Sarbanes-Oxley
Small businesses that sell products often find it easiest to
offer samples in the store, where customers who enter can easily
find them. Businesses that use mailers can include coupons for
free samples or scratch-and-sniff cards to advertise their
products. Others can specialize in sampling packages for certain
groups of consumers, such as students, new parents, or
newlyweds who may be interested in several different samples
made available together. Small-business owners should always
ensure manufacturer consent before offering free samples.
TRADE PROMOTIONS
A trade sales promotion is targeted at resellers who distribute
manufacturers’ products to the ultimate consumers. The objec-
tives of trade promotions differ from those directed at
consumers. Trade sales promotions hope to accomplish four
goals: 1) develop in-store merchandising support; 2) control
inventory by increasing or depleting inventory levels; 3) expand
or improve distribution by opening up new sales areas; and 4)
generate excitement about the product among those responsible
for selling it.
Point-of-Purchase Displays. Manufacturers provide point-of-
purchase (POP) display units free to retailers in order to
promote a particular brand or group of products. These are
special racks, display cartons, banners, signs, price cards, and
mechanical product dispensers designed to generate sales for the
retailer. High product visibility is the basic goal of POP
displays. In industries such as the grocery field, where shoppers
spend only a fraction of a second viewing a product, anything
that increases product visibility is valuable. POP displays also
provide or remind consumers about important decision
information, such as the product’s name or appearance.
Trade Shows. Trade shows allow businesses to write immediate
orders for products being demonstrated and explained on the
trade show floor. Trade shows can attract hundreds of major
manufacturers and retailers from around the world, or be simple
sales meetings at the local chamber of commerce. These events
motivate sales agents and are often used to introduce new
products. Online trade shows are common among businesses
that can create effective online booths for their products.
Push Money. Push money (PM), also known as a spiff, is an
extra payment given to salespeople for meeting a specified sales
goal. For example, a manufacturer of refrigerators might pay a
$30 bonus for each unit of model A, and a $20 bonus for each
unit of model B, sold between March 1 and September 1. At
the end of that period, the salesperson would send evidence of
these sales to the manufacturer and receive a check in return.
Deal Loaders. A deal loader is a premium given by a
manufacturer to a retailer for ordering a certain quantity of
product. Two types of deal loaders are most typical. The first is
a buying loader, which is a gift given for making a specified
order size. The second is a display loader, which gives products
on display to the business if it has managed to sell a certain
number of those products to consumers.
Trade Deals. Trade deals are arrangements made between sell-
ers and manufacturers over specific products. The manufacturer
might receive special displays, larger-than-usual orders, superior
in-store locations, or greater advertising effort. In exchange, the
retailer might receive special allowances, discounts, goods, or
money. In many industries, trade deals are the primary expecta-
tion for retail support, and the marketing funds spent in this
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COPYRIGHT 2017 Gale, Cengage Learning WCN 02-200-210
area are considerable. There are two main types of trade deals:
buying allowances and advertising/display allowances.
A buying allowance is a bonus paid by a manufacturer to a
reseller when a certain amount of product is purchased during a
specific time period, similar to a buying deal loader. If the deal
is good enough, a business may buy more inventory than usual
to receive the allowance and, then, store it for later use.
Slotting allowances, a hybrid form of the buying allowance,
are fees retailers charge manufacturers for each space or slot on
the shelf or in the warehouse that new products will occupy.
This tactic may discourage some manufacturers from attempting
to sell with retailers who practice it. The third type of buying al-
lowance, a free goods allowance, replaces the monetary bonus
with a number of free products if a certain sales level is reached.
An advertising allowance is a dividend paid by a
manufacturer to a reseller for advertising its product. The
money can only be used to purchase advertising; for example, to
print flyers or run ads in a local newspaper. Sometimes display
allowances are used, when a manufacturer pays a specific
amount to have its display highlighted in the store. Businesses
must usually produce certification that proves they have fulfilled
their advertising portion of the deal before the dividend is
granted.
BIBLIOGRAPHY
Belch, George E., and Michael A. Belch. Advertising and
Promotion: An Integrated Marketing Communications
Perspective. 10th ed. New York: McGraw-Hill, 2014.
