Sarbanes-Oxley Act Essay

1173 Words 5 Pages
Sarbanes-Oxley Act Impact on Businesses When determining to transition from a private company to a public company there are many factors that must be considered. There are decisions that need to be made determining whether enough capital can be raised. The economic impact of the transition in some cases will be the deciding factor in this determination. There are both advantages and disadvantages to either side and companies must factor in all characteristics when making such an integral business decision. Whether it involves obtaining capital or complying with laws and regulations; these things must be determined prior to deciding company’s outcome (Rittenberg, L. E., Johnstone, K., Gramling, A., & Knapp, M. C. 2012).
Benefits of a Public
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The current ratio calculation helps to determine in the short term how well a company is able to cover its liabilities in relation to their current assets. To assist a company in evaluating how much debt they have and whether the debt is too high would be the debt to assets ratio. This formula takes the company’s debt in the form of notes payable, long term bonds and long term debt and splits the total among total assets for the company. The net profit margin is calculated by taking net income available divided by total sales; which gives a breakdown of income compared to sales. The liabilities-to-assets ratio, a solvency ratio, takes the total liabilities and divides them by the total assets yielding the percentage by which assets are not financed by that of equity. The results of these four ratios will have a strong impact on how lenders determine how much of an investment to make into the company (Brigham, E. F., & Ehrhardt, M. C. …show more content…
Disadvantages may include the cost to begin this process and the reformation of the company in order to be in accordance with the rules and regulations established within the scope of the act. Prior to becoming a public company, private companies are not exposed to the strict rules and regulations associated with the Sarbanes-Oxley Act and may not have the appropriate amount of fraud prevention and detection in place. Therefore, creating an audit committee and extending external auditor responsibilities help to embark on a more seamless business process within the company. There are lots of costs associated with this new business venture which impact the newly required roles to ensure compliance with SOX regulations. The benefits can outweigh the costs, but because they are not quantitative this impairs the decision making within the business. Companies began to believe that they are better off without the inclusion of SOX as it appears to be heftier in the cost arena than that of the benefit (Coderre, D.

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