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Thinking About Putting Off Compliance? Think Again.



With the SEC’s recent postponement of Sarbanes-Oxley (SOX) Section 404 compliance until 2007 for companies with a market cap of under $75 million, many of these smaller firms are breathing a collective sigh of relief. But SOX compliance must still be faced eventually and becoming SOX compliant doesn’t happen overnight. So the heavy-weighted burden of SOX compliance remains and poses major challenges for companies without large IT budgets. For those who chose to see the glass as half full, the SEC’s decision can be seen as a chance for small to medium sized businesses (SMBs) to begin implementing the necessary steps to lessen this onerous burden.

In part, the SEC’s decision to delay was made because larger companies were struggling mightily — in spite of being equipped with greater resources and IT budgets — to meet the first phase of SOX compliance. SMBs should heed the struggles of their larger counterparts and begin setting the foundation for SOX 404 compliance now.

Defining SOX 404

For accelerated filers who now are in year two, SOX 404 requirements are less of a mystery. However, for SMBs who have not embarked on their year one journey, the application of the law and its implications on their day-to-day IT processes and infrastructure may be a conundrum. Understanding the requirements for internal controls, as well as identifying and assessing how controls are instituted throughout IT is no small task. This presents quite a challenge for SMBs who typically lack the large IT budgets necessary to effectively manage a compliance process in addition to day-to-day operational controls. This uncertainty coupled with projected high costs is precisely why the SEC pushed SOX 404 compliance back to 2007 for SMBs.

For example, according to a recent study done by the Small Business Administration, small businesses pay an average of 46 percent more per employee in meeting federal regulations for compliance than their larger counterparts. Most companies with a market cap of less than $75 million have an IT department consisting of approximately 25 to 30 people. These organizations lack the manpower, expertise and technology resources necessary to begin a dedicated audit process. Traditionally, the SMB’s IT budget is prioritized for systems that directly drive product or services versus controls initiatives. In contrast, large corporations have the internal resources to put controls and processes in place before an external auditor identifies areas of weakness. As SMBs prepare for their SOX 404 audit process they often have to call in external consultants to make recommendations of where internal processes and controls can be improved — essentially forcing SMBs to pay for the audit review process twice.

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