Nonpublic Companies and the Post Sarbanes-oxley Era
| Jurisdiction | United States,Federal |
| Citation | Vol. 49 No. 1 Pg. 0018 |
| Pages | 0018 |
| Publication year | 2008 |
2008 Spring, Pg. 18. Nonpublic Companies and the Post Sarbanes-Oxley Era
Volume 49, No. 1
Spring 2008
Background
The American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act ("the Act"), was signed into law on July 30, 2002. Passed in response to the corporate and accounting scandals of Enron, Arthur Anderson and others of 2001 and 2002, the law's purpose is to rebuild public trust in America's corporate sector. The law requires that publicly traded companies adhere to significant new governance standards that broaden board members' roles in overseeing financial transactions and auditing procedures. This Act created and defined the role of the Public Company Accounting Oversight Board (PCAOB). The PCAOB is a private-sector, nonprofit corporation created by the Act, to oversee the auditors of public companies in order to protect the interest of investors and further the public interest in the preparation of informative, fair and independent audit reports.
Application to Nonpublic Companies
While most provisions of Sarbanes-Oxley do not apply to private companies, as new corporate governance and accounting rules come into effect for public companies, the impact on private companies is becoming noticeable. The Act sets a higher standard that all businesses will be measured against, whether or not they are legally required to comply with such standards. Certain new and enhanced criminal penalties do apply to private businesses that have dealings with the federal government. In addition, private companies planning to go public may have to follow the Act's provisions relating to auditor independence in order to have their financial statements accepted when they file for an initial public offering. The following are two provisions of the Act that apply to all organizations, not just publicly traded corporations.
Whistleblower Protection Policy
Sarbanes-Oxley requires all organizations, including nonprofits, to establish a means to collect, retain, and resolve claims regarding accounting, internal accounting controls and auditing matters. The system must allow such concerns to be submitted anonymously. Sarbanes-Oxley provides significant protections to whistleblowers, and severe penalties to those who retaliate against them.
Why is this important? The 2006 Report to the Nation by the Association of Certified Fraud Examiners reported that U.S. organizations lose 5 percent of their annual revenues to fraud which would be the equivalent of $652 billion when applied to the estimated Gross Domestic Product for 2006. The report also stated that "occupational frauds are more likely to be detected by a tip than by other means such as internal audits, external audits or internal controls." The report also concludes from the cases reviewed that "organizations that had anonymous fraud hotlines suffered a median loss of $100,000, whereas organizations without hotlines had a median loss of $200,000."
Document Retention Policy
Destruction of Documents: In light of the shredding of documents that occurred at Enron, the purpose of this provision is to expand requirements related to destruction of documents, which have been narrowly interpreted in the past, and to close certain loopholes in the law. For example, "certain current provisions make it a crime to persuade another person to destroy documents, but not a crime to actually destroy the same documents yourself." Senate Report 107-146 for S. 2010. Therefore, the Act contains new penalties for the alteration or destruction of documents. The provision creates new criminal penalties for a wide array...
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