RUNNING HEAD: PHASE 3 GROUP PROJECT: INDIVIUDAL PORTION

Sarbanes-Oxley Research Proposal Phase 3 Group Project: Individual Portion

By Khushboo Kataria

Date: March 13, 2010 Class: MGMT605-1001B-02: Graduate Research Methods Instructor: Jack Huddleston

Abstract The intent of this research proposal is to evaluate, via qualitative means and predict the implications of the extent to which the 2002 Sarbanes Oxley Act has had to date and will have in the future regarding the formation of smaller, privately held businesses and the decision of larger, publicly-held corporations to go private in order to avoid the costs and complications of complying with the Sarbanes-Oxley Act. The migration of smaller companies away from being public to opting to become private are also researched and validated in the proposed research. The Sarbanes-Oxley Act has also been attributed with the decision of smaller firms to seek acquirers to alleviate the costs of being in compliance. The role of acquisitions as an exit strategy for smaller, undercapitalized firms who cannot afford to invest in technologies and process-redefinition efforts to become compliant with the Act is also evaluated in this proposal. The costs of internal controls include adherence to Section 404 of the Act, CEO and CFO certification of financial statements, and extended statute of limitations for shareholder lawsuits are variables which will be considered as part of the analysis. As the Act also addresses executive compensation in Section 402, Audit Committees, and the separation of Audit and non-Audit Services are all considerations which will be taken into account within the proposed research. Problem Statement The impact of the Sarbanes-Oxley Act on the decision of any size of company to stay private, or if already publicly-traded, to seek out either an acquirer or to take their companies private again, is the main research problem of this proposed research study. For the smaller companies who may not have the financial resources to fulfill compliance

and re-engineering tasks, the strategies they use to seek out acquirers and if publiclytraded, to go private, are researched in this qualitative case study. For the larger corporations who are public today, the decision to take themselves private is financially quantified. The impact of the Act on the net increase in privately held smaller businesses and the migration of larger corporations from being public to being private. Research Design In creating a research design to quantify and develop a financial valuation of the impact of the Act on small and large companies, first the definition of just what a small company is relative to a larger corporation. In the latter case, those members of the Fortune 1,000 can be considered members of the larger corporation sampling frame for this analysis. The smaller companies are defined by having a value of $15M in their current fiscal years. These sampling frames will be specifically for those companies headquartered in the United States. Other studies such as the one conducted by Engel, Hayes and Wang (2005), and Cosgrove (2006), analyze market values both pre-SOX and post-SOX to specifically measure and see if there are any statistical significance in differences between the companies who experience a large drop in value in financial periods post the Acts enforcement. Methodology In evaluating the impact of the Act on the decisions of smaller companies to stay private, and if already publicly-traded, take themselves private again will be analyzed in this research design. Engel et al. (2005), measure the dynamics of the first sample frame using a stratified random sample of small companies who fit one of four criteria: those smaller companies who have been publicly-traded and chose to go private; those smaller

companies who have gone from being public to being sold (specifically the factors leading to their acquisition will be explored and quantified); and finally those smaller firms who have been private and have completed S1 filings with the Securities and Exchange Commission prior to the enactment of the Act and have since decided to stay private. The stratified random sample for the larger corporations depicted that those corporations who were public and went private; secondly, those who were public and went through the costs of becoming compliant with the Acts; requirements; and third, those larger corporations that chose to be acquired versus spend to be compliant with the Act. Taken together, all these factors will yield a table of values driven both by small, public, small private, small acquired companies versus larger corporations who went private, stayed public, and chose to be acquired. From this table of values a statistical analysis of significance will be possible to complete, in addition to the effects of the Act on valuations of all three classes of firms. Whereas Cosgrove (2006) utilizes correlation analyses to see the level of variations explained by the three dominant strategies of going private after being public, staying public and spending to be in compliance with the Acts requirements, and third, choosing to be acquired will all be analyzed. The use of statistical techniques including t-tests, ANOVA, Pearsons Correlation Coefficient analysis and the use of predictive statistics techniques in addition to those mentioned were also utilized by both Engel et al. (2005) and Cosgrove (2006). Expected Results of Research It is anticipated that the Act will be shown to have a statistically significant effect- based on Engel et al. (2005) and Cosgrove (2006)- on smaller firms choosing to stay private, and if they are public already, to choose to either go back to being privately held or be

