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Complying With Government Regulations

Implementing Sarbox-style strategic governance changes can help small businesses woo---and win---more big customers.

Brent Longnecker didn't need to worry about complying with Sarbanes-Oxley to run his Houston-area consulting practice, which specializes in corporate governance and executive compensation. As a private company with 15 employees, Longnecker & Associatesdoesn't generally have to answer to anyone except its customers. But given that it routinely doles out advice on corporate governance issues to its clients, the CEO thought it might be a good business strategy to take a dose of his own medicine.

So during this past year, Longnecker implemented several governance changes. For example, where previously only one employee would review accounts receivable, accounts payable and other key financial data before sending a report to the boss, Longnecker now has three sets of eyes scour the numbers. He is also putting together a formal, paid advisory board. "Now," he says, "I can tell a prospective client what I'm doing from a standpoint of understanding and not from some ivory tower [strategy] I read in a book and want to make money on."

Longnecker is one of a growing number of private-company CEOs who find themselves contemplating Sarbox-style governance changes for their companies. Even if they don't have any plans in the works to take their companies public or merge with a public entity, many CEOs are making changes to satisfy lenders, creditors and other outside parties. They are also looking to please large potential customers, which may consider a company's governance as well as its ability to do the job when selecting a vendor.

"Big public companies want to do business with partners that aren't going to embarrass them in one way or another," says Paul Broude, partner with Boston--based law firm Foley & Lardner LLPand co-author of a March study revealing that an increasing number of private companies say their customers support their decision to adopt new corporate governance measures. As Sarbanes-Oxley becomes a community standard and a best practice, Broude adds, "It becomes a disadvantage if you're in that shrinking minority of companies that don't do these kinds of things."

Unlike their big public customers and partners, however, private companies tend to adopt Sarbox measures piecemeal. "Sarbanes-Oxley lite," as this practice has been dubbed, includes the measures that are least expensive to implement but carry the biggest bang for the buck, reputation-wise. Some examples include installing independent directors with financial expertise, establishing an audit committee to oversee auditors, creating whistleblower procedures to help prevent internal theft and fraud, and increasing the internal audit function.

"The advantage the smaller private company has is it can choose the depth to which it's going to go to implement the provisions," says Trent Gazzaway, managing partner of corporate governance for accounting firm Gran Thornton LLPin Charlotte, North Carolina. He recommends starting with the top areas of risk relating to financial reporting, "and drive into the details of how you know, on a day-in, day-out basis, that you don't have a [discrepancy] on your financial statements or in the processes that ultimately create those statements."

By testing your internal controls and processes, you can offer your clients a positive report card, which is particularly useful when your company is competing as an outsourcer or other service provider that houses sensitive customer or employee information, says Edward Valaitis, national director of client relationships for BridgeMark, BDO Seidman's New York City-based dedicated risk consulting practice. That kind of traditional risk assessment, he says, costs less than Sarbanes-Oxley compliance