THE IMPACT OF SARBANES-OXLEY ON SMALL BUSINESS
As a result of the spate of corporate corruption, most notable that exposed in the headline stories of the notorious Adelphia, Dynegy, Enron, WorldCom, and Tyco financial scandals, Congress passed the Sarbanes-Oxley Act of 2002. Named after the two members of Congress Senator Paul Sarbanes and Representative Michael Oxley who authored the legislation, the “Public Company Accounting Reform and Investor Protection Act” is frequently referred to as SOX. The intent of Congress was to protect investors and shareholders from executive fraud and, to make certain the best possible protection the legislation is vast.
SOX covers among other procedures, actions of boards of directors, reporting requirements, financial controls and financial disclosure. Most financial and legislative analysts as well as many firms have felt because the SEC has the responsibility for interpreting SOX and the legislation was written to address executive fraud in large publicly traded corporations that there would be little if any impact on small, private, or closely held companies. From AVTAXMAN & ASSOCIATES’ research and discussions with experts in small business issues, we strongly believe that SOX will have a direct impact on small businesses. It will change expectations by those that lend to small business, insure small business, and make determination of the value of small business related to financing, banking and exit strategies.
Section 404 of Sarbanes-Oxley Act of 2002 is considered the most important section of the Act. This section relates to internal controls. Those who have interpreted this section broadly and I believe that Section 404 applies not only to internal financial controls but all internal controls. Daniel Henriquez, president of the highly respected accounting firm AVTAXMAN & ASSOCIATES whose practice includes small and middle market businesses, is advising clients that SOX will result in the need for more documentation to satisfy anticipated requests from financial institutions.
Though the intent of SOX legislation is to remedy problems, it can also be interpreted as an opportunity to make improvements in business processes that will result in a stronger, more competitive company. It is very possible that a small private-business submitting a loan or credit line application to a lending institution that is publicly traded and must meet SOX requirements, could have some of these requirements passed through.
Many of my colleagues are among those that believe Insurance companies will eventually add compliance with SOX as a component in determining risk especially in the areas of professional liability, errors & omissions, and directors & officers insurance. The impact would be especially severe for small & minority businesses who historically have had encountered barriers in obtaining these coverages in the past.
It is important to note that the corporate scandals were not just about financial audits, they encompassed a number of other areas such as responsibilities of the Board of Directors and Officers of the Corporation. Under SOX executives are held personally responsible for attesting to the validity of the financial reporting and to the internal controls.
AVTAXMAN & ASSOCIATES will give your company the independent expertise you need to comply with Section 404 of the Sarbanes-Oxley Act. Our thorough approach to creating, examining and testing your internal controls includes expertise in the following areas:
- Revenue Management:
Assist and train accounting & finance personnel in justifying manual financial processes.
Financial data, unless it is reconciled on an automated system will not be acceptable by any institution demanding Sarbanes-Oxley compliance.
- Internal Controls:
Create and document Internal controls specifically for your business and industry.
Employee roles, employee qualifications, security provisions, back up systems, succession planning will all need to be characterized and documented.
- Contract Management including Supplier/Vendor contracts:
Examine and document IT and Supply Chain protocol (vendor/supplier relationships, rules, buying processes, payments).
Are there controls in place? Are there logical processes? Are there systems that automate basic business processes?
- Business Process Management:
Assist in demonstrating that appropriate management, technical, and systems infrastructure exist to support the business operations.