subject: Application Hosting: Sarbanes-oxley Act's Impact On Mid-market Companies [print this page] Do you outsource your application hosting? Are you unaware of the Sarbanes-Oxley Act and how it will affect your business? This article will discuss how companies that provide application hosting and their customers will be impacted by the Sarbanes-Oxley Act.
On July 30, 2002, the American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act, was signed into law. The Sarbanes-Oxley Act has had a dramatic affect on application hosting services as well as business as a whole. Businesses now must provide financial evidence that their accounting house is clean and ensure that their application hosting services provider comply with SOX guidelines. This Act has put into law tougher regulations against public business of all sizes and has drastically changed the nature of all IT outsourcing providers especially application hosting services.
Although the Sarbanes-Oxley Act rose to prominence on the wrongdoings of large, public companies, there's now a new level of expected compliance that cascades down to private companies too; anyone using 3rd party IT services, including application hosting services. In short, any private company - large or small - that has a requirement for an audit (especially from a national auditing firm), and uses an IT service provider, will likely have to comply with the spirit of Sarbanes-Oxley.
Additionally, many companies that have investments from other than family members will be pressured to conform to Sarbanes-Oxley's best practices. Because in the long term, it's unlikely that public accounting firms will have two sets of standards by which they'll audit, one for public companies and another for private. In the near term, public accounting firms are most likely to recommend Sarbanes-Oxley's standards as best practices that should be set as goals for private firms using outside IT service providers.
Also impacting SMBs is the fact that accounting firms have been challenged too. Because of a large number of high-profile accounting frauds and bankruptcies, some firms have removed themselves from high-risk audit environments. And while the additional work generated from SOX has resulted in the large accounting firms having more work than they can service, some of these firms have resigned smaller clients due to capacity constraints, or have decided simply to under-serve them.
With all these factors considered, it's logical to conclude that public accounting firms will view an application hosting company that refuses to adopt SOX as high-risk and either drop them from their customer list or refuse to take them on as a new client.
Privately held companies that are planning to go public, grow in revenue, or become acquired also need to seriously consider complying with the Act as a sign of financial soundness and integrity in reporting. SMBs that do business and partner with public firms governed by SOX are increasingly required by their larger business partners to demonstrate SOX compliance as well.
We believe that SOX compliance for all companies will become a requirement to stay in business - an "expected behavior" of sorts to maintain the spirit of good business. Compliance ensures solid financial reporting and cannot help but improve business processes. From our perspective, it's not a matter of "if" your company needs to comply with the Sarbanes-Oxley Act. It's simply a matter of "when."
Unfortunately, the SOX compliance pill is harder to swallow for smaller businesses because of the costs associated with the process. With many SMBs working to reduce costs through outsourcing of non-core functions, the pressures of compliance have trickled down to their application hosting or outsourcing partners. They, too, must now enable compliance within their scope of services, since many application hosting and IT outsourcers are providing, hosting, or managing the systems through which financial information flows. Without doubt, those systems must now be compliant with the spirit of SOX.
