The study, which comes on the heels of a decision by the U.S. Securities and Exchange Commission (SEC) to delay compliance requirements for small businesses by one year, brings to light the opinions and difficulties faced by small-business decision-makers managing SOX-related processes at public and private small businesses nationwide. More than two-thirds of all small businesses favor differing sets of compliance standards for small and large companies, while others are outsourcing or cutting back in areas such as marketing, research and personnel to meet compliance demands. As the leading provider of financial and business management solutions to companies of all sizes, SAP developed the survey to provide insight into the regulatory issues and obstacles facing small companies attempting to grow operations and compete in the larger marketplace.
In September 2005, having recognized a perceived compliance burden within the small and midsize enterprise (SME) arena, the SEC issued a one-year compliance extension to small companies with less than $75 million in public float, giving them until July 2007 to become fully compliant. Looking to prevent future discrepancies in accounting processes and to improve corporate governance practices, the U.S. Congress signed the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act into law in 2002. Applicable to all publicly owned and operated businesses nationwide, the law forced many small businesses to react with limited budgets and resources to meet compliance standards within an established timeline.
The SAP America, Inc. survey discovered many valuable points regarding how small companies have approached SOX compliance, including:
- Most businesses are investing, adjusting resources. The SEC’s September 19 decision to extend compliance for small companies until July 2007 has affected the way many small public companies are approaching their compliance plans. According to the SAP survey, 54 percent of companies have altered their focus, investing more time and money into planning. In addition, 53 percent of all non-compliant companies are now working with outside consultants to guide measures and carefully lay out a methodical approach to SOX compliance. Only 10 percent of companies intend to ignore Sarbanes-Oxley regulation in anticipation of an eventual repeal for SMEs.
- Cost of compliance cited as greatest challenge. The survey concluded that for the majority of public small businesses, the significant compliance cost was the greatest challenge in dealing with Sarbanes-Oxley regulations. Among responders, 54 percent of public small businesses cited the cost factor as the greatest challenge facing decision-makers. The next greatest challenge – the balancing of compliance costs with budget forecasts – was cited by 16 percent of respondents.
- Outsourcing used in funding compliance. The challenges of SOX compliance costs are further evident when measuring how respondents have funded compliance plans: 42 percent of companies have outsourced SOX compliance, 18 percent are cutting marketing and/or research and development and 16 percent have reduced their headcounts to scale back costs.
- Strongest support for separate standards among public companies. When measuring only publicly owned small companies that are required to meet regulatory measures, 86 percent of decision-makers support separate sets of rules.
Compliance remains an important issue to both small and large companies – not only for adhering to the law but also for improving financial transparency and setting internal process controls,” said Garry Lowenthal, CFO of Viper Motorcycles and a Congressional witness who testified about the disproportionate burden of SOX compliance on smaller companies. “With the right business management solution, small businesses can develop the discipline to formulate sound business processes and controls. We now can attest to the adequacy of our internal controls for financial reporting through the use of technology.”
Companies that leverage the systems, processes and controls that enable them to manage their business growth on a day-to-day basis as well as foresee problems and initiate proactive decisions will have a huge advantage over their counterparts who are in a continually reactive mode, according to a white paper by Peter Russo, certified public accountant (CPA) and director of the Entrepreneurial Management Institute at Boston University’s School of Management. Larger enterprises have commonly moved to enterprise resources planning (ERP) solutions to address this need and products are now being offered that bring much of this functionality to smaller companies.
“According to the SAP survey, the majority of small businesses now acknowledge the need for improved reporting and greater investments in time and money to effectively meet Sarbanes-Oxley guidelines,” said Michael Sotnick, senior vice president, Small and Midsize Enterprises, SAP America, Inc. “As regulatory pressures increase, SAP and its partners are helping small businesses meet the challenge with affordable and easy-to-use tools that not only enable better reporting, but also provide an effective platform for profitable growth.”
Source: SAP AG