Boone, Louis E., and David L. Kurtz. Contemporary Marketing.
17th ed. Boston: Cengage Learning, 2015.
Mullin, Roddy. Promotional Marketing: How to Create, Imple-
ment & Integrate Campaigns That Really Work. 6th ed.
Philadelphia: Kogan Page, 2014.
O’Guinn, Thomas, et al. Advertising and Integrated Brand
Promotion. 7th ed. Boston: Cengage Learning, 2014.
“Sales Promotions.” Houston Chronicle. Accessed 1 September
2016. Available from: http://smallbusiness.chron.com/sales-
promotions/.
Schenck, Barbara Findlay. “Three Steps to Effective Sales
Promotions.” Entrepreneur. 1 February 2010. Available from:
https://www.entrepreneur.com/article/204860.
Swanson, Kristen K., and Judith C. Everett. Promotion in the
Merchandising Environment. 3rd ed. New York: Fairchild
Books, 2015.
SARBANES-OXLEY
The Sarbanes-Oxley Act of 2002, enacted in response to the
bankruptcy of Enron and other accounting scandals at the
beginning of the twenty-first century, is federal legislation that
imposes strict accounting and reporting standards on publicly
traded companies. Its provisions include increasing audit
controls, codifying the oversight responsibilities of corporate
management, strengthening disclosure rules, and imposing
criminal penalties for certain activities related to improper
disclosure or document handling.
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BACKGROUND AND LEGISLATION
On December 2, 2001, the Enron Corporation, a growing
energy-trading company, filed for the largest bankruptcy in U.S.
history at that time. Investors lost billions of dollars due to the
company’s earnings inflation and fraudulent representation of
financial status. The fate of Enron and other companies led to
legislation passed by the 107th U.S. Congress. In the U.S. Sen-
ate the legislation was called the Public Company Accounting
Reform and Investor Protection Act and in the U.S. House of
Representatives it was named the Corporate and Auditing Ac-
countability and Responsibility Act.
The two chief sponsors of the legislation were Senator Paul
Sarbanes (D-MD) and Representative Michael G. Oxley (R-
OH), giving it the name the Sarbanes-Oxley Act of 2002, which
was later commonly known as Sarbanes-Oxley and abbreviated
as SOX or SarbOx.
Examination of Enron and other corporations showed that
more complete disclosure of transactions and greater transpar-
ency of financial statements would have prevented the large-
scale fraud, bribery, and insider trading responsible for ruining
these businesses.
Sarbanes-Oxley was principally a reaction to this failure,
dealing with: 1) reform of auditing and accounting procedures,
including internal controls; 2) the oversight responsibilities of
corporate directors and officers and regulation of conflicts of
interest, insider dealings, and the disclosure of special compensa-
tion and bonuses; 3) conflicts of interest by stock analysts; 4)
earlier and more complete disclosure of information on
anything that directly and indirectly influences or might influ-
ence financial results; 5) criminalization of fraudulent handling
of documents, interference with investigations, and violation of
disclosure rules; and 6) requirements for chief executive
certification of financial results and federal income tax
documents.
SUMMARY OF PROVISIONS
Sarbanes-Oxley governs the activities of publicly traded
companies. It aims to protect investors who, unlike those in
privately held corporations, are presumed to be at a greater
distance from management and therefore more vulnerable. This
means that most small businesses are exempt from many
requirements of Sarbanes-Oxley. The Act is divided into eleven
main sections.
Title I—Public Accounting Oversight Board. Title I cre-
ates an independent Public Accounting Oversight Board
(PAOB) under the general oversight of the U.S. Securities and
Exchange Commission (SEC). The PAOB is charged with newly
registering, regulating, inspecting, and generally overseeing
companies that audit publicly traded companies.
Title II—Auditor Independence. Title II legislates the
behavior of auditing firms, restricting public firms from carrying
out compensated activities for their auditing clients that fall
outside the boundaries of auditing. Such “outside” activities
include the provision of bookkeeping, accounting, financial
information systems, and appraisal services. This prohibition
restricts audit firms from being influenced in their audit
practices in favor of long-standing clients.
