Sarbanes-Oxley for Entrepreneurs

The Sarbanes-Oxley Act: Help for Small Businesses

Written by Bennet Grill for Gaebler Ventures

The Sarbanes-Oxley Act was passed in 2002 after a number of corporate scandals including Tyco International, WorldCom, and most notably, Enron. This article focuses on how Sarbanes-Oxley affects small businesses.

While Sarbanes-Oxley legislation does not apply to private firms, it is important information for entrepreneurs to know because it dictates how all public companies are required to disclose financial information and highlights some of the faulty accounting and dishonest business practices which contributed to the recession of the early 2000s.

Since the passing of the Sarbanes-Oxley Act of 2002, many questions have been raised regarding the necessity of this new legislation for smaller businesses.

The corporate accounting scandals of the early 2000s, which collectively served as the impetus for the passing of Sarbanes-Oxley, all involved gigantic multi-billion dollar companies. The fraud and misstatements were deliberate and committed on a massive scale. Many have questioned whether such strict regulations are appropriate for businesses that operate on such a smaller scale.

One of the largest complaints regarding the Sarbanes-Oxley Act is that the cost of compliance is simply too expensive for many small public companies to handle.

The SEC estimated that it would cost at least $100,000 for companies to fully comply with the regulatory standards of the Sarbanes-Oxley Act, and many companies have estimated the cost in the millions. For any business, this cost represents an extremely high number as it directly takes away from the bottom line, or the business' profit.

Some even consider the Sarbanes-Oxley Act to be unconstitutional -- in 2006 a D.C. based lobbying group called the Free Enterprise Fund sued the Public Company Accounting Oversight Board for setting unrealistically demanding auditing requirements.

On June 20th, 2008, legislation was passed to give small businesses a one year extension to reach full compliance with the Sarbanes-Oxley Act. A number of resources from the SEC are available for small businesses to help companies by the Sarbanes-Oxley Act:

• Implementing Rules
• Interpretive Guidance
• Rules Defining Material Weakness and Regarding Voluntary Use of the Interpretive Guidance
• Rule Defining Significant Deficiency
• SEC Staff's FAQs

Also available are several articles by a private organization called The Committee of Sponsoring Organizations of the Treadway Commission. These articles are available at: http://www.coso.org/publications.htm.

Bennet Grill is a writer who has a passion for business and finance. He is currently an Economics major at Duke University in North Carolina.

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