Tip of the Month for January 2006

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TIP: Sarbanes-Oxley Compliance May Boost Your Business
Private companies - and most small businesses - are not required to comply with the governance changes resulting from the Sarbanes-Oxley Act of 2002 - legislation which sought to strengthen corporate governance following financial scandals at major corporations like Enron and WorldCom. However, an increasing number of business executives, whose companies aren’t subject to public sector scrutiny, are voluntarily choosing to adopt policies in accordance with Sarbanes-Oxley (Sarbox). Many business owners, especially those who provide goods or services for larger, publicly traded companies that are required to follow the more stringent Sarbox guidelines, believe it makes good business sense to do so.

Would voluntary compliance make sense for your firm? Perhaps so, if the following apply to your business:
  • You participate in competitive bids for new business from large corporations or government agencies. No organization wants to do business with someone who may become an embarrassment at a later date. Many large public and private sector organizations select business partners based on the quality of their governance, as well as their track record in providing quality goods or services.
  • Most of your competitors are Sarbox-compliant. If Sarbanes-Oxley is becoming the "standard" in your industry sector, it might be unwise to buck the trend even if you are not required to comply.

  • Your company provides business consulting or professional services in areas involving financial or ethical business practices. It is sound business sense to adopt the best practices that are required of your clientele.

  • You require loans or credit arrangements periodically to support business operations or expansion plans.
If compliance seems a little daunting, remember that unlike big public corporations, private companies can adopt Sarbox measures piecemeal. A small business owner can decide to what degree he, or she, wishes to embrace new compliance measures. Your professional tax and financial advisors can help you determine which measures would be best for you - the ones that are least expensive to implement but provide maximum impact.

Many small businesses start by reviewing their internal controls (checks and balances) and adding measures to prevent discrepancies on financial statements on a day-in, day-out basis. Depending upon the nature of the business, appropriate changes might include:
  • Adding further review steps to routine internal accounting procedures.

  • Forming an advisory board comprised of independent directors with financial expertise.

  • Establishing an audit committee.

  • Putting "whistle-blower" policies and procedures in place to prevent fraud and theft.
Willingness to continually reinforce internal controls and maintain needed checks and balances can do much to improve a small company’s competitive edge. More and more entrepreneurs believe updated governance to be as important in their new business efforts as traditional sales and marketing efforts.


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