Running head: IMPACT OF SARBANES-OXLEY ACT ON DECISION TO GO PUBLIC 1

Impact of Sarbanes-Oxley Decision to go Public

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Benefits of a Medium-Size Private Company Going Public

Several benefits accrue to a medium-size company when it chooses to go public. After

considering that they meet the Sarbanes-Oxley Act, the first benefit is that the company has

improved access to capital. Immediately the company goes public; it invites Initial Public

Offering where investors buy shares, or else, the company sells its stocks to the general public.

The IPO investors only seek an appreciation of their investment, which is mainly made through

dividends. The benefit of an IPO is that it does not need to be repaid, which means that the

company is able to retain the capital (Takahashi & Okada, 2018). It is also possible that the

company may obtain capital quickly in the future through public debt offerings and new stock

offerings.

Secondly, the medium-sized company has increased public awareness of its activities and

operations. Since it is a public company, it is expected to print information in newspapers, and

this generates attention from the public. This, in turn, leads to new opportunities for the company

as well as new customers. New customers mean that the company will have more capital and

earnings as well. Local and international customers will cause the company to grow and

maximize globalization; it will start to operate on an international level. Additionally, the

company will have improved credibility with its investors, suppliers, lenders, among others, due

to improved credit status (Takahashi & Okada, 2018).

Lastly, the company is in a position of using their stock in creative incentive packages for

their staff and the management at large. This means that the company starts to offer stock shares

and stock options as compensation to the management personnel. This attracts better

management talent as they will feel like part of investors in the organization. The incentives will

act as motivation to perform better hence raising the financial status of the company. The
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employees who become investors and part-owners are motivated since they share in the

company’s success. Additionally, raised credibility means the company has better chances of

entering into mergers and acquisitions.

Achieving Public Benefits while Operating as a Private Company

A company may also choose to remain a private entity and enjoy the public company

benefits, however, in moderation. First, investing in a private company will require that the

investor is the owner of the company. The owners will have their part of the company's

investment and will receive a measure of earnings according to their capital measure. This means

that the private company is in a position to access capital just like the public company. The more

the owners put in the company, the higher the capital base of the private firm. Since the company

is not required to provide any information to the public, the owners divide their profits as they

wish, and they are able to manage the company as they wish (Ghonyan, 2017). Also, private

owners' earnings are paid directly to them just as dividends are paid to public company investors.

Just like public companies, private companies have opportunities for growing their

opportunities and customer base. Since they do not publish their management information, a

well-performing private company will be known by their increase in infrastructure, products, and

services excellence and expansion status. A well-performing company will always have a

competitive advantage, and just like the public company, it will have a chance of operating on a

global scale (Ghonyan, 2017). A high success rate will also attract more owners or partners who

want to invest in the company. This creates new opportunities for the company to grow and

brings more customers for their products and services. Lastly, since the managers are mostly the

owners, the company's success will motivate them to perform well, as in the case of public
IMPACT OF SARBANES-OXLEY ACT ON DECISION TO GO PUBLIC 4

companies. The private company’s success means that the owners will have increased earnings

or profits.

Four Leading Financial Ratios and their Effect on Company’s Decision to go Public

Medium-size companies that want to go public must consider and use financial ratios to

assess the company's performance as this will be used to compare it with other companies in the

market. The first financial ratio is Return on Investment Ratios or the profitability ratio. This

ratio provides information about the performance of the management. This ratio will help the

company to evaluate if it earns more revenue than it spends on expenses. If the expenses rate is

higher than the revenue, the private company's decision to go public will be barred since it lacks

investors (Kadim, Sunardi & Husain, 2020). The second ratio is the liquidity ratio that shows the

company's ability to pay its obligations, which compares the current assets to the current

liabilities. When the private company achieves a high liquidity ratio, it is better positioned to go

public than lower liquidity ratios.

The third ratio to be considered is the leverage ratios, which indicate the extent that the

private company is dependent on borrowing to finance its activities. This is an essential ratio that

investors consider before investing through measurements of debt to equity ratios, fixed to worth

ratio, and debt ratio. When a private company has a high leverage ratio, it may choose not to go

public as it will turn off investors from buying shares and stocks. Lastly, efficiency ratios show

how well a private entity can use its current assets to manage its current liabilities in the short-

term period. These ratios are such as inventory turnover ratio and asset turn over ratios. A

company will use this information to see if the credit terms are appropriate to go public and

excellent credit terms will mean that private company has good chances of prospering as a public

company (Kadim, Sunardi & Husain, 2020).

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SOX Compliance Surveys

Any private company that considers going public must meet the SOX compliance survey,

which affects the financial status. First, SOX requires that all financial reports be publicly

announced or reported after monitoring and reviewing the CEO and CFO. SOX requires that top

managers in public companies certify the accuracy of the financial reports. This means that the

private company will invest more in excellent auditing skills to meet SOX's requirements

(Nazarova & Mysiuk, 2018). Our company can overcome the challenges posed by SOX if it

decides to go public as with a well-endowed audit committee, the financial reports will always be

accurate and to date. Additionally, our company's CEO and CFO are in a position to meet

corporate responsibility for financial reports.

The main advantage that SOX has is that it will ensure the clean auditing of financial

reports, which will be an accurate indicator of the company's financial position, not only to the

management but also to the public. Another advantage is that our company will make positive

internal reforms to ensure that we secure a sound financial future for the organization. The

primary disadvantage is that the company will not have secrecy, especially when making losses,

which negatively affects potential investors (Nazarova & Mysiuk, 2018). Another disadvantage

is the risk of facing the law if the company makes an error in its accounting system. As the

company's CEO, I would recommend the decision to go public for our private entity. This is

because the company has been performing reasonably well, which means going public will raise

more capital, increase earnings, and investors. The expansion goals will be achieved since many

investors will bring in their capital, which will cater to the several expansion projects our

company plans to have.

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References

Ghonyan, L. (2017). Advantages and Disadvantages of Going Public and Becoming a Listed

Company. Available at SSRN 2995271.

Kadim, A., Sunardi, N., & Husain, T. (2020). The modeling firm's value based on financial

ratios, intellectual capital and dividend policy. Accounting, 6(5), 859-870.

Nazarova, K., & Mysiuk, V. (2018). SOX compliance-audit. Економіка та держава, (3), 29-32.

Takahashi, H., & Okada, K. (2018). The Benefits of Going Public: Evidence of Increased Public

Recognition. Available at SSRN 3573324.