Impact of the Sarbanes-Oxley Act (SOX) Assume that you are a CEO of a medium-sized company that needs a significant influx of cash for several expansion projects. As the CEO, you must determine whether your company should remain private or go public. Some companies postpone going public due to the unpredictability of economic and market conditions.
Consider the ramifications of both alternatives. Construct an argument for and against going public. Before providing your response, review the guidelines and regulations associated with going public by visiting Small Business and the SEC located at http://www.sec.gov/info/smallbus/qasbsec.htm.
Use the Internet to research SOX law, located at http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm. Write a four to five (4-5) page paper in which you: Outline three (3) ways in which your medium-sized private company may benefit from going public, providing a rationale for each.
Create an argument that the same goals may be achieved if the company remains a privately held entity. Provide support for your argument. When a company decides to go public, it can typically obtain capital by issuing stocks or bonds. Suggest four (4) leading financial ratios that will be evaluated and how each will impact the company’s decision to obtain expansion funds.
Determine whether the results of the ratios would alter the decision to go public. By researching the results of SOX compliance surveys, assess the financial impact that SOX might have on your company if it decides to go public. Considering the impact of SOX compliance, take a position as to whether your company can overcome the challenges posed by SOX compliance if the decision is to go public.
Based on your research, support your decision by identifying the potential advantages and disadvantages that SOX may have on your company.
Provide specific examples. Make a recommendation as the CEO regarding the alternative (i.e., going public or staying private) that will best support the company’s expansion goals.
Support your position. Use at least four (4) quality academic resources in this assignment.
Analyze financial reports, prepare analysis, and draw conclusions based on the financial analysis. Calculate and interpret various financial and operating ratios used in business. Use technology and information resources to research issues in accounting management. Write clearly and concisely about accounting management using proper writing mechanics.
Three Benefits from Going Public
There are many ways in which the medium-sized company can be benefitted and three of them are discussed below:
Influx of Capital – The medium-sized business will be able to sell large block of shares of the company at the time of initial public offering (IPO) when it goes public. This creates large influx of capital at a single time while the company is not required to incur debt. It can facilitate expansion projects of the company (Ghonyan, 2017).
Improved Credibility with Business Partners – The sentience that the medium-sized company has gone public leads to the creation good impression among the business partners like customers, creditors, distributors, supplier and lenders. Moreover, more information on the company will be circulated once the company goes public; and these will make the company more credible and significant while the partners will gain a sense of security while entering business relationship with the company. In addition, the company will be perceived as a more attractive business partner for joint ventures and other business relationships (Gallagher, 2019).
Increased Ability to Raise Future Funds – Going public will facilitate the medium-sized company’s future requirements of acquiring funds. The enhanced value of the company by going public will enable it to secure additional future funding through selling additional stocks or debts in favourable terms. This leads to increased access to the capital market for future funding (Ferreira, 2016).
Achieving the Same Goals by remaining Privately Held Company
It is important to assess whether the medium-sized company can achieve the above-discussed goals through remaining public. First of all, it is required to mention that the medium-sized company will not be able to raise huge amount of capital through IPO since medium-sized companies are not entitled to issue IPO. This will hamper the large influx of capital for the company for its expansion projects (Kesten, 2018). At the same time, by remaining publicly held, the medium-sized company will not be able to access the capital market for issuing shares, bonds or debts in favourable terms. In the presence of this, it will not be possible for the medium-sized company to raise further funds or capital for facilitating any future expansion projects. This is a huge difficulty for the companies remaining publicly held. Good performing medium-sized companies have reputation, but they do not get the exposure like the publicly traded companies and this restricts the circulation of business related information among the business partners like suppliers, customers and others. This creates negative impact on the development of further business relationship with the business partners which affects the company’s goals related to business expansion and others (Kesten, 2018).
Current Ratio – This ratio analyses the medium-sized company’s ability to repay the short-term business obligations with current assets; and thus, the company is required to have more current assets than current liabilities. The company should not go for business expansion in case it does not have adequate current assets. This will affect its ability to repay the long-term loans taken for expansion (Khadafi, Heikal & Ummah, 2014).