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Title III—Corporate Responsibility. Title III requires that
companies establish audit committees made up of independent
board members who have no financial ties to the company. The
chief executive officer (CEO) and the chief financial officer
(CFO) both must certify the material correctness of financial
statements underlying the audit reports produced by the
committees. If financial statements must be revised because of
misconduct, the CEO and CFO forfeit bonuses, incentives, or
profits from securities sales. Directors and officers may be barred
from service for violating certain SEC requirements.
Title IV—Enhanced Financial Disclosures. Title IV
requires corporations to make certain transactions public
knowledge, especially those not previously shown on balance
sheets or transactions involving unconsolidated entities. Execu-
tives and stakeholders with 10 percent or more of the company
holdings must also reveal any special bonuses or stock grants
that they receive, and they cannot receive loans from their own
companies. Necessary changes to financial documents should be
made in real time, and the business must show that it has
internal controls and a code of ethics to prevent fraudulent
activity.
Title V—Analyst Conflicts of Interest. Securities analysts
who recommend the purchase of securities to the public are ad-
dressed by Title V. It requires that National Securities Exchanges
and associations of registered securities formulate and adopt
rules governing conflicts of interest for analysts.
Titles VI and VII—Commission Resources and Author-
ity; and Studies and Reports (respectively). These titles ad-
dress the SEC’s various roles.
Title VIII—Corporate and Criminal Fraud Account-
ability. Title VIII makes it a felony to destroy documents or to
create fraudulent documents in order to thwart federal
investigations. Auditors must keep all paperwork related to an
audit for five years. It changes the statute of limitations on
securities fraud claims and extends whistleblower protections to
those who disclose closely held company information to parties
in a lawsuit. Title VIII also establishes a new crime for securities
frauds punishable by up to ten years in prison and fines.
Title IX—White-Collar Crime Penalty Enhancements.
Expanding on Title IV requirements, Title IX requires the CEO
and CFO to state that financial reports comply with new regula-
tions and include all material aspects of the company’s finances.
Violations of this provision carry a fine of $500,000 and up to
five years in prison. The Title then specifies actions and
consequences that the SEC can take against executives convicted
of securities fraud.
Title X—Corporate Tax Returns. This Title requires that
the CEO of a company sign corporate income tax returns.
Title XI—Corporate Fraud and Accountability. This Title,
known as the Corporate Fraud Accountability Act of 2002,
specifically amends the U.S. Code to make tampering with
records and interfering with official proceedings a crime with a
penalty of a fine or imprisonment for no more than twenty
years. It gives the SEC authority temporarily to freeze
extraordinary payments to directors, officers, agents, and
employees of a company during investigations of security law
ENCYCLOPEDIA OF SMALL BUSINESS, 5TH EDITION

violations, and codifies the SEC’s right to prohibit persons
convicted of securities fraud from serving as a director or officer
of a public company.
MAJOR DOS AND DON’TS
Sarbanes-Oxley can be summarized in part as thirteen basic
principles, which make a good reference for small businesses to
examine if they are considering going public.
1. Audit firms shall be registered. If they do other work for
a company, they must not do audits for that company.
2. The company’s audit committee members shall be
independent board members.
3. Stock analysts shall be subject to conflict-of-interest rules.
4. Companies must disclose all pertinent information that
may in any way affect company finances, whether on or
off the balance sheet.
5. Companies shall not lend money to executive officers or
directors.
6. CEO and CFO compensation, bonuses, and profit shar-
ing shall be reported to the public.
7. Insider trades must be made public immediately.
8. Insiders shall not trade company stock during periods of
pension fund blackouts.
9. Financial reports must be certified by the CEO and
CFO.
10. Financial reports must be accompanied by a special
report on internal controls and an assessment on how
well they work.
11. Federal income tax filings must be signed by the CEO.
12. Whistleblowers shall be protected.
13. Violators shall pay higher fines and spend longer periods
in prison than heretofore.
