March 2004 - Article supplied by Reminick Aarons & Co LLP, a MSI accounting member firm based in New York, USA.Recently two cases related to Business Valuations were decided which may be of interest.

Although the enactment of the Sarbanes-Oxley Act in July 2002 is applicable to public companies and their auditors, private companies and their auditors may also ultimately be affected as a result of the far reaching cascading effect.

Continuous proposed and final regulations by the Securities and Exchange Commission and the stock exchanges have a direct impact on corporate governance, financial statement disclosure, management compensation, and auditor independence. Although these regulations presently apply only to public companies, it may be only a matter of time before state regulators that oversee the practice of accounting and auditing adopt similar rules. Accounting boards in many states have proposed rules that, to some degree, follow the intent or spirit of the Sarbanes-Oxley Act. In addition, there is recently proposed state legislation in New York intended for not-for-profit organizations that parallels the Sarbanes-Oxley Act. The proposed rules vary from state to state, some of which include provisions for increased accountability for auditors, criminal penalties, limitation on non-audit services that can be provided to audit clients and auditor rotation, among other provisions.

As regulations are passed in the various states, different states may also adopt additional rules to become more uniform with other states. Private companies may at first see the indirect affect, such as lending institutions and investors insisting that private companies adopt many of the practices mandated by Sarbanes-Oxley. This may include increased expectations in the areas of corporate governance by having qualified independent directors and independent audit committees, in addition to other areas such as internal control compliance, and financial statement disclosure similar to those of public companies.

Private companies may also be affected by the continuous accounting regulation from the Financial Accounting Standards Board ("FASB"), which sets accounting rules in the United States known as Generally Accepted Accounting Principles. The current and future trend in setting accounting rules is convergence with international accounting standards set by the International Accounting Standards Board ("IASB"). The goal is to achieve worldwide use of a single set of accounting standards for both domestic and international financial reporting and will apply to both public and private companies, with very limited or no exceptions.

Another factor to consider is that auditing standards, which were previously only issued by the American Institute of Certified Public Accountants (“AICPA”), will now be issued by the newly formed Public Company Accounting Oversight Board (“PCAOB”) for audits of public companies and the AICPA will be issuing auditing standards for private companies. Even though there are now two different audit standard setters, the future trend may be that auditors could adhere to the PCAOB auditing standards, in order to maintain consistency in their audit approach and avoid potential challenges to their audit work.

Private companies should be aware of these regulations in order to be prepared to adopt the necessary procedures for compliance. Although the Sarbanes-Oxley Act may not currently apply to private companies, the impact due to the cascading effect to private companies may be imminent. Many companies may find themselves unprepared to comply with applicable regulations if they wait until such regulations are actually passed. The time for private companies to review their ability to comply with these current or upcoming regulations is now.

In addition to preparing for compliance for regulatory purposes, companies, including not-for-profit organizations that take a proactive approach to compliance will have an advantage by providing the company’s top management and its investors the added confidence that comes from having appropriate corporate governance, strong internal controls and reliable financial statements.