Sox Comes Calling

Practicing accountants should all give a cheer for S-O-X. Every business is impacted by the Public Company Accounting Reform and Investor Protection Act of 2002, commonly known as Sarbanes-Oxley or SOX. The politicians attempting to plug holes and round up the animals escaping from the open barn door have provided the foundation for enactment of Sarbanes-Oxley. They have done much more than they ever anticipated.

SOX’s Design & Intent
SOX was designed by a committee to handle issues surrounding business management and financial reporting. The intent of the Sarbanes-Oxley Act is to improve the accuracy and reliability of corporate disclosures. It created new standards for corporate accountability as well as new penalties for acts of wrongdoing. Key to understanding within the accounting community is how SOX changed the interactivity among corporate management, accountants and auditors.

The Impact on Small & Medium-sized Businesses
While SOX was designed for public companies, it is absolutely clear that SOX impacts small and medium-sized businesses in a major way. Companies of every size must implement people and technical resources that improve internal controls over operations. In this way, the SOX regulations can boost reliability over financial statements.

Public companies have to comply; it’s the law. Any appeal to a higher authority requires lots of legal support and the probability that non-compliance can result in penalties and/or jail time. The consequence of fines is less onerous then the very real impact of prison confinement.

The establishment of regulatory standards for the public companies is clearly having a trickle-down effect on all non-public companies. The trickle is migrating to a fire hose as these standards have become the standard for all assessments surrounding operations and procedures. Banks are encouraging the implementation of SOX compliance. For example, Wells Fargo bank has a page devoted to SOX information (www.wellsfargo.com/com/focus/sox). This web page includes the following sentence that applies to all companies, regardless of size:

“Instituting the controls envisioned by SOX will patently require a concerted effort. Over time, however, your initial investment should be amply compensated by the benefits of increased transparency and control.”

Today’s transaction-based systems have created islands of data that have a growing number of tentacles to other systems. With every system impacting every other system, there is an increasing collaboration of strengths and weaknesses throughout a company’s business operations. One system’s controls impact every other system. This can be complicated. The smaller business may not have all of the internal staff needed to implement appropriate SOX standards based controls. Accountants can certainly play a role applying their skills to design and implement proper controls.

This article explores a few of the technology tools and products for small firms and how small to medium-sized tax and accounting firms can use such tools.

ACCOUNTANTS & RELIABILITY

Accuracy and reliability are what accountants should be all about. Federal regulations are important but do not have to be the sole driving force for supporting controls over transactions and reporting. SOX has removed the “I never knew and was not there” defense from everyone’s legal vocabulary. The accuracy of financial reporting is no longer just the accounting department and public auditor domain. Of course, the higher up the pay and responsibility scales, the more accountable one becomes.

One of the values of SOX is how it shines a very bright light on improved financial reporting responsibilities along with new internal controls and procedures for the maintenance of financial accounting records. It is understandable that the intent of Sarbanes-Oxley is to enhance corporate governance and strengthen corporate accountability.

A few of the key intended enhancement points include the following: