How does SOX affect small- and medium-size businesses?

Small companies that provide business services to companies that care about SOX need to be aware of the SOX compliance effort, and prepared to help the companies they serve.

For example, if you provide payroll outsourcing services to a large company and allow payroll checks to be calculated incorrectly to the degree that it affects that company’s financial statements and confuses stockholders, then you are causing problems for your customer.

There is nothing inherent in SOX that dictates that all of your company’s processes must be automated. However, automated processes are more likely to be consistently performed. And when the auditors come calling, it’s nice to be able to point to a piece of software (such as a timesheet software) which provides audit trails (an easy test result), separation of authority (a natural control), and a capable reporting system (some SOX tests). This gives SOX auditors something to look at besides just you.

Another key question is whether anyone really expects managers to understand SOX. The answer is that they absolutely do. SOX now is a part of the way America does business. Being able to handle SOX environments is critical to the future of payroll, administration, IT and any other processes in the company that can significantly affect the financial statements. Increasingly, small companies have more than just SOX to worry about.

For example, when business services companies implement time and attendance systems to automate payroll, they often miss the chance to facilitate greater profitability throughout the entire company. These managers are usually not experts at payroll, project accounting or billing automation.

However, the time data, if collected appropriately, can be used to automate project management, project accounting, project tracking and project estimation improvement, as well as for internal, external and reverse billing automation – and any of these can become SOX concerns.

Time and attendance, SOX, and the new people business economy

These new challenges are being caused by the tectonic shift from capital businesses to people businesses. This is a shift of valuing time as much as money. About 50 years ago, when most people twisted bolts in a factory, workers were not considered volunteers, they were not empowered, and managing the money of the company (i.e. the capital) was much more important than maximizing the time and knowledge of the worker. Such businesses are called capital businesses because power and wealth flowed from the capital.

Today, capital businesses are on the wane and companies are becoming people businesses. Simple manufacturing has moved overseas. Software, entertainment, consulting, design and architecture exemplify people businesses, but increasingly, even traditional manufacturing businesses, like GM and Ford, win through design and intellect rather than through excellence in bolt twisting on the shop floor.

People businesses, like software companies and architecture firms, don’t track employee time to minimize break times, if they track time at all. They do it to understand costs and automate billing, and to a lesser extent, to track salary, paid time-off, or to pay hourly knowledge workers correctly. These areas are rife with potential SOX compliance issues. The rise of the people business is challenging news for payroll and HR executives – and it makes their function more critical than ever. Furthermore, it may be our inexperience as business people in measuring creativity and other ‘soft’ people-oriented assets that has led to some degree to scandals like Arthur Andersen, Enron and WorldCom.

In today’s business environment, it is critical that all systems implemented be SOX compliant.

In many cases, automating billing or project management provides a much higher ROI to the organization and this can make the case that automation is both necessary and economically feasible. Many large organizations have employees fill out more than one timesheet: one for project management, one for customer billing, one for payroll, and sometimes another for vacation/leave tracking. This is unnecessary and can damage morale. The right time management system can replace multiple systems.

Time management systems that historically have automated payroll are an outdated concept for people businesses. Time tracking is now a core business process. It should automate payroll, billing and project accounting. If SOX compliance efforts lead your company in the direction of replacing or upgrading your existing time tracking automation system, you should consider one that helps in all of these areas, particularly in project accounting which has enormous SOX implications in its own right.

The SOX act is not only relevant to time tracking software, or to payroll, or to HR, but to all the financial processes in your entire company. It is your responsibility to ensure your company’s processes are the best they can possibly be.

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