SOX-Appeal for Non-Public Companies:
Why Voluntary Compliance May Be a Smart Move
Steven P. Blonder has argued successfully before the Court of Appeals for the Seventh Circuit, and possesses a record of consistent success in motion and trial practice—both jury and non-jury—in state and federal courts. His litigation practice is primarily centered in the areas of real estate and business issues, financial services, corporate governance control and securities. Steve can be reached at 312.521.2402 or sblonder@muchshelist.com.
By Steven P. Blonder
Since it was signed into law in July 2002, the Sarbanes-Oxley Act (SOX) has been the subject of countless books, articles and seminars, many of which have been critical of the added costs and other burdens associated with compliance. Two primary goals of SOX were to restore transparency to financial recordkeeping by public companies and to impose greater accountability across the board. Although small public companies have arguably been hit the hardest, organizations of every size have questioned whether the intended benefits to the financial markets and the investing public outweigh the significant time and financial resources required to comply. Further, many have wondered if the protections offered by SOX are really broad enough, as the requirements only apply to public companies.
What, then, does Sarbanes-Oxley mean for privately held entities and why should senior management even care? For better or for worse, SOX and the best practices associated with it have extended their reach to non-public companies, many of which are beginning to realize a number of potential benefits to voluntary compliance. For example, the financial transparency and management accountability that come with SOX compliance are often attractive to lenders and investors, which can mean lower credit costs and increased access to financing. Efforts to comply voluntarily could open the door to strategic alliances and other modes of business expansion with companies that view SOX best practices as an appropriate standard for measuring management performance within any organization. Likewise, if a non-public company wants to minimize risk and protect against claims of malfeasance and misfeasance, it may choose to implement at least some elements of SOX on a voluntary basis. And finally, if the owners of a private company are contemplating a sale or public offering at some future date, certain SOX-based best practices are a must.
Reaping the Benefits of Transparency and Management Accountability
Organizations seeking to approximate the transparency and management accountability protections inherent in Sarbanes-Oxley may do so without undertaking all of the burdens that publicly traded entities face. As a starting point, private companies should clearly define individual roles and responsibilities for senior management. After all, it is difficult to hold senior management and others accountable if their roles in the operation of the business are ambiguous.
Another important tool in the quest for transparency and accountability is a clear, comprehensive and well-communicated code of conduct designed to help employees avoid even the appearance of impropriety. A successful code of conduct should, for example, require senior management to disclose financial interests that might point to a conflict of interest. Disclosure is also critical when it comes to corporate gifts and reimbursements for entertainment and other expenses. A company can further strengthen its code of conduct by incorporating a provision that protects whistleblowers who identify deviations from the mandates of the code and other company policies.
An effective document retention policy can also be extremely valuable, as the ability to document transactions, as well as the decisions that led to those transactions, is an essential component of the transparency sought by SOX. Objective parties (including auditors, potential suitors and other financing sources) must be able to reconstruct and evaluate a company's operations by reference to its documents, making these materials an indispensable tool for preventing fraud and financial irregularities. Document retention and management may sound like a simple concept, but the proliferation of e-mail and electronic document exchange has created a host of new challenges, including the substantial expense and burden associated with document storage. However, a good document retention program will ensure that a company maintains its records in a uniform and consistent manner for as long as it needs them (but not longer).
Although full compliance by a private company is likely a nonstarter, virtually any organization can find ways to embrace the core principles of transparency and management accountability that SOX mandates. In the end, a well-crafted program designed to voluntarily implement certain elements of Sarbanes-Oxley will likely bring about significant financial and risk management gains.
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