Contact Us

Math Captcha   + 68 = 74

* Required Fields

Contact Us

What To Do When You Don’t Have SOX

What To Do When You Don’t Have SOX

FEBRUARY 8, 2013

“Former Congressman Michael Oxley, co-sponsor of the Sarbanes-Oxley Act (SOX), speaking at the Distinguished Speakers Series hosted by SolutionPoint International, parent of Guidepost Solutions, a global investigative and security consulting firm, expressed regret in not attempting to regulate the alternative investment market when he could. “You cannot have a multi-trillion dollar market with no transparency,” Oxley said.  Failure to regulate it led to “disastrous results,” he said.  He explained that SOX was designed to “restore investor confidence and¦instill transparency and accountability to capital markets,” after the collapse of Enron, in much the same way Dodd-Frank was passed to prevent the”excessive risk-taking with OPM (other people’s money) in the over the counter derivatives market, which was opaque and unregulated.”  Ten years later, SOX has done what it set out to do according to Oxley.  “There hasn’t been another Enron or WorldCom since,” the SEC began enforcing SOX.

But in 2012 Congress passed the JOBS (Jumpstart Our Business Start-Ups) Act.  It provides a five year exemption from SOX compliance for emerging growth companies (EGCs), which are defined as start-ups with less than $1 billion in gross revenues.  The White House and Congress defend this gap in investor protection by arguing the suspension promotes IPO’s – the proverbial “green shoots” of economic health.  In the first thirty days after the JOBS Act became effective, approximately sixty percent of the IPO registrations qualified under this exemption, according to Paula Dubberly of the SEC. But that pace didn’t continue.  A recent survey noted that the SEC reports a little over 100 ECG filings for the remainder of 2012 and the investment bankers questioned did not believe the JOBS Act had increased IPO activity.  Almost half of those bankers also expressed concern that the lack of transparency had shaken investor confidence in these new companies. Taking advantage of the protections provided by the JOBS Act has become a risk factor that most EGCs feel compelled to report.

Oxley called the JOBS Act, “A worth experiment,” but cautioned, “The jury’s still out on whether [the JOBS Act] creates jobs and is effective.” When asked if he was concerned about the SOX suspension, he replied, “Investors have been burned twice in a short period of time and they are going to be careful when investing.”

Congressman Oxley is right, but lack of internal controls and full financial reporting hides fraud.  The first prosecution of an EGC was brought against Caribbean West Marketing, a penny stock scheme in Florida, in November. More will probably follow.

In the meantime, here are five steps to take when doing business with or considering investing in an EGC:

1. Give credit to companies that choose to comply with SOX even when they don’t have to. 

If a company is exempt from SOX, yet still chooses to comply, it shows an ethical “tone at the top.”  Voluntary compliance shows that a company is planning for the long term and has nothing to hide. It also shows a company that recognizes investment in internal controls and heightened compliance early makes good business sense; incorporating the cost of SOX compliance into their ongoing operations from the start insures that ethics will never be sacrificed for profit.

2. Look carefully at the principals and professionals retained by EGCs.

When EGCs do decide to take advantage of the suspension, look carefully at who they are and who they have hired to bring them to market.  The lawyer representing Caribbean West Marketing had been previously sanctioned by the SEC and disbarred by New York State.  Is the start-up using reputable auditors and lawyers who regularly works for companies who are SOX-compliant or did it retain inexperienced, small-time professionals to cut costs and cut corners? Cutting corners in critical areas early on suggests a lack of appreciation for the importance of corporate integrity.

3. Examine the balance sheets of EGCs with a magnifying glass.

Take extra care when reviewing balance sheets that have not withstood SOX scrutiny.  Even a small inconsistency or slight deviation from industry norms could signal potentially dangerous holes in the company’s financial reporting procedures and internal controls. Any error, large or small, is a red flag.

4. Ask lots of questions and if the answers don’t make sense, more than SOX is missing.

An EGC should expect that management, operations, and the entire business will be scrutinized by investors, vendors, and customers alike. They should be willing and able to provide answers to every question. If they don’t satisfactorily answer your questions or refuse to provide transparency, this is a warning sign.

5. Put a premium on compliance of all kinds at any company with which you do business. 

When companies try hard from the beginning to place a premium on ethics and compliance  in all aspects of their operations, it usually means they value their investors and customers and take pride in what they do and how they do it.  You should look for companies that are willing to go the extra mile from the beginning.”

About the author

schwartz_bBART M. SCHWARTZ

Bart M. Schwartz is the chairman of Guidepost Solutions LLC, a global leader in investigations, due diligence, security and technology consulting, immigration and cross-border consulting, and monitoring and compliance solutions. Bart can be reached at


Please enter your email to subscribe. By doing so, you are opting-in to receive news from Guidepost Solutions LLC.

Math Captcha   3 + 7 =