Impact of the Sarbanes-Oxley Act (SOX)
Going public is a phenomenon that describes a situation where a private organization engages in its initial public offering (IPO) by offering to sell shares of its stock to the public to help the firm raise additional capital. There are several reasons that compel many privately held companies to go public (Ghonyan, 2017). More often than not, some firms make this move because of the desire to compensate employees and attract more customers with stock options and public company stock. Secondly, companies choose to go public because of the desire to broaden their potential opportunities and raise significant capital to facilitate the growth of their stock capital (U.S. Securities and Exchange Commission, 2017). This paper reviews the benefits and shortcomings of public and privately held companies.
Ways in which Medium-Sized Private Company May Benefit from Going Public
Going public enables a company to access a broad range of capital. This form of money does not entail interest charges and may also not require to be paid. In return, this helps IPO investors to increase their dividends as well as their invested shares. Going public also makes it possible for an organization to quickly sell its stock and get public debts, which avails the capital needed for future developments (U.S Securities and Exchange Commission, 2017). Secondly, becoming a publicly held IPO augments a company’s public awareness, which, in turn, opens up the firm to new customers and opportunities. This is because IPO facilitates a process that fosters the dissipation of public companies’ information by printing it in the local dailies as well as generating and increasing public attention and media concerns about the firm. Also, going public enables an organization to acquire other business enterprises using the stock of a public company. Thirdly, going public benefits a firm by creating a friendly environment that fosters the company’s ability to use its capital in innovative incentive packages for employees and management (Ghonyan, 2017). Selling shares and stock options as a form of compensation may help an enterprise to attract potential employees with better management talents as well as creating an atmosphere that favors their optimum performance, such as giving them incentives.
An argument that the same goals may be achieved if the company remains a privately held entity
The cost of going public is usually very high. A privately held company can invest this money in real estate or other projects that will generate revenue other than borrowing money and paying interest, as in the case of publicly held companies. Secondly, a publicly held company abides by SEC rules, which are also called principles that determine the functioning of the company (Meluzín, Zinecker, Balcerzak & Pietrzak, 2018). On the contrary, their privately held counterparts do not have to adhere to these rules and limitations, which allow them to run the business with the freedom and flexibility it deserves. Additionally, complying with the principles of the SEC is usually expensive, especially for a start-up business. On the other hand, a private corporation may use this freedom to employ qualified and skilled personnel to maximize the capacity to generate high revenue that promotes the growth of the business.
Four financial ratios and how they impact the company’s decision while acquiring expansion funds
Liquidity ratios
These kinds of rates measure the amount of cash that can be easily converted to assets; they can be used to cover debts, thus improving the firm’s financial health. The capital ratio is used to measure the firm’s ability to produce cash that can be used to meet a short-term monetary commitment (Focacci, 2008). Additionally, the quick ratio measures the company’s ability to access emergency cash that can be used to cater to immediate demands. Thus, low liquidity ratios can lead to loss of opportunities that the firm may have to obtain some money for its business expansion. On the other hand, a higher liquidity ratio allows the company to borrow funds for its development.
Efficiency ratios
These types of rates are measured over three to five years, and it give the organization additional insight into different areas of the firm, such as cash flow, collections, and operational results. Inventory turnover tries to identify the period inventories take to be sold and replaced annually. Assessing inventory turnover is crucial since it helps the company realize the gross profit made (Focacci, 2008). Moreover, it helps the firm to identify areas of improvement by either minimizing the held inventories at hand or by introducing discounts to the clients. Getting to understand the efficiency ratios in an organization helps it to make a wise decision leading to growth.
Profitability ratios
These types of rates are used to assess the financial capability of an organization. Moreover, it is used to compare the level of business of a firm with other firms in the field. The net profit margin is used to measure the amount of capital the company earns after the deduction of taxes. A firm that has a higher net profit margin tends to be more efficient and can take on new opportunities. On the other hand, return equity is used to measure the growth of the business concerning the shareholders’ investment. It enables the stakeholders to realize the profit earned for each capital they invested (Focacci, 2008). Any organization that makes a high net profit margin gets the chance to borrow more cash for the expansion of its business, while an organization that has a low net profit margin experiences difficulties in tapping new opportunities.