SARBANES-OXLEY AND SMALL BUSINESSES
Sarbanes-Oxley was created with exemptions for businesses that
are rated at less than $75 million market value. These SEC
exemptions were temporary and set to expire in June 2010, but
in 2009 Congress, although divided on the subject, approved
legislation to make the exemptions permanent. The exemption
helps smaller public companies not only avoid the time-
consuming requirements of Sarbanes-Oxley but also helps them
save millions of dollars that would otherwise need to be invested
in internal controls.
Even without these exemptions, Sarbanes-Oxley touches
only a small fraction of American businesses, and most small
businesses are not affected directly by the legislation. Indirectly,
small businesses must face two challenges that Sarbanes-Oxley
has presented.
First, the legislation has made both investors and entrepre-
neurs much more wary of investment. One of a business’s
primary goals is to grow large enough to go public, but with the
intense requirements of Sarbanes-Oxley this has become a more
expensive endeavor. Fewer investors are willing to spend money
on businesses trying to go public because of the risk that
expenditures related to Sarbanes-Oxley will be too costly and
the business will fail. Entrepreneurs, in turn, may be less likely
to start businesses, decreasing interest in small-business
investment. In the end, venture capital funds become more dif-
ficult to raise.
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COPYRIGHT 2017 Gale, Cengage Learning WCN 02-200-210
Scalability
Second, small businesses may not be required by law to
meet Sarbanes-Oxley standards, but a trickle-down effect is
evident. As Sarbanes-Oxley has become accepted throughout the
largest businesses in the United States, investors and even
consumers expect to see the same practices in all businesses.
This has put pressure on small businesses and even nonprofit
organizations to develop new standards similar to Sarbanes-
Oxley laws. Accountants, especially, are being trained to meet
Sarbanes-Oxley specifications and tend to scrutinize all busi-
nesses more carefully as a result. Small business financial report-
ing is slowly mirroring the required changes of public
corporation.
BIBLIOGRAPHY
American Institute of Certified Public Accountants. “The
Sarbanes-Oxley Act of 2002 and Key Issues Relevant to
Business Valuation and Litigation Services.” Accessed 6
September 2016. Available from: http://www.aicpa.org/
interestareas/forensicandvaluation/resources/standards/pages/
the%20sarbanes-oxley%20act%20of%202002%20and
%20key%20issues%20relevant%20to%20business%20
valuation%20and%20litigation%20services.aspx.
Bandiz, Matthew. “Sarbanes-Oxley Reform Needed for
Stimulus?” U.S. News & World Report. 29 June 2009.
Hanna, Julia. “The Costs and Benefits of Sarbanes-Oxley.”
Forbes. 10 March 2014. Available from: http://www.forbes.
com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-
benefits-of-sarbanes-oxley/#711060292776.
Orol, Ronald D. “10 Years On, Sarbanes-Oxley Revisited on
Hill.” Market Watch. 26 July 2012. Available from: http://
www.marketwatch.com/story/10-years-on-sarbanes-oxley-
revisited-on-hill-2012-07-26.
Public Company Accounting Oversight Board. “About the
PCAOB.” Accessed 6 September 2016. Available from:
https://pcaobus.org/About/Pages/default.aspx.
“Sarbanes Oxley Act.” Huffington Post. 1 April 2016. Available
from: http://www.huffingtonpost.com/news/sarbanes-oxley-
act/.
Tysiac, Ken. “SOX Compliance Costs Rise for Many
Companies, Report Finds.” Journal of Accountancy. 15 May
2013. Available from: http://www.journalofaccountancy.
com/news/2013/may/20137990.html.
U.S. Congress. “H.R.3763—Sarbanes-Oxley Act of 2002.” Ac-
cessed 6 September 2016. Available from: https://www.
congress.gov/bill/107th-congress/house-bill/3763.
SCALABILITY
The word “scalability” refers generally to the ability to increase
the size of any system in a linear manner without changing its
fundamental properties. In business, scalability refers to the abil-
ity to grow online services to match the growth of demand and
service use. Since all of the work on a website must be
performed by central processing units (CPUs), the idea of scal-
ability became a central concern in the technology industry
because popular websites can exhibit explosive growth. If they
are poorly designed or difficult to scale up (because they slow
down substantially as more nodes are added) demand is difficult
to satisfy and traffic will decline.
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