The cost and complexity of complying with the Sarbanes-Oxley Act may keep more U.S. small companies private. Entrepreneurs who might have gone public in past years are staying away from IPOs.
As the deadline for complying with the financial reporting segments of Sarbanes-Oxley draws near, small and medium-sized public companies are finding themselves disproportionately impacted compared to their larger counterparts.
A massive effort is required by a company in order to comply. Many small and medium-sized companies just don’t have the resources.
Small tech companies especially are challenged by compliance. They must divert cash from critical research and development and instead put it into compliance reporting.
Under Sarbanes-Oxley, publicly held companies must document their internal financial controls. That requires setting up sophisticated internal compliance systems.
It is estimated that the initial cost of setting up compliance systems runs several hundred thousand dollars (US). After that it will cost an extra $50,000 in legal and accounting fees annually. Also, the costs of setting up independent Boards (required by Sarbanes-Oxley) and finding and insuring Directors has risen significantly. These costs could easily reduce a small company’s profits by 15%, some say.
Because of Sarbanes-Oxley it is now a lot more expensive to be a public company. Many small businesses simply won’t be able to afford it. That means they will have to find alternate sources of capital for business expansion — other than the stock market.