In the modern Sarbanes-Oxley environment, smaller companies that can’t stomach the onslaught of accounting and securities requirements should abandon their listings and turn to surging private equity sources, says James Quigley, CEO of Deloitte & Touche USA.
“There’s a lot of concern for smaller public companies, but doing business in the capital markets is a privilege, not an entitlement,” Quigley said in an exclusive interview to preview remarks he will deliver as a speaker at the Financial Executives International Summit 2005 beginning tomorrow, May 18, in Chicago. “If you want to enjoy the privilege and the benefits of raising capital in public markets, you have to pay the cost.”
Private investors are starting to see new opportunity to serve as a stepping-stone between venture capital and initial public offerings, according to Quigley. “We’re starting to see private equity step into the void,” he said. “To the extent they need capital, smaller companies may find private equity more appealing.” Small companies are huge force in the U.S. economy that needs equity capital, but they should recognize that “public markets are not the single, only source of capital,” he said.
Quigley predicts that if smaller companies decide to exit capital markets in favor of private equity offerings, the average size of public companies will increase. There are still some unknowns, however, as implementation of Sarbanes-Oxley continues to unfold that will impact what happens for smaller public companies.
The COSO project currently underway at the request of the Securities and Exchange Commission may prove pivotal, according to Quigley. The Committee of Sponsoring Organizations of the Treadway Commission, which authored the internal control framework being utilized by most companies as part of their SOX 404 efforts, is currently developing a framework for use at smaller companies. The committee has targeted July for its release date.
“That will add to the dialogue,” Quigley said. “There’s concern by some that the COSO framework was designed for GE and GM and we’re trying to use it for smaller companies. Those are legitimate, valid concerns.”
Pending guidance from the SEC and PCAOB may also impact the fate of smaller companies and the direction of internal controls reporting in general as required in Section 404 of Sarbanes-Oxley. “I expect it to be constructive,” Quigley said. “This is not the time to amend the [SOX] statute, nor Audit Standard No. 2. We need guidance on implementation.”
The Changed World
During his speech, Quigley also plans to review the reduced risk of financial reporting fraud that currently exists. “Is the risk eliminated? Surely not,” he said. “Will there be future frauds? I’m confident it will occur.”
Fraud risk is reduced and financial reporting is improved, however, as a result of Sarbanes-Oxley, he said. He will credit the management certification process, protection of whistleblowers, access to the audit committee, and auditors’ role in documenting the control process.
Quigley will be one of more than a dozen speakers who will address a host of emerging issues in corporate finance. He became CEO of Deloitte’s U.S. operations in June 2003.
Nusbaum
Edward Nusbaum, CEO and executive partner for Grant Thornton, also will address the FEI Summit, focusing on leadership qualities essential in the finance arena today.
“The world has changed, particularly in the accounting and financial reporting world,” Nusbaum said in previewing his speech. “Overall, Sarbanes-Oxley has been a positive influence, but there are certainly things we can do to improve Section 404. Costs have been very high, and we have not completely restored public trust. There are various survey reports that say we still have a way to go, and there continue to be scandals.”
Nusbaum plans to address what finance professionals can do to act as leaders to continue to effect change.
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