Leverage ratios
These kinds of ratios are used to determine the extent to which the company uses long-term debts to support its business. Bankers use debt-to-asset and debt-to-equity ratios to determine how the firm’s assets are financed (Focacci, 2008). The assets can be funded through the company’s investment or creditors. If the firm has lower rates, banks consider them to have the ability to repay their debts. On the other hand, organizations that have higher ratios of banks are considered to have a lower capability of paying debts.
The financial impact that the Sarbanes-Oxley Act might have on an organization if it decided to go public
The Sarbanes-Oxley Act has set rules and regulations for companies that choose to move from the private to the public sector. These rules create financial impacts on the firm since financial transactions are monitored, thus increasing accountability (Slavens, 2015). Moreover, the Sarbanes-Oxley Act protects company shareholders from false financial statements. When firms decide to go to the public, they gain more opportunities for raising capital for their growth. Considering the impact of Sarbanes-Oxley Act compliance, I believe our company can be able to overcome the difficulties posed by this act on our decision to go to the public. Sarbanes-Oxley Act has its merits and demerits. The benefits include; the Sarbanes-Oxley Act discloses all vital information to the stakeholders. The law reveals all financial losses in the business operation that can lead to a firm downfall. For example, Enron was one of the biggest companies in the world, but due to poor accounting practices, it collapsed. This improves shareholders’ confidence, which leads to capital flowing into the marketplaces.
Secondly, the act emphasizes the need for internal controls, which increases efficiency. Internal control ensures that transactions are executed in the right way, ensuring that any imbalances and abnormalities are identified (U.S Securities and Exchange Commission, 2017). Thirdly, the act increases transparency in firms. It discloses crucial information on companies’ financial transactions, and any executive involved in giving fraudulent information is penalized. Despite the bill having some advantages, it also has some disadvantages, such as; it is costly, especially to the small companies. Big companies have many resources as compared to small companies, and the charges are the same; this discourages small entities from moving to the public. Secondly, the act has resulted in increased audit fees, which are tolling companies’ profits (Slavens, 2015). Since 2002, audit fees have been growing since control auditors are forced to be more accountable in the audit reports that they give their customers.
As the CEO of a firm, I would recommend my organization take the risk and go public. Going public gives the firm the chance to tap new opportunities in the market, which helps it in its expansion (Strayer University, 2013). Going public also makes it possible for an organization to quickly sell its stock and get public debts, which avails the capital needed for future developments. Moreover, an IPO helps the firm gain more market share since it advertises its products and services (Zhang & Han, 2015). Contrary, when an organization decides to remain privately held, it experiences limitations to new opportunities since it can only use its private resources for its growth. Hence, if the funds are minimal, the chance of growth can be meager.
References
Focacci, A. (2008). Business evaluation systems: credit risk assessment by using a linear combination of financial ratios. International Journal Of Business And Systems Research, 2(4), 387.
Ghonyan, L. (2017). Advantages and Disadvantages of Going Public and Becoming a Listed Company. SSRN Electronic Journal, 4(7), 78-93.
Meluzín, T., Zinecker, M., Balcerzak, A., & Pietrzak, M. (2018). Why Do Companies Stay Private? Determinants for IPO Candidates to Consider in Poland and the Czech Republic. Eastern European Economics, 56(6), 471-503.
Slavens, K. (2015). 4 Serious Pros and Cons of the Sarbanes-Oxley Act. Retrieved 3 November 2019, from https://connectusfund.org/4-serious-pros-and-cons-of-the-sarbanes-oxley-act
Strayer University (2013). Graduate accounting capstone. Mason, OH: Cengage Learning.
U.S Securities and Exchange Commission. (2017). SEC.gov | Should my company “go public”?. Retrieved 3 November 2019, from https://www.sec.gov/smallbusiness/goingpublic/companygoingpublic
Zhang, J., & Han, J. (2015). Adoption of Sarbanes-Oxley Act in China: Antecedents and Consequences of Separate Auditing. International Journal Of Auditing, 20(2), 108-118.
