Foley & Lardner LLP's third annual national study, The Impact of Sarbanes-Oxley on Private & Nonprofit Companies, reveals that private organizations are continuing to adopt aspects of the Sarbanes-Oxley Act as a set of best practices, despite the fact that Congress never intended the Act to apply to nonpublic companies.
The study also shows that private organizations are consistently self-imposing Sarbanes-Oxley standards and that nonprofit organizations have been more aggressive in their adoption of corporate governance reforms than their private for-profit counterparts.
"For the past three years, executives of private organizations have told us that the standards outlined by Sarbanes-Oxley are being adopted as best practices for a variety of reasons," explained Paul D. Broude, study director and Foley partner. "Some organizations are feeling pressure from auditors or board members to adopt these standards, while others are doing so in anticipation of an upcoming IPO or sale.
"Regardless of their reasoning, one thing is clear: the time-consuming and often costly provisions outlined by Sarbanes-Oxley are having an impact that reaches far beyond public companies and into the private and nonprofit sectors."
The study reveals substantial consistency in year-over-year results, indicating that private organizations have reached a "steady state" and have already implemented the aspects of corporate governance reform they intend to adopt.
Among the findings:
- 86 percent of survey respondents felt that SOX and other corporate governance reform requirements have impacted their organizations, consistent with the 87 percent who responded in this manner in 2005.
- Private organizations continue to self-impose corporate governance standards, but are also strongly influenced by their boards and outside auditors.
- Private companies tend to adopt the least expensive reforms, as opposed to more costly initiatives such as Section 404 audits of internal financial controls. · 84 percent of private organizations responding to the survey felt that corporate governance reform is "about right," an increase in comparison to 2005, when 78 percent responded in this manner.
- Private organizations responding to our survey estimated an average annual price tag of $105,000 for corporate governance procedures, representing an estimated increase of approximately 26 percent of their estimated costs prior to the enactment of the Sarbanes-Oxley Act.
Consistent with the study's findings in 2005, nonprofit organizations continue to adopt more aspects of the Sarbanes-Oxley Act than for-profit companies. Overall, nonprofits were more likely to have implemented or planned to implement whistle-blower procedures, board approval of non-audit services by auditors and restrictions on executive compensation, among other areas of reform.
"In our view, this is a logical development because nonprofit organizations have a greater number of stakeholders to whom they are accountable, compared to for-profit organizations which are typically more closely held," explained Broude.
Broude went on to explain that one reason for increased adoption among nonprofit organizations could stem from the fact that a large number of directors who sit on nonprofit boards also serve on the boards of public companies. These directors are therefore more familiar with the Sarbanes-Oxley Act and more likely to recommend adoption of similar governance policies by nonprofits.
In January 2006, Foley & Lardner worked with research firm KRC Research to facilitate and analyze the results of a national study designed to measure the financial impact of corporate governance reform among private companies across the country.
The study provides a window into the boardrooms of private organizations, illustrating how corporate governance reform is affecting for-profit and nonprofit organizations alike. Fifty-six private company surveys were completed by top executives within these organizations, reflecting the input of 20 nonprofit organizations and 36 for-profit private companies.
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