Inventory Turnover Ratio – This ratio assesses the number of times the medium-sized company can sell or replace its inventory in a year. Inadequate inventory turnover ratio is a barrier for business expansion because there is no point of business expansion when the existing business is not able to generate adequate sales for clearing the inventories (Grubor, Milicevic & Mijic, 2013).
Net Profit Margin – This ratio analyses the earnings of the medium-sized company in relation to sales. Business expansion requires high net profit margin that indicates towards the profit-making ability of the company. Poor net profit margin ratio restricts the business expansion strategy of the company (Pratama & Erawati, 2014).
Return on Assets – This ratio assesses the ability of the medium-sized company to generate income from using its assets. The assets of the company need to perform well in order to expand its business operations (Omitogun, Olanrewaju & Alalade, 2016).
Sarbanes-Oxley Act (SOX)
The financial impact of SOX is the increase in both direct and indirect cost of the public companies. It is required for the public companies to incur high quantifiable and non-quantifiable costs for the adoption of SOX; such as cost of insurance premium, increased costs in director’s fees due to the greater time commitments and responsibilities, additional expenses associated with internal control software and additional fees related to consulting fees (Dah, Frye & Hurst, 2014). These expenses reduced the profitability of these companies.
Public companies are needed to consider aspects under SOX compliance; they are 9-step checklist, SOX audit requirements and SOX certification (CSOE). These compliances create challenge for the publicly traded companies since they have to comply with huge number of rules and regulations associated with internal control, financial reporting and corporate governance. However, the medium-sized company can go public by overcome these challenges through strict compliance with the norms of SOX (sarbanes-oxley-101.com, 2019).
However, the medium-sized company needs to consider both the advantages and disadvantages of SOX. The two advantages are the disclosure of crucial information of the company to the shareholders and increased emphasis on the necessity of internal control. At the same time, the disadvantages of SOX include the increase in cost due to its adoption and the increase in audit fees because it makes auditors more accountable to the financial reporting of the companies. However, the advantages of SOX outweigh the disadvantages because SOX provides greater financial reporting transparency by strengthening the internal control and enhancing external auditor’s accountabilities (Dah, Frye & Hurst, 2014).
On the basis of the above discussion, it is recommended to the CEO of the medium-sized company to go public because this will provide the company with the necessary access to the required funds as well as credibility to business expansion strategy. In addition, the compliance of the public company with SOX rules and regulations will strengthen financial reporting, internal control and corporate governance of the company. All these greater advantages outweigh the challenges of SOX compliance. Therefore, the decision to go public will be appropriate for the company.
Dah, M. A., Frye, M. B., & Hurst, M. (2014). Board changes and CEO turnover: The unanticipated effects of the Sarbanes–Oxley Act. Journal of Banking & Finance, 41, 97-108.
Ferreira, J. V. (2016). The Performance of Family Firms After Going Public. Available at SSRN 2906411.
Gallagher, P. J. (2019). Going Public Secretly. Columbia Business Law Review, 2019(1), 306-366.
Ghonyan, L. (2017). Advantages and Disadvantages of Going Public and Becoming a Listed Company. Available at SSRN 2995271.
Grubor, A., Milicevic, N., & Mijic, K. (2013). Empirical Analysis of Inventory Turnover Ratio in FMCG Retail Sector-Evidence from the Republic of Serbia. Engineering Economics, 24(5), 401-407.
Kesten, J. (2018). The Law and Economics of the Going-Public Decision. In The Oxford Handbook of IPOs (p. 27). Oxford University Press.
Khadafi, M., Heikal, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12).
Omitogun, O., Olanrewaju, D., & Alalade, Y. S. (2016). Loans Default and Return on Assets (Roa) In the Nigerian Banking System. International Journal of Economics and Financial Research, 2(4), 65-73.
Pratama, A., & Erawati, T. (2014). Pengaruh current ratio, debt to equity ratio, return on equity, net profit margin dan earning per share terhadap harga saham (study kasus pada Perusahaan Manufaktur yang terdaftar di Bursa Efek Indonesia periode 2008-2011). Jurnal akuntansi, 2(1), 1-10.
Sarbanes-Oxley Act – Summary of Key Provisions. (2019). Sarbanes-oxley-101.com. Retrieved 15 October 2019, from https://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
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