The Effect of Sarbanes-Oxley on Small Business: More Than You Might Think
Most small businesses think of the Sarbanes-Oxley Act (SOX) in terms of large corporations, if they think of it at all.
After all, the law was passed back in 2002 to reform the business and accounting practices of publicly held companies and protect investors from fraud.
For the majority of small, privately owned companies with no intention of ever going public, the principles of Sarbanes-Oxley simply aren’t a concern.
However, as with so many other laws, the ripple effect of SOX is significantly further reaching than it appears at first glance.
And in fact, the law does have a few key provisions that do affect privately held small businesses, even if they don’t realize it.
The Whistleblower Provision and More
Of all of the regulations put forth in SOX, the one that affects all businesses, regardless of size or ownership, is the whistleblower provision. Essentially, Sarbanes-Oxley made it illegal for anyone to retaliate against a whistleblower, defined as someone who provides accurate and truthful information to law enforcement about a potential or obvious federal offense. This provision applies across the board, clearing the way for individuals to report their employers’ wrongdoing and protect innocent people from financial or other harm.
However, while other provisions of the act may not have a direct impact on small businesses, the changes in the business climate that it brought about do. Often, smaller companies look to their larger counterparts as an example of best practices.
Small businesses model their policies and procedures after those of major companies, and as those larger corporations work toward Sarbanes-Oxley compliance, so do the smaller businesses. For example, SOX requires the CEO and CFO of large companies to certify their financials. As a result, many small businesses have also implemented a certification process for their financials to fall in line with best practice.
Other areas in which the financial reform legislation has influenced small business includes the development of a code of ethics. Under the terms of the act, companies that have an established code of ethics face lighter sentencing provisions in the event that wrongdoing is discovered. While smaller companies may not be held to the same standards, many have also adopted a code of ethics as a means to protect the company in the event that wrongdoing is discovered.
The Downside of Sarbanes-Oxley
While there have been some positive changes as a result of the landmark act, there’s also been some unintended consequences for all businesses. The most notable criticism of the act has been the cost of compliance.
According to a survey from 2015, many companies find full compliance with the act to be “elusive” and expensive. More than half of large companies spent more than $1 million each on compliance in the last fiscal year, and the cost for smaller companies tops out at about $500,000, and those were just internal auditing costs.
These costs have had a direct impact on smaller companies considering going public. Many companies that had planned to go public changed their strategies and opted to remain private; in fact, some publicly held companies have even often to go back to being private to reduce the costs associated with compliance.
For those companies that do opt to go through with their plans to go public, the process is proving costlier and more cumbersome than ever before. For instance, putting together a board of directors is a significant undertaking, one that delays the process for a smaller company. In many cases, small companies opt to sell rather than go through the process of going public and attempting compliance with the SOX regulations.
Sarbanes-Oxley has undoubtedly affected the world of business, and many would argue in a positive way. In the wake of the accounting scandals of the early 2000s, these new requirements offered greater investor protections than had ever been seen before.
However, it’s also had a profound effect on the way that all businesses operate. And while it may not affect the typical small business on a daily basis, it undoubtedly has an impact on the overall business climate, operational standards, and the potential growth of any business.