Impact of Sarbanes Oxley-Act (Essay Sample)

Impact of Sarbanes-Oxley Act
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The decision to go public is one of the most critical decisions a business can make. The process of going public virtually affects every operation of the business. Before going public, a firm must seriously consider whether it can successfully issue securities and the implications of being a public corporation (Clemens 2011). The success and failure of public offerings is highly dependent on both the domestic and global market conditions. There should be adequate preparation and analysis before deciding whether to remain private or go public.
The company should go public to take advantage of the ability to raise capital and expand opportunities for accessing finance in the future. As a public corporation, it can issue bonds and stock to the public and generate capital for its expansion projects. Stock is sold at the prevailing market value capital generated is immediate. Being a public trading company will increase liquidity of the company’s stock as well as increase the transferability of stock by employees and shareholders (Michael 2015). Shareholders in a public company have the privilege of transferring their shares to other shareholders. Transfer of shares and availability of high market for the shares increases the value of the company stock which in essence improves its liquidity.
It’s easier to acquire other businesses as well as attract and compensate employees using the company’s stock. Going public will give more publicity to the company, increase its brand awareness and image (Michael 2015). The more the capital, the better the company is in a better position to buy other businesses in the industry which eventually leads to growth of the company. Since going public increases the value of the stock, more revenue is generated and consequently its profits rise by a big margin. The company is therefore able to increase remuneration to its employees and improve their motivation.
Selling the business on a public offering creates an immediate influx of capital to the company. While going public seems attractive, it’s important to note that being a public corporation comes at a price (Clemens 2011). Staying private means that the company does not have to report to shareholders and its’ able to keep its plans and finances private. Some drawbacks of public company do outweigh the attractiveness of accessing large sums of capital. A private company is not liable to the Security and Exchange Commission rules that require reporting and auditing by external auditors. Reports generated by public companies contain extensive information about the finances of the company. Private companies only require to practice current and correct accounting but not as thorough as the public companies.
The main reason for going public is to increase sources of capital. However, a private company can still access capital through bank financing (Clemens 2011). The company has been in business for a long time and has since established relationship with the banks. It is therefore possible for the company to tap into commercial lines of credit when there is a need for expansion by the company. Capital can also be sourced by using assets and inventory as security for loans.
Since the company will not have to make its operations and finances public, it’s in a better position to be unique in its service delivery and improve its image to the public. Brand image is generated through provision of quality products that are consumer specific. By expanding its operation, the company is able to tap into newer markets and promote its products. Intensive promotion through direct sales and advertisements increase brand awareness as well as publicity of the company. Having a big market share in the industry gives prestige to a private company. Market share is improved by increasing product availability and provision of quality goods and services (Michael 2015). It is therefore possible for a private company to increase its publicity and image without having to go public.
A private company is also in a position to offer ownership of stock to employees and outsiders. The value attached to a private company’s asset is determined by private valuation. Stock value is given as per the book value. Issuing of stock increases the value of the stock and the profitability of the company (Alex 2012. Employees are therefore better compensated just like those in public holdings.
A financial ratio establishes a relationship indicative of a company’s activities. The source of the ratios is the company’s financial statements that contain values of assets, liabilities, losses and profits. Ratios only become meaningful when they are compared with other financial information since they are mostly compared with those of competitors and industrial average (Joe 2012). Financial analysis reveals information pertaining to a company’s strengths and weaknesses in its operations.
Financial ratios that are evaluated before going public are profitability ratios, liquidity ratios, activity ratios and debt ratios. Profitability ratios act as a measure on how a company uses its assets and controls its expenditure in order to generate income. Gross margin, operating margin and return on assets are some of the profitability ratios that measure a company’s profitability (Joe 2012). If the profitability ratios are above industry average, the company is in a better position to obtain expansion funds and become public. On the other hand, low profitability ratios act as an indicator that the company is not able to manage its assets and control its expenses well and hence not in a position to obtain expansion funds or go public.
Liquidity ratios are used to evaluate the ability of a company to pay its debts. Cash ratio, operating cash flow ratio, and current ratio are some of activity ratios that act as determinants on a company’s ability to pay its dues. The ratios should be above the industrial average in order for a company to access expansion funds (Alex 2012). If the activity ratios indicate that the company is not able to pay its debts, it’s not likely to be considered to go public.
Asset turnover, stock turnover and debt collection days are some of the activity ratios that measure the efficiency of a firm. If the ratios show that the company manages its resources efficiently, it’s chances of obtaining expansion funds increases. Also, if the company uses its resources effectively, it is in a position to go public since shareholders will have confidence in it.
Debt ratios are a measure of a company’s financial leverage and are indicative of its ability to pay long-term debts. To obtain expansion funds, the ratios should be in line with current industrial average and should be positive in order for a company to consider going public.
Complying with SOX by going public has a high price tag. Quantifiable and non-quantifiable costs such as the increase in...