Sarbanes-Oxley: It’s Not Just for Public Companies

by Irvin Brum and Seth I. Rubin
Do privately held companies and not-for-profit corporations need to start worrying about the recently adopted Sarbanes-Oxley Act of 2002? If the political climate, current investment environment and judicial history are guides, the answer is yes.

As a result of the highly publicized scandals that have rocked the corporate world recently and in an almost desperate attempt to restore investor confidence and eliminate abusive practices, the federal government adopted the Sarbanes-Oxley Act, setting in motion the most sweeping changes to the securities laws since the 1 930s. Although the focus of the Act Is on public companies, private companies and not-for-profit entities will soon feel its effects, particularly in the area of corporate governance.

It may be only a matter of time before state attorneys general begin policing not-for-profit and private companies with non-management shareholders, especially in the areas of financial transactions and not-for-profit reporting. States will likely consider requiring compliance with some of the corporate governance provisions contained in Sarbanes-Oxley, such as certification of financial statements, review of senior executive compensation, an enhanced role for the board of directors and board committees, and other measures allowing the board to more carefully oversee and control operations

Even if no new legislation is adopted by the states, the norms created in the public company arena will soon become standards for non-public companies, as updated notions of corporate fairness and disclosure take hold. Additionally, the courts will likely apply various requirements of Sarbanes-Oxley to private entities, similar to the way in which Rule l0b-5, the anti-fraud statute, was extended to cover private entities.

Insurance companies, too, may demand that not-for-profits and certain private companies comply with key provisions of Sarbanes-Oxley. For example, if a company fails to require its CEO and CFO to certify the company’s financial statements, the insurance company could decline coverage for claims based on false or misleading financial statements. Lenders may also require similar action before providing funding.

Not-for-profit corporations and private companies (particularly those that have an eye on going public someday) should actively develop their own corporate governance procedures. Voluntary compliance with Sarbanes-Oxley can go a long way toward insulating companies from claims resulting from bad financial news. Companies should adopt codes of conduct and ethics, detailing the behavior and performance expected of employees. Companies should also create audit committees to retain and supervise outside auditors and review all internal policies.

All companies today—whether public or private, for-profit or not-for-profit—face intense scrutiny of their internal practices. Executives and directors of private and not-for-profit companies who fail to respond to the current environment risk learning their corporate governance lessons the hard way. And that’s a bad thing.

Irvin Brum is a partner at Ruskin Moscou Faltischek, P.C., where he chairs the Corporate & Securities Department and is a member of the Corporate Governance Practice group. He can be reached at 516-663-6610 or

Seth Rubin is a senior associate in the Corporate & Securities Department and a member of the Corporate Governance Practice Group. He can be reached at 516-663- 6691 or

The Corporate Governance Practice Group of Ruskin Moscou Faltischek, P.C. includes highly experienced general corporate, securities, white-collar crime, employment, litigation and alternative dispute resolution attorneys who are fully conversant with this complex landscape and will assist in your timely compliance with these new and difficult legal requirements.

You may contact any of us at 516-663-6600 or via e-mail:

Alexander G. Bateman, Jr.
Irvin Brum
Michael L Faltischek
Douglas J. Good

Gregory J. Naclerio
Seth I. Rubin

Stuart M. Sieger

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