Here are some common misconceptions about the Sarbanes-Oxley Act of 2002:
- “We are not a public company, why should we worry about SOX compliance?”
- “Becoming and staying SOX compliant is very costly; we can’t afford that right now.”loo
- “All of those internal controls only get in the way of running our business.”
Over the years, the experts at Ravix Group have heard similar comments and more from some very well-meaning people. But the truth is, they are all misguided. Fortunately, our outsourced accounting and bookkeeping services include preparation for SOX compliance. Just don’t wait until the last minute or you could delay your Initial Public Offering.
Startups Need to Plan for SOX Compliance on Day One
Waiting until your company goes through an IPO to start working on SOX compliance is not only impractical, but it can also lead to much a greater expense after the IPO. Well-designed internal controls should not be a hindrance to running the business. And having the correct number of internal controls is not very costly. Let our experts help you build best practices and establish the right accounting leadership.
Many of our consultants have Big 4 auditing and private industry accounting experience. Over the years, they have learned the importance of well-designed, right-sized internal controls. Our outsourced accounting for startups includes resources to guide your journey to SOX compliance.
Knowing How To Implement Controls the Right Way
Running a business without internal controls may invite people to try to get away with fraud. It has often been said that “padlocks only keep honest people honest. The thieves are not going to stop because of the lock.” It can be similarly said that internal controls will not prevent fraud, but they will deter honest people from taking a risk.
There are two key points to remember when putting internal controls in place.
- You don’t need any ‘extra’ internal controls (i.e. enough is enough)
- Controls should support your business model – not interfere with it or slow it down.
SOX compliance is no longer a new thing, but professionals are still trying to figure out what it requires and how to do it. Assistance from an outsourced controller with public company experience can help you implement the right controls to protect your business without slowing it down.
Many companies begin earnestly, documenting all their internal controls and testing every one of them. This typically leads to an enormous amount of work for a relatively small company. While not every company uses this approach, many new companies can err on the side of doing too much. In this case, the PCAOB published guidance that companies should ‘right-size’ the number of controls. This number could vary from one company to the next as long as you could reasonably demonstrate that the company had enough controls to produce reliable and timely financial information. Over time, many companies have learned where the balance is, and don’t try to earn extra points by doing any more than necessary.
Case Study: Don’t Go Overboard on SOX Inventory Controls
It is common in companies that manufacture and sell tangible products to count their inventory every so often at the end of a period (at least quarterly). In the past, it was not unusual to stop all shipping and receiving activities for a period of time in order to complete this count. But for a company struggling to meet their revenue goals for a year, any stoppage of shipping products leads to a problem. So many of these companies have now learned how to perform this critical internal control without interfering with the shipments that need to go out.
What is the moral of the story? Internal controls should be designed so they do not interfere with running the business, whether in shipping products, delivering software, or automatically processing a credit card payment.
Develop a SOX Action Plan That Works for You
The following action plan results from a few simple questions:
- Do you feel your company is the ‘Wild West’ with no controls?
- Do you feel your company’s controls are constantly getting in your way?
- What is the best way to implement controls without impeding business?
If you honestly consider these questions and are not happy with the answer, consider talking with a financial consulting firm like Ravix Group. We have people on our team that have extensive experience with setting up and documenting internal controls, making sure you have enough but not too many controls, and designing controls that fit your business model and help it run efficiently.
A Ravix Group fractional CFO can guide your startup through growing pains and get it ready for an IPO. Whether you are a public or a private enterprise, SOX regulations affect your company more than you think. Contact us online today or call 408 216 0656 to right-size your internal controls and nurture growth with smart accounting practices, including voluntary SOX compliance.
SOX Compliance: Everything You Need to Know in 2022 | tenfold (tenfold-security.com)
Sarbanes–Oxley Act – Wikipedia
