A recent study by Financial Executives International found that companies have spent 39 percent more than originally anticipated for Sarbanes-Oxley compliance, largely due to rising costs for consulting, software and external auditors.
The burden of reporting requirements convinced the management of Robroy Industries Inc. that taking the manufacturer private after more than 40 years as a public company was a prudent move, says Peter McIlroy, chairman and CEO. Robroy Industries, with $78 million in sales in 2004, made the switch in 2001, before Sarbanes-Oxley took effect. McIlroy says the reporting requirements even before Sarbanes-Oxley were costly to maintain for the small-cap, lightly traded 330-employee company.
The number of public companies going private has declined since 2003, when nearly 100 made the switch, according to accounting and consulting firm Grant Thornton LLP. The number fell to fewer than 50 last year, mainly because of an upturn in the equity markets, Grant Thornton reports.
The number of accounting firms with the resources required to audit large corporations and ensure Sarbanes-Oxley compliance is limited to the very largest, while the demand for audit services has ballooned in response to the act. The result has been fatter auditing fees, as well as smaller clients forced to look elsewhere for services.
Bill Troup, managing partner of Sisterson & Co., a Downtown accounting firm, says it's a rare week that his firm doesn't get a request for proposal from a potential client.
But for companies seeking to raise large amounts of capital in one swing, public offerings remain one of the best ways to do it.
For Portec Rail Products Inc., going public in 2004 was the best way to raise the funds it needed to make acquisitions required to grow the company. While the costs associated with Sarbanes-Oxley are considerably more than what was required to operate privately, being prepared before its IPO has made compliance easier.
"We kind of ran our private company almost as if it were a public company, so when it came time to go public, there was a lot to do, but there was an awful lot done," says John Cooper, president and CEO. "We did benefit from the fact that we carried into this company some reasonably good financial records, procedures and habits."
Ironically, Sarbanes-Oxley is providing private companies and nonprofits with opportunities to improve their internal controls and management accountability. Troup says nonprofits have been particularly active in adopting some Sarbanes-Oxley provisions, particularly those dealing with board responsibility.
"I think virtually all of our nonprofit clients have addressed some parts of Sarbanes-Oxley, and I see a fair number of our private company clients that are selectively looking at it," says Troup, who also serves on the board of UPMC.
Troup says the UPMC board is bringing some of its procedures and policies into line with Sarbanes-Oxley, a process that will take at least a year. Along the way, says Troup, the board discovered that it might reap an unexpected benefit from the changes -- an improved rating on its debt.
"Early on, we got the impression that it would be viewed very favorably by the credit community," says Troup.
Troup also points out that any organization can implement some Sarbanes-Oxley requirements, including ethics policies, conflict of interest policies or audit committees at a reasonable cost and with the result of an improved accountability and oversight.
Says Troup: "There's no downside to understanding the benefits that can come from selectively adopting parts of Sarbanes-Oxley."