HONESTLY, NOW, IF YOU'RE not an executive working for a public company, why all this fuss about Sarbanes-Oxley? A day hardly goes by when we don't pick up the newspaper or turn on the television and find a piece about high-profile corporate VIPs on trial, another investigation by the Securities and Exchange Commission, or some other news about Sarbanes-Oxley. The world of corporate governance and financial reporting and disclosure changed significantly since the day the Sarbanes-Oxley Act of 2002 made bean counters of the corporate masses. Congress enacted “SOX,” as the Sarbanes-Oxley Act is affectionately known, in response to numerous high profile corporate scandals in the late 1990s, including Enron and WorldCom. Still, while the provisions of the Act are directed at how public companies run, private company executives are finding they too need to talk, frankly, about SOX.

SOX FOR US IDIOTS So what is the Sarbanes-Oxley Act? Price-WaterhouseCoopers labels the Act as “the most far-reaching piece of U.S. legislation impacting corporate governance, financial disclosure, and public accounting practices since the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934.”

Created to restore public confidence in Wall Street high finance, PWC notes that the law heaps significant new responsibility on corporate boards of directors and on management of public companies, expands the powers of the Securities and Exchange Commission, and empowers a brand new Public Company Accounting Oversight Board.

While SOX has numerous provisions, perhaps the two most notable appear in sections 404 and 302. Section 404 requires that a company's management test the effectiveness of the company's internal controls annually. Additionally, this section requires the organization's independent auditors to evaluate the company's annual assessment for effectiveness, and to comment on the company's internal financial reporting. Section 302 requires management to disclose—on a quarterly basis—any material changes to their internal controls over financial reporting. This might include entering new lines of business and any significant transactions that are of a new or different nature.

Also of note: Section 301 requires independent directors to comprise the audit committee; section 406 requires companies to disclose whether they have adopted a code of ethics for senior financial officers; and section 407 obliges disclosing whether at least one “financial expert” sits on an organization's audit committee, and if not, why.

SOX COSTS As one might imagine, the cost of implementing the systems, processes, and people necessary to comply with SOXis significant. So much so, that the onus of expense is the nearly universal complaint heard from senior managers of public companies.

Norman Bartczak, professor of accounting at Columbia University's business school and law school, argues, “The main section of SOX that needs to be rethought is Section 404, which requires the auditors to comment on a company's internal controls. This section in particular is hurting smaller companies because the expense of complying with the requirements of Section 404 is so high.”

Professor Bartczak continues, “In my judgment, 404 represents overkill for small publicly traded and non-American companies. What needs to be done is some kind of cost benefit analysis. Whether this will be done is still open to question.”

TIME OUT FOR SOX In addition to the high cost of compliance, a secondary concern of public companies is the loss of productivity and focus on a company's business implementing SOX. Professor Bartczak recalls comments made at a recent conference: “One of the CEOs during his address asked if anyone had measured the loss of productivity companies are experiencing in the last month of their [fiscal] year and the first month of their new [fiscal] year due to SOX.” In today's rapidly changing and competitive environment, companies can't afford to experience a decrease in productivity or loss of focus on their business.

Sounds like fun, doesn't it? After this introduction to SOX, owners of private home builders and their CEOs and CFOs are, most likely, just thankful to be private. But are there any benefits to SOX? In “Finding the Silver Lining: How Private Companies can Benefit from The New Governance and Disclosure Standards,” PWC asserts, “Companies are finding that giving consideration to certain provisions of the Act may result in significant benefits by enhancing their ability to manage risk, to secure competent and qualified board members, to obtain needed financing, to detect fraud and reduce exposure to litigation, and to eliminate redundant business processes while improving others.” Note that PWC is an audit firm that stands to benefit from broadening SOX applications to privately held organizations.