Why should private companies implement Sarbanes-Oxley? While public companies must comply with provisions of the Sarbanes-Oxley Act, that's not the case for private companies. Financial Executives Research Foundation (FERF) looks at whether private companies are complying anyway--voluntarily.

• Author: Reed, Ronald O.
• Position: Private companies

Publicly held companies are now reporting on the effectiveness of their internal controls over financial reporting, as required by the Sarbanes-Oxley Act of 2002. They have expended considerable time and effort to document and test their internal controls, and have paid their auditors significant sums to test these controls. Some companies have had to disclose material weaknesses that must now be remediated.

At the state level, some legislators, regulators and other elected or appointed officials are now seeking to duplicate or extend the provisions of the Act to privately held companies and their auditors. While some measures may have merit, and could be supported, other measures may be overreaching. Financial Executives Research Foundation (FERF) polled senior finance executives at private companies to assess their thinking on complying. While not all agree on the merits of compliance, featured here are interviews with executives from three private companies who are in agreement, but for different reasons.

The Software Developer

"We think that it is good business to have good processes," says Patrick Mulloy, Director of Finance for Hyland Software Inc. Hyland is a privately owned developer of enterprise content management software that allows companies to automate their business processes, such as storing and retrieving documents like images of bank checks.

Hyland, which has been profitable for 26 consecutive quarters, is owned by employees, friends and family, and has no institutional investors. Its approximately 200 employees with stock options hope to have a "liquidity event" sometime in the future. To do this, the company would have to go public, or at least be acquired, which will then require it to comply with Sarbanes-Oxley.

"With about $50 million in annual revenues, we are going through the awkward teenage years of corporate development, but we are ready to grow," concedes Mulloy. He says the company decided it was time to document its processes, and he hired an accountant to document the firm's business and financial processes, just like larger public companies have been doing for the past year or so. Although Hyland does not yet have an internal audit function to report to its audit committee, this individual will rotate into that function.

Hyland decided that this process was so important that it assigned a software developer and a product manager to create new documentation software (OnBase SOX Solution), which it now markets...