SOX Compliance Made Easy Through Software

Many publicly held companies have been struggling with SOX (the Sarbanes-Oxley Act) since its enactment on July 30, 2002. In fact, some companies have chosen to either de-list as public companies (go private again) or change their listings to the Pink Sheets — an electronic market where the companies listed do not have to comply with SOX.

(Please see my previous articles on SOX for additional background: Sarbanes-Oxley: Insurmountable Hurdle for Small Business?, Sarbanes-Oxley: Avoiding Its Pitfalls and Serving on a Board After SOX: Opportunities and Perils.)

This article will look at how software companies are creating programs that aid publicly held companies in complying with SOX.

Where They Are Fumbling

But first, let’s take a look at where the companies seem to be fumbling. As I mentioned in a previous article: “SOX is organized into 11 titles. But insofar as compliance is concerned, make sure you pay special attention to Sections 302, 401, 404, 409, 802 and 906 as you read through the Act. Among these, the section that seems to cause the most worries for accountants and those responsible for the implementation of the Act is section 404.” That section is entitled “Management Assessment of Internal Controls.”

In that article, I go into some detail on that particular section: “Section 404 clearly lacks specific standards for compliance. When these standards are written, accounting costs will begin to subside. The final 404 procedures are what audit firms need. In the meantime, accountants are well served if they work closely with the SEC and the Public Company Accounting Oversight Board (PCAOB) when they are uncertain of how to deal with certain key issues.”

Industry’s Response to SOX

Many executives of publicly held companies are complaining about the complexity of managing the SOX reporting process and its costs. Fortunately, there are software companies that see this as a wonderful opportunity to garner additional revenue, while helping the industry comply with a complicated law.

Here are some of the companies that have stepped into the fray: Certus, Movaris, Documentum, Handysoft, Integrify and Microsoft. Your company’s IT person can research these companies and others that are specializing in SOX compliance.

I did a Google search where I inserted the phrase “SOX compliance.” I got 448,000 hits! So you see, there are plenty of opportunities for your IT person to check out.

Biggest Problem of Non-Compliance

The major problem, from what I read, is that of revenue recognition. Many companies have had to restate their financial results because they had problems with the ways by which they recognized revenues.

What’s making this situation even more critical today is the ongoing publicity about companies such as Enron and WorldCom. In my opinion, this is making the regulators even more vigilant because there is so much negative publicity each time companies restate their incomes. I guess we all fear another WorldCom or Enron meltdown.

For the nervous CFOs and board members out there, I’ll restate an old accounting axiom: “Anticipate no profits, but provide for all loses.” One can’t go wrong by taking this conservative path. Just remember that a sale is not a sale until the revenue is irrevocably earned.

I recently read in The New York Times: “Time Warner, Inc. has agreed to pay $300 million to settle a complaint by the Securities and Exchange Commission that the company’s AOL unit overstated revenue for nine quarters.” So, you see, the problem of revenue recognition is very much in the news today and will continue to be until more publicly held companies get their “revenue-recognition” houses in order.

10-Ks Currently Being Restated

The annual filings of publicly held companies to the SEC are, in too many instances, being restated or delayed. Here’s a quote from an actual 10-K where the officers are explaining why they cannot file that report on a timely basis:

“The Registrant has experienced significant delay in completing its …financial statements (because) the Registrant did not maintain effective internal control over revenue recognition … in accordance with generally accepted accounting principles …”

Therefore, I would stress to CFOs and board members that they search for companies that are paying special attention to revenue recognition.

Revenue Recognition Software

Though I have not done an exhaustive search, I did find a company that seems to be making the process “idiot proof” (my words). It has created tamper-free software that is used by distributors for public companies that have to report to the SEC.

This software assures that reporting companies are not recording income when they ship to distributors (often referred to as the Point of Purchase, POP, method of recognizing income), but when the distributors sell the products to their customers (often referred to as the Point of Sale, POS, method of recognizing income).

The company that created this software is out of Bellevue, Washington, and is called Entomo. Go to its Web site and click on Entomo SmartHub/SFR to get a description of how the software works.

Whichever software company that you go to (remember that I got 448,000 hits when I did my search), just be sure that the software you end up using takes the most conservative approach to recognizing income.

Phantom Income

We are reminded almost daily of the frauds perpetrated by CEOs and CFOs who have “cooked their books.” They were recognizing “phantom income” (my phrase) as though it were real. In today’s heavily regulated environment, there is just no excuse for misleading the public with inaccurate sales figures. And, the penalties are just too great to even consider such folly.

A healthy concern for Sarbanes Oxley and its rules will make your life a lot easier. The appropriate software can make it easier still. Do some good research and try to find a software program that gives your company all of the protections against violating SOX that are possible.

The conservative regulatory path is the safest one. Stick to it, and good luck!

Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public. He also is a frequent speaker on the subject of financial advice for small businesses as well as the IPO process. He can be contacted at [email protected].

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