Sarbanes-Oxley

When the US Congress passed the Sarbanes-Oxley Act in July 2002, the mandates to put more stringent controls on corporate accounting practices were primarily aimed at public companies. But executives, consultants and lawyers are starting to realise that there are both direct and indirect implications for privately-held businesses as well.

For instance, public and private companies alike must adhere to the so-called whistle-blower provision of the financial reporting law, an analyst at AMR Research, John Hagerty, said.

That section specifies that employees must be given the means to anonymously notify federal regulators or corporate audit committees of any potential wrongdoing within their companies.

In addition, privately held companies would have to take many of the other steps mandated by Sarbanes-Oxley if they decided to go public or agreed to be acquired by a public company, according to Hagerty and other analysts.

Other considerations

The whistle-blower provision probably won't pose major IT implications for most companies, beyond the need to provide confidential methods of communication.

But the stock-offering and merger considerations are another story. Just like their peers at public companies, IT managers who work for privately held businesses could be forced to make substantial changes to their system infrastructures and data-reporting capabilities.

"If you're thinking of going public, or it's even in the realm of possibility for you, this is sure as heck something that you'd better plan for," an analyst at Meta Group, Robert Handler, said, in referring to Sarbanes-Oxley compliance.

Corporate records manager at J.R. Simplot, Fred Pauls, said the privately held agribusiness has already taken steps to address the provisions of Sarbanes-Oxley because it had government contracts that required compliance with the law.

J.R. Simplot, which has annual revenue of more than $US3 billion, last year began indexing its purchase-order system so the application meets Sarbanes-Oxley's record-keeping requirements. The company is using an automated records management system from Optika that it has used for other purposes since the early 1990s.

"We do comply in most cases with Sarbanes-Oxley, due to previous [internal financial control] policies, and this software system is a key part of that," Pauls said.

In the future, he added, J.R. Simplot would most take advantage of a link between Optika's Acorde Records Management software and J.D. Edwards & Co.'s financial applications to help ensure that its procedures comply with other parts of the law.

A partner at Testa, Hurwitz & Thibeault, Jocelyn Arel, said some public companies that she's representing in potential acquisition deals were beginning to push privately held businesses to document their internal accounting controls and processes in order to show compliance with the Sarbanes-Oxley Act.

"We're starting to see that in the due diligence process that buyers are going through," said Arel, who is co-chairman of the law firm's corporate finance and securities group.


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