Thursday, December 09, 2004

Small tech companies are howling as they scramble to comply with the Enron-inspired Sarbanes-Oxley corporate governance act.

Smaller tech firms say the act, designed to prevent accounting fraud, creates busywork that drains resources — and shareholders' pockets. "All of this is really just paper-pushing," says David Anastasi, CEO of business software maker Captaris. "I haven't met one investor that thinks it's a good thing."

The 2002 law affects all public companies. Tech firms with 500 employees or less say they're particularly hard hit because they run fast and lean. They warn of added bureaucracy and stifled innovation. "It's a drag on entrepreneurial companies," says Brian Henry, CFO of Bellevue, Wash.-based Onyx Software.

Small companies are grousing now because most face deadlines early next year. (Most larger firms had even earlier deadlines.) And they say they had no idea how many problems Sarbanes-Oxley would create, including:

Escalating costs. Firms are hiring extra accountants, consultants and even full-time staff to handle accounting procedures required by the act. Captaris estimates its direct costs alone will reach $1 million — a lot for a company that was $10,000 short of breaking even in the first nine months of the year.

Huge workloads. TransAct Technologies, a Wallingford, Conn., specialty printer maker, scuttled plans for an enterprise resource planning (ERP) computer system after it started its Sarbanes-Oxley compliance. The company's 200 employees just couldn't handle two big projects at once, CEO Bart Shuldman says.

Not enough accountants. Some accounting firms are shedding clients as they struggle to keep up with Sarbanes-Oxley work. Wireless equipment maker Endwave was dumped by Ernst & Young in September, forcing the Sunnyvale, Calif., company to turn to second-tier firms BDO Seidman and Grant Thornton. They were also too busy.

Endwave ended up with local firm Burr Pilger & Mayer. CFO Julianne Biagini says the new accountants have done a good job, but she's worried that "they aren't going to have the back-up resources (of a big firm)." Ernst & Young says it's trying to hire more staff to meet demand.

Impractical rules. The section of Sarbanes-Oxley attracting the most criticism requires companies to certify the accuracy of internal accounting controls. Although the language is vague, most auditors are telling clients to put in strenuous checks and balances. That can be difficult with a small staff. "We don't have a lot of people to do the double-checks," Onyx Software's Henry says.

Henry and others say they support the spirit of Sarbanes-Oxley but oppose its most-cumbersome requirements.

Others say the stiff rules are necessary so companies "churn out accurate financial data," says lawyer Richard Swanson of Thelen Reid & Priest, who runs a Sarbanes-Oxley seminar.

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