Sarbanes-Oxley Hampers Tech Startups?

Lora Bentley

EDN's Geoffrey James posted a thought-provoking piece yesterday. In How Sarbanes-Oxley Makes Electronic Startups Less Competitive, he points out yet another "unintended consequence" of Sarbox:

[W]hile Sarbanes-Oxley may have prevented accounting debacles like those that plagued Enron, Tyco and WorldCom, it's also had a chilling and unintended consequence: reducing (and even eliminating) the attractiveness of an IPO as a growth strategy for small electronics firms.

James explains that Sarbox has such a chilling effect on electronic startups for three primary reasons, and all of them revolve around money. First, compliance is expensive. The base spend for compliance -- "anywhere from half a million to a million dollars," according to an analyst cited in the piece -- is hardly petty cash for a startup.

 

Second, he says, startups typically "lack the existing infrastructure that might make compliance less expensive." And even if initial compliance costs go down after the first year, audit costs don't go down that much. In fact, some reports say audit costs and director pay associated with Sarbanes-Oxley have increased.

 

James also notes that Sarbox concerns sometimes cause companies to focus on unimportant aspects of their businesses at the expense of things that should be front-of-mind. As Douglas Hubbard, president of Hubbard Decision Research, told EDN:

It's not unusual to see firms struggling to achieve a complete inventory of every device connected to their network while simultaneously neglecting controls that might prevent data theft.

It just goes to show that Sarbox affects many more companies than was intended.



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