SOX Can Be a Benefit to Small Businesses

Written by the Controller | CFO Advisor Team

Sarbanes-Oxley Act (SOX) was signed into law in 2002 to combat the release of misleading financial information to the investing public.  Ethics aside, certain corporate leaders ignored prudent business practices for their own personal gain.  This led to the enactment of SOX.  Unfortunately, many companies view this only as an extra cost of doing business, and are reluctantly instituting it.  Small business owners often ignore it completely and see it as of no benefit to their business.  But should they?  “No”, says Dr. Peggy Jackson, a risk management consultant and author of the book Sarbanes-Oxley for Small Businesses: Leveraging Compliance for Maximum Advantage(Wiley, Sept. 2006).

“It is essential for you to understand how Sarbanes-Oxley legislation affects your company”, explains Jackson.  “By leveraging these requirements (there are only two that apply to private companies) and “best practices”, you can save your company money, lower overhead costs, and improve sales.”  In reality, many of the components of this legislation should already be a part of your everyday business model.

What are these requirements?  The first is “whistleblower protection” which provides safeguards to employees who report suspected fraud or other illegal activities.  The second is document preservation.  These two provisions along with “applying the SOX best practices can help small business owners to strengthen their internal controls” according to Jackson.  Further, “Today’s business environment has raised the expectations for all companies, not just publicly traded ones”.  She adds, “the gold standard in management today is SOX compliance, regardless of the size of your company”.

Whistleblower Protection
SOX requires all businesses, including those considered small, to establish a means to collect, retain, and resolve claims regarding accounting, internal accounting controls, and auditing matters.  Furthermore, the system must enable such concerns to be submitted anonymously.  Why is this important?  According to Jackson there are two primary factors that appear to facilitate fraud in small businesses: (1) the lack of internal controls and (2) the reluctance of coworkers to report the situation.

It is not unusual for the owner to be the last to know of a problem.  Employees need to feel free from reprise to report a wrong doing.  More so, Jackson indicates these employees should be rewarded, if appropriate, for bringing to light things that are for the good of the overall company.

By ensuring that your company is in compliance with whistleblower protection component of SOX, you are protecting your firm’s employees, customers, investors and other stakeholders.

Document Preservation
Like whistleblower protection, documentation preservation is an important means to help your company grow and thrive.  There are two aspects to this provision:

• Preservation and archiving of documents for the purpose of timely retrieval
• Prohibition against the destruction or falsification of records or documents

Having an integrated management system ensures that important documents are stored in safe, accessible locations and are backed up on a daily basis.  Jackson explains that the core of any document management system is access and accountability.  It is vital to the well-being of your company.  Also she adds that a “document preservation policy needs to have a component that states that document destruction is prohibited if the company is under investigation or in a legal action.”

Companies that don’t have effective document management policies often find themselves in challenging circumstances such as problems preparing tax returns or being called to respond to a tax audit. 

Internal Controls
According to the National Commission on Fraudulent Financial Reporting, COSO, internal controls are put in place to keep the company on course toward profitability goals and achievement of its mission, and to minimize surprises along the way.  Internal controls promote efficiency, reduce risk of asset loss, and help ensure the reliability of financial statements and compliance with laws and regulations.

Internal controls through best practices are intended to institute a higher level of management accountability, which includes certifying financial statements and upgrading policies and procedures for management accountability.  With proper controls in place the business can reduce the risk of unintentional errors or embezzlement of the company’s resources.

BIK’s outsourced Controller|CFO Advisors can review your document management policies and your company’s internal controls.

The BIK Controller|CFO Advisors:

Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt
Mark Stricker

Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically.  Our objective will be to improve your bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209. 

Visit our web-site at www.bikcfoservices.com.