Sarbanes-Oxley Has Some Publics Thinking Private

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May 20, 2004 -- The increasing cost of complying with the Sarbanes-Oxley corporate reform law has more public companies mulling going private, according to a survey published by the law firm of Foley & Lardner LLP in Chicago.

More than 20% of the 115 companies surveyed said they are considering going private as a result of new corporate governance and disclosure reforms, nearly a 50% increase over 2003 survey results. The respondents consisted mostly of small and mid-sized companies with annual revenue under $1 billion.

The current temptation to go private comes on the heels of a 130% increase in the cost of being public since the passage of the Sarbanes-Oxley law in 2002. Of those surveyed, the average cost was more than $2.86 million in 2003, up from $1.24 million prior to the law's enactment. Soaring insurance premiums, audit and legal expenses made up the brunt of the increase.

A separate study by Foley & Lardner showed that private companies have a starkly contrasting view of the reforms. More than 80% of the 30 private companies responding felt that the demands of corporate governance reform are "about right," compared to 67% of the public companies that felt the reforms are "too strict."

Of the private companies, 60% of the respondents said they had either self-imposed some corporate governance reforms or done so at the urging of board members or auditors. The most commonly adopted measures were certification of financial statements by the CEO and CFO, establishment of whistle-blower procedures, outside audit of internal financial controls, board approval of non-audit services by auditors, and the adoption of corporate governance policy guidelines.

Matt Quinn contributes to the Wall Street Journal's corporate finance blog. He has also written extensively about banking and corporate finance for publications including Inc., American Banker, and Financial Week. He lives in Brooklyn, New York.