The Private Company Mindset

"We're not public—we don't need SOX controls." It's a common refrain in private companies, and it's technically correct. Sarbanes-Oxley applies to publicly traded companies. You have no legal obligation to implement internal controls over financial reporting at the SOX level. No Section 404 attestation. No external auditor opinion on controls. No regulatory consequences for gaps.

So why bother?

Because the logic that drives SOX requirements—preventing fraud, ensuring accurate financial reporting, maintaining operational integrity—applies to every company regardless of public status. The question isn't whether controls are legally required. It's whether your business can afford to operate without them.

The regulations were created in response to spectacular corporate frauds at Enron, WorldCom, and Tyco. Those were public companies, but the control weaknesses that enabled fraud exist in private companies too—often in more pronounced form because there's less external scrutiny.

Private companies that implement SOX-style controls aren't doing it for compliance. They're doing it because mature controls make their businesses run better, protect against fraud, and position them for whatever comes next—growth, acquisition, PE investment, or eventual public offering.

Why Controls Matter Without the Legal Mandate

Fraud Prevention

Fraud happens at private companies. Often more easily than at public companies, because there's less scrutiny, fewer formal controls, and more trusted relationships that can be exploited.

The Association of Certified Fraud Examiners estimates that organizations lose 5% of revenue annually to fraud. For a $50 million company, that's $2.5 million—every year. The median loss from occupational fraud is over $100,000, and frauds at smaller organizations tend to be proportionally larger because controls are weaker.

The cases that make news are dramatic: the bookkeeper who embezzled $2 million over a decade, the CFO who manipulated financials to inflate bonuses, the trusted manager who created fake vendors and paid himself. But most private company fraud is never publicized. It's discovered quietly, handled internally, absorbed as a loss, and sometimes not even fully understood.

How Fraud Happens in Private Companies

The fraud triangle—opportunity, pressure, and rationalization—operates the same way regardless of company size. But private companies often create more opportunity through:

• Concentrated responsibilities: One person handles cash receipts, makes deposits, and reconciles the bank account

• Trust-based controls: "We've known Mary for 20 years; she wouldn't steal"

• Informal approvals: Decisions made verbally without documentation

• Lack of oversight: Owner/executives too busy with operations to review details

• IT access: Everyone is an admin because it's easier than managing permissions

Controls exist to remove opportunity. Segregation of duties, approval requirements, reconciliation processes—these exist because they actually prevent fraud, not because regulators require them.

Accurate Financial Reporting

Even without SEC reporting requirements, you need reliable numbers. Banks require financial statements for lending. Investors require them for funding decisions. Insurance companies require them for coverage. Customers sometimes require them for vendor qualification.

Most importantly, your own decisions require accurate information. If your revenue is overstated, you might invest in growth you can't afford. If expenses are in the wrong period, you might think profitability is better—or worse—than reality. If inventory is wrong, you might order too much or stock out unexpectedly.

Controls that ensure data quality and reporting accuracy serve you first, not external parties. Accurate financials lead to better decisions. Inaccurate financials lead to mistakes that compound over time.

Where Private Company Financials Go Wrong

Without disciplined controls, private company financials often suffer from:

• Revenue recognition issues: Recognizing revenue when billed rather than earned

• Expense timing problems: Recording costs when convenient rather than when incurred

• Inventory discrepancies: Books don't match physical counts, and nobody investigates why

• Accounts receivable aging: Uncollectible balances carried as assets

• Intercompany confusion: Transactions between related entities that don't reconcile

• Estimate inconsistency: Different approaches to reserves, accruals, and judgments period to period

These issues don't trigger regulatory consequences for private companies. But they do lead to bad decisions, surprised bankers, and complicated due diligence when transactions eventually happen.

Operational Efficiency

Controls aren't just about preventing bad things—they ensure processes run consistently and efficiently. This operational benefit is often overlooked in discussions of internal controls.

Documented procedures mean work happens the same way every time, regardless of who's doing it. Defined approvals mean decisions are made by the right people with the right information. Systematic reviews mean problems are caught early when they're easier to fix.

Companies without mature controls operate on heroics. Things work because specific people make them work through personal effort and institutional knowledge. When those people are sick, on vacation, or leave the company, processes break down.

Companies with mature controls operate on systems. Processes work because they're designed to work, documented so anyone can follow them, and monitored to catch problems. The organization is more resilient, more scalable, and less dependent on individual heroics.

Transaction Readiness

If you ever sell the company, go public, take PE investment, or merge with another business, buyers and investors will scrutinize your controls. Building controls during due diligence is expensive, time-consuming, and raises red flags about how the business has been managed.

Due diligence teams have seen hundreds of companies. They know what mature operations look like. Control gaps don't just create work during the transaction—they create concerns about what else might be wrong. They affect valuation, deal terms, and sometimes whether deals happen at all.

Building controls before you need them means you're always ready. You can pursue opportunities on your timeline rather than scrambling to prepare when an opportunity appears. The companies that achieve the best transaction outcomes are the ones that operate with discipline before the transaction is on the horizon.

The Controls That Actually Matter

You don't need to implement every SOX control for a private company. Focus on the controls that address real risks and create operational value.

Segregation of Duties

The principle: no single person should be able to complete a high-risk transaction from start to finish without oversight. This prevents both fraud and errors.

