June 28, 2005--The PricewaterhouseCoopers' Trendsetter Barometer released last week reported that 17% of the fastest growing private companies in the U.S. have felt the impact of the Sarbanes-Oxley Act of 2002 in the last 12 to 24 months, with another 13% expecting to do so in the near future.
Those companies that have been affected have adopted selected aspects of the Act, with 64% improving control documentation and testing, 53% updating governance procedures, and 50% strengthening their code of conduct. A smaller proportion adopted other aspects, such as initiating public company "best practices" or creating independent audit committees.
"Many private companies have something to gain by embracing the spirit, if not the letter of the Act," said Jay Mattie, a partner at PWC and national assurance leader for its Private Company Services practice. Yet, of the combined 30% of companies who have adopted or expect to adopt Sarbanes-Oxley initiatives, 43% say the costs will exceed the benefits, compared to 26% who believe benefits will exceed the costs, and 22% who believe it will be a breakeven situation.
Thomas Hartman, partner at Foley & Lardner, a multidisciplinary law firm, and vice-chair of its Private Equity and Venture Capital Team, believes that the Act generates company best practices and will continue to do so, but points out that it is not contradictory for a company to find both that the act is useful and that its costs outweigh the benefits.
Private companies may be able "pick and choose" which aspects of the Sarbanes-Oxley Act to comply with and thus "at the end of the day they will be happy with what they pick," Hartman said, but sometimes management is pressured to comply with costly procedures in the face of pressure from independent directors, or in anticipation of going public.
For fast-growing companies seeking to tap public capital, Hartman argues that the increased cost of Sarbanes-Oxley regulations can actually delay the IPO, by increasing the potential price-earnings ratio and thereby decreasing the potential stock price.
The survey found that about 60% of the companies that adopted Sarbanes-Oxley initiatives did so because it was considered a "best business practice," and 59% did so to head off future problems with compliance. In contrast, 19% adopted such initiatives to solve current problems, 26% in anticipation of a future sale, and 17% because they considered going public.
Chief executive officers of 341 privately-held companies identified in the media as the fastest growing businesses in the nation and with revenue of approximately $5 million to $150 million were interviewed for the PWC survey.