Defining moment for good governance: research from both Financial Executives Research Foundation and Robert Half international find that Sarbanes-Oxley compliance is fast becoming a standard measurement for governance best practices for public companies and private companies, as well.

• Author: de Mesa Graziano, Cheryl
• Position: Best practicesA

To say that keeping up with ongoing regulation has been challenging is an understatement. Laboring to comply with Sarbanes-Oxley, public companies have committed resources and expanded finance staffs, and are clearly further along with their efforts than private companies. Still, while private companies are not required to adhere to the provisions, a majority are finding it beneficial to take action.

In a Robert Half International survey of 1,400 CFOs from privately held businesses, The Impact of Sarbanes-Oxley on Private Business, 58 percent said that their companies are responding to accounting regulations by implementing new practices. Among those who cited a specific action, 44 percent are reviewing or changing current accounting procedures, and 36 percent are creating or expanding the internal audit function.

In interviews with FEI members and other professionals, Financial Executives Research Foundation (FERF) examined how Sarbanes-Oxley could be implemented in the private sector, and learned that there are advantages for early voluntary compliance.

Why Sarbanes-Oxley for Private Companies?

Some of the Sarbanes-Oxley provisions are directly applicable to both public and private companies. These include: document retention, increased penalties for mail and wire fraud and liability for retaliation against whistleblowers, and increased criminal penalties for violation of ERISA says Craig Adoor, a partner at Blackwell Sanders Peper and Martin LLP. Violations of those sections call for fines and/or imprisonment.

Furthermore, debts incurred in violation of federal or state securities law or common law fraud in connection with the purchase or sale of a security are non-dischargeable in bankruptcy. There are benefits to be gained under the Federal Sentencing Guidelines, Adoor says, and while complete immunity is not provided if something goes wrong, the courts will take compliance into consideration.

Boards of directors of companies with only very few shareholders should be cognizant of good corporate governance principles. The boards of these types of companies are often comprised of these shareholders inducing the board to ignore principles of governance and fiduciary duties. However, as Adoor points out, these directors will be held to owe a fiduciary duty to creditors if the company suffers financial difficulty and enters into what he says the courts refer to as the "zone of insolvency."

Apart from statutory requirements, companies will benefit from complying with some sections of Sarbanes-Oxley, particularly from a governance perspective, as they need to stay competitive in the marketplace. For example, companies that rely on lenders or venture capital...