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Sarbox has driven up audit costs for startups as well. A decade ago, all kinds of small practitioners would be willing to do routine audits for $10K or less for
by grellas 17y ago
Sarbox has driven up audit costs for startups as well. A decade ago, all kinds of small practitioners would be willing to do routine audits for $10K or less for early-stage companies. Now that cost easily runs into the high five figures, if not more.
Of course, startups usually do not do formal audits until they bring on investors who will insist upon them, i.e., typically VCs. Thus, this is just one more reason for a startup to try to bypass such funding sources and pursue less restrictive sources if possible (why add yet another $100K to the annual burn rate when you want above all to preserve cash and use it wisely?).
Combine this (and other factors) with the crimp that Sarbox has put on companies going public, and you have an environment where the value of VC funding (which typically is key to launching a startup on the road to going public) has depreciated.
A founder might look at this and think that this has little or no impact on his bootstrap or angel-funded startup that he plans to sell to Big Company X. But the effect on valuations is real. As with any negotiation, if you have fewer levers to use in the negotiating process, you will be at a relative disadvantage. If your company has no alternative but to be acquired in order to achieve a liquidity event, the buyers on the other side (i.e., potential acquirers) will factor this into their pricing to your detriment.
These sorts of changes may have hurt VCs but they have hurt entrepreneurs as well in limiting or eliminating funding options that were readily available to such parties in the pre-Sarbox era, leaving all parties poorer in the process.
These are real costs (as are the ones that fall on public companies directly, as noted in this piece), while the benefits of Sarbox to date have been dubious at best. Of course, the accountants, lawyers, regulators, etc. who benefit from the regulatory complexity through increased business and/or power will beg to differ, but this doesn't mean they are right.
On a final note, the Supreme Court case noted in this piece does raise the prospect that Sarbox will be declared unconstitutional and, should that happen, there may indeed be some real prospects for reform. The justices seemed skeptical about the constitutional argument during oral argument, however, and this may therefore go nowhere as a potential solution to the problems raised.
- joubert 17y agoWhy would Sarbox drive up audit costs for non-public companies (i.e. startups and small business owners)? Financial statement audits for private companies are exempt from SOX. PS: I used to be an external auditor at PwC.
- tptacek 17y agoSupply and demand, and business processes tuned for bigco audits? A similar thing happened with security audits. Huge demand from large companies with extreme requirements has definitely raised the cost of assessments for small companies.
- joubert 17y agoSo maybe this just opens up the market for more small CPA firms?
- tptacek 17y agoIf VC's and F-500 acquirers aren't going to accept results from small CPA firms, then increasing the supply of small CPA firms will only indirectly help startups.
- joubert 17y agoI wonder which CPA firms VC's typically use today? I'd be curious to see to what extent these non-small CPA firms latch SOX reporting requirements onto their audits or other engagements for VC's.
- grellas 17y agoI can't speak for the auditors, since I am a business attorney, but I do know what I have seen in helping to find this type of service for clients. For example, just within the past year, I was asked to help find a good auditing firm by one closely held Silicon Valley startup with fewer than 50 employees and a few million in annual revenues - the cheapest estimate came in at the $60K-$80K range (and this was from regional firms, not Big Four). Don't know exactly why this is, except that the auditors themselves kept referring to Sarbox-type requirements that had become standard practice for all audits, public and private. Also, I think many of the smaller players have been chased out of the auditing field by the new complexities injected by Sarbox and relating recent developments in the field. Whatever the cause, at least in and around Silicon Valley, it is no longer easy to find a small firm that will do a quickie audit for a modest sum. [Edit: just saw reply by tptacek - he says it much better than I do.]
- Perceval 17y agoYou wrote: Sarbox has driven up audit costs for startups as well. That's exactly what legislators and regulators in DC never seem to understand. Every politician repeats bromides about the small businesses and how they're the engine of growth in this country. And then they make it impossible to be a small business by raising barriers to entry through fee after fee and regulation after regulation. Big companies don't care, because they would rather pay the government than face competition. From the article: Larger firms lobbied for passage of the act, figuring they could absorb the costs that would hobble smaller competitors - which is just what happened. This is what happens with every major piece of economic regulation going back to the New Deal. Well-intentioned legislators regulators aim to constrain big business, but end up choking small business.
- grellas 17y agoSecurities laws generally would have choked small-business capital formation when first enacted but for the fact that broad categories of "exemptions" were recognized that essentially allowed private placements to continue without being burdened by onerous disclosure and registration requirements. Attempts are afoot to get a comparable carve-out from Sarbanes-Oxley's most burdensome requirements for small-cap public companies but these have stalled to date as the regulatory impulse continues unabated in today's Washington.