Key segregations for private companies:

• Cash handling separated from recording: Person who receives cash shouldn't record it or reconcile the bank

• Vendor management separated from payments: Person who creates vendors shouldn't process payments

• Customer management separated from collections: Person who creates customers shouldn't apply cash receipts

• Inventory management separated from counts: Person who manages inventory shouldn't control count results

• Journal entries separated from approval: Person who creates entries shouldn't be able to post them

Perfect segregation isn't always possible in small teams. When it's not, compensating controls—management review, reconciliation by outside parties, system-enforced limits—can provide alternative protection.

Custom workflows in NetSuite can enforce segregation automatically. Approval routing, required authorizations, and transaction limits can be built into the system so the controlled path is the only path.

Documented Processes

When procedures are written down, they're followed consistently. New employees can learn faster. Errors are caught against defined standards. Tribal knowledge is captured before people leave.

Critical processes to document:

• Month-end close procedures

• Cash handling and reconciliation

• Revenue recognition and billing

• Procurement and payment processing

• Payroll processing

• Inventory management

Documentation doesn't have to be bureaucratic. Simple checklists, process flows, and reference guides are often more useful than elaborate procedure manuals. The goal is consistency and accountability, not compliance theater.

Management Review

Regular review of key transactions by someone senior enough to catch anomalies. Not rubber-stamping—actual review with questions asked and issues investigated.

Effective management reviews include:

• Financial statement review: Does this make sense? What changed and why?

• Variance analysis: Actual vs. budget, actual vs. prior period, with explanations

• Transaction review: Sampling high-risk or unusual transactions

• Reconciliation review: Verifying that key accounts are actually reconciled

• Access review: Periodic verification that user access is still appropriate

Management review creates accountability. People are more careful when they know their work will be reviewed. It also catches errors and irregularities early, before they compound.

Automated Controls

System-enforced validations and workflows are more reliable than controls that depend on human diligence. Systems don't forget, don't take shortcuts, and don't have bad days.

Examples of automated controls in NetSuite:

• Required fields that prevent incomplete transactions

• Approval workflows that route based on amount, type, or other criteria

• Validation scripts that check data quality before saves

• Role-based access that restricts what users can do

• Audit trails that capture who did what and when

Custom automation makes controls invisible but reliable. Users don't experience controls as obstacles—they experience them as how the system works. The right data is required. Approvals route automatically. Exceptions are flagged without manual monitoring.

Reconciliation Discipline

Bank reconciliations, intercompany reconciliations, subledger-to-GL reconciliations. Monthly, without fail.

Reconciliation discipline catches errors before they compound and fraud before it grows. A $500 error that's caught in month one is a minor correction. The same error undetected for 18 months is a material misstatement requiring explanation to auditors, banks, and potentially transaction counterparties.

Beyond catching errors, regular reconciliation forces attention to data quality. When reconciliations are performed diligently, the problems they reveal get fixed. When they're skipped or rubber-stamped, problems accumulate.

Building Controls Without Bureaucracy

The goal is controls that work, not controls that exist on paper. Private companies have an advantage here: they can implement controls pragmatically without the documentation overhead that public companies face.

Start with Risk

Identify where things could actually go wrong. What transactions involve significant money? Where is there opportunity for fraud? What errors would have material consequences?

Focus controls on those areas. Low-risk areas don't need the same attention as high-risk areas. Proportionate controls mean appropriate protection without unnecessary overhead.

Design for Operations

Controls should make operations better, not slower. Well-designed controls catch problems early, ensure consistency, and reduce rework. Poorly designed controls create bottlenecks, frustrate users, and get bypassed.

When implementing controls, ask: Does this actually reduce risk? Is it the simplest way to achieve the protection needed? Will people actually follow it, or will they work around it?

Automate What You Can

Every manual control is a control that depends on someone remembering, having time, and choosing to do it correctly. Automated controls operate consistently regardless of workload, staffing, or individual judgment.

Custom development in NetSuite can automate controls that would otherwise be manual. Approval workflows, validation scripts, automated reconciliations, exception alerts—these are investments that pay back through reduced risk and improved efficiency.

Keep Documentation Useful

Documentation should help people do their jobs, not satisfy auditors. Write procedures that new employees can actually follow. Create checklists that improve consistency. Build reference guides that answer real questions.

Documentation that sits in binders unread is waste. Documentation that's used daily is valuable. Design for the latter.

The Maturity Advantage

Companies with mature controls operate differently than companies without them:

• Problems are caught earlier, when they're cheaper to fix

• Processes are repeatable and don't depend on individual heroics

• Financial reporting is trusted for decision-making

• Audits are smoother and less expensive

• Transactions proceed faster with fewer surprises

• Key-person risk is reduced because knowledge is documented

• Growth is easier because systems scale better than tribal knowledge

This operational maturity has tangible value. It shows up in efficiency, in decision quality, in risk reduction, and eventually in valuation when transactions happen.

Bottom Line

SOX compliance isn't required for private companies. But the logic behind SOX—that controls protect financial reporting integrity—applies regardless of public status.

Build controls because they make your business better, not because someone requires them. Focus on controls that address real risks. Design for operations, not compliance theater. Automate where possible. Document for usefulness.

The companies that operate with control maturity don't do it because they have to. They do it because it works—reducing fraud risk, improving accuracy, enabling consistent operations, and positioning for whatever opportunities come next.

You're not public. You don't need SOX. But you probably need what SOX provides.