acquired. Further, it is expected that the results will show that those small companies who had the greatest drop in market valuation will be the most likely to be acquired by companies in their industries fulfilling the roles of market consolidators. This will be because those companies acting as market consolidators will have purchasing power and the need in building out their broader market strategies to include smaller, more nicheoriented firms into their strategic plans. For larger corporations the costs of being in compliance will be shown as a factor influencing their decisions to offshore not only their Sarbanes-Oxley compliance initiatives, but their entire business process management (BPM) initiatives as well. The larger corporations will be seen as off shoring all unnecessary processes and tasks so they can concentrate on their core businesses, often looking for a reduction or more so in achieving compliance by using outsourcers to attain cost advantages. In this regard it will be shown to be statistically significant that the Sarbanes-Oxley Act has in the end contributed on average of approximately 30% of the net incomes of outsourcers who have become billion-dollar organizations as a result of serving large and small publicly-held US corporations to become complaint with the Act.

References Primary Resources Columbus. (2006). Surviving Sarbanes-Oxley Audits. InformIT Magazine and website. Retrieved March 01, 2010 from, http://www.informit.com/articles/article.asp?p=415980&rl=1 Cosgrove, S. (2006). The Effects of Sarbanes-Oxley on the Public Accounting Industry. Retrieved February 28, 2010 from, http://www.economics.neu.edu/activities/seminars/documents/cosgrove.pdf Engel, E., Hayes, R. M. and Wang, X. (2004). The Sarbanes-Oxley Act and Firms' Going-Private Decisions. Retrieved March 05, 2010 from, http://ssrn.com/abstract=546626 or doi:10.2139/ssrn.546626 Fowler, T. (2006). FOLLOWING THE RULES / The Sarbanes-Oxley Act has its defenders and detractors as companies shell out to comply / Taking an accounting of reform. Retrieved March 01, 2010 from, http://www.chron.com/CDA/archives/archive.mpl/2006_4051626/following-the-rulesthe-sarbanes-oxley-act-has-its.html FLeC Legal Services. (n.d.) Sarbanes-Oxley and the Non-Public Company. Retrieved March 04, 2010 from, http://www.soxboxsolutions.com/files/articles/SarbanesOxleyandtheNon-PublicCompany.pdf Grinberg, E. (2007). The Impact of Sarbanes Oxley Act 2002 on Small Firms. Retrieved March 05, 2010 from, http://digitalcommons.pace.edu/cgi/viewcontent.cgi?article=1055&context=honorscolleg e_theses Koenig, J. M. (2004). Survey: A Brief Road Map to Going Private. Retrieved March 10, 2010 from, https://litigationessentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cit e&docid=2004+COLUM.+BUS.+L.+REV.+505&srctype=smi&srcid=3B15&key=e4878 28eac7c78c126e1d8041d67d4d7 Sarbanes-Oxley Act. (2002). U.S. Senators Sarbanes and Oxley. Passed in 2002 by both the House and the Senate. Retrieved March 01, 2010 from, http://www.aicpa.org/info/sarbanes_oxley_summary.htm U.S. Securities and Exchange Commission. (2009). Going Private Transactions, exchange Act Rule 13e-3 and Schedule 13E-3. Retrieved March 08 from, http://www.sec.gov/divisions/corpfin/guidance/13e-3-interps.htm

U.S. Securities and Exchange Commission. (2005). Testimony Concerning the Impact of Sarbanes-Oxley Act. Retrieved March 08, 2010 from, http://www.sec.gov/news/testimony/ts042105whd.htm

Secondary Resources Ireland, J.C. and C.S. Lennox. (2002). The large audit firm fee premium: a case of selectivity bias? Journal of Accounting, Auditing and Finance Vol. 17, Issue 1: Page 7391. Marshall, J. (2006). Are Foreign Issuers Shunning the U.S.? Financial Executive Vol. 22, Issue 8. Page 25-28. Menon, K. and D.D. Williams. 2001. Long-term trends in audit fees. Auditing: A Journal of Practice and Theory Vol. 20, Issue.1 Page 115-136.