TRACKING THE NUMBERS
Sarbanes-Oxley Spurs Growth of Accounting Software Makers
By Chris Cziborr
A cottage industry has sprung from last year’s Sarbanes-Oxley Act: software makers that help public companies comply with new accounting rules.
San Jose-based Nth Orbit Inc. is among the new crop. The company earlier this month made the first sale of its Sarbanes-Oxley software,”Certus”,to Newport Beach chipmaker Conexant Systems Inc.
Nth Orbit’s software covers several Sar-banes-Oxley areas, including Section 404, “Management Assess-ment of Internal Control,” perhaps one of the most critical and difficult for businesses to comply with.
Section 404 requires auditors to certify the controls and processes companies use to come up with their financial results.
The original deadline for compliance was this fall, but it was extended to June 15, 2004, for most large U.S. companies. Smaller companies have until April 15, 2005.
Sarbanes-Oxley, passed in the wake of last year’s slew of corporate scandals and the collapse of accounting firm Arthur Andersen LLP, requires companies to disclose more accurate and timely financial details.
Company officials now have to verify and sign off on the accuracy of their company’s financial reports. And executives and auditors also now have to document and certify that internal accounting systems and procedures actually are working.
Nth Orbit’s Certus software helps companies document, implement and test these internal and disclosure controls as required by Sarbanes-Oxley.
Others joining Nth Orbit with compliance software include Bay Area veterans PeopleSoft Inc., Oracle Corp. and Documentum Inc., as well as Germany’s SAP AG. So far a market leader has yet to emerge, industry observers said.
Oracle has developed software to help companies set up financial controls and provide alerts whenever those controls aren’t followed.
PeopleSoft is selling software that helps companies collect and report data from global operations. It also has software that makes financial information available to shareholders.
Boston-based AMR Research Inc., which has an office in Irvine, reported earlier this year that public companies could spend as much as $2.5 billion to comply with Sarbanes-Oxley.
Two-year-old Nth Orbit last year started focusing on more specific compliance software. The move came in the wake of the Enron Corp. accounting scandal and subsequent regulatory changes made by Congress and the Securities and Exchange Commission.
“Last year when the initial sections of Sarbanes-Oxley were passed, we started an investigation with hundreds of CFOs and external auditors,” said Deidre Paknad, Nth Orbit’s vice president of marketing and business development. “We discussed ways to develop compliance software.”
Paknad said that Section 404 compliance in particular is a lengthy process for companies.
“There are more than 200 processes companies have to go through,” she said. “They have to describe each of the steps and each of the places in the process where something could go wrong and all of the things they do to prevent something from going wrong.”
Paknad said companies also have to provide evidence that they’ve tested their accounting controls.
Nth Orbit recently sold software to a few more companies but wouldn’t disclose names.
Conexant officials declined to talk about the Certus software.
The package costs between $100,000 and $500,000, depending on the size of the company and scale of its activities, Paknad said. “The software takes a couple of hours to install,” she said.
Paknad said Nth is targeting mid- to large-cap companies across all industries. As Nth Orbit has just started making sales, it has yet to turn a profit.
“Our future revenue really depends on whether public companies will get onboard,” Paknad said.
Some in the accounting industry aren’t convinced software is needed to comply with Sarbanes-Oxley.
Dean Samsvick, managing partner of the Costa Mesa office of New York accounting firm KPMG LLP, said he doesn’t plan to promote compliance software.
“I don’t think anybody in the accounting sector is really promoting software,” he said. “We don’t believe Section 404 is a software issue. Software can be an enabler, but 404 is more complicated than a software solution.”
