The Sarbanes-Oxley Act of 2002 introduced stringent regulations that were intended to increase accountability in publicly owned companies and prevent future Enron-like scandals and abuses.

Even though private companies and nonprofit organizations are exempt from Sarbanes-Oxley, many could benefit by adopting some of the new law’s accounting and auditing standards and practices.

Best practices mean better business

Implementing a transparent system of financial management is simply a smart decision for any organization, and Sarbanes-Oxley provides an ideal model for private firms wanting to institute greater checks and balances.

Some of the law’s key provisions help to improve governance and oversight through the implementation of internal and external controls. Highlights include establishing an independent audit committee, requiring CEOs to sign off on the accuracy of financial information, instituting formal document and management practices, and measures to protect whistleblowers who report irregularities.

Two other provisions of the law are also worth emulating: an annual published assessment of the organization’s financial controls, and a requirement that this assessment be certified by the company’s executives and auditors.

The benefits of higher standards

Private companies that proactively align their financial systems with Sarbanes-Oxley can strengthen their operating procedures and position themselves in a better light. This can be particularly advantageous for companies seeking expansion capital, since they will have already demonstrated the kind of compliance that reassures lenders and investors.

In light of the recent scandals, customers, employees, and donors have also come to expect that private firms and not-for-profits will also raise the bar on financial accountability. Aligning auditing and reporting procedures with stringent Sarbanes-Oxley standards demonstrates a company’s earnest commitment to prevent fraud.

Having an updated code of ethics and a high profile as a principled leader can galvanize the public’s trust and enhance employee retention. A good governance reputation can also help in recruiting talent.

Finally, larger private companies should consider forming an independent audit committee as outlined in Sarbanes-Oxley. Such a committee offers private management a new level of reassurance and heightens the credibility factor with boards and banks. In closely held companies where management can consist of relatives and other insiders, an independent assessment can provide the kind of candid and dispassionate review necessary for true transparency.

Only a matter of time?

Many states are introducing compliance laws similar to Sarbanes-Oxley that could ultimately apply to private companies and not-for-profits. By adopting Sarbanes-Oxley requirements sooner rather than later, private organizations can prepare themselves for any future extensions of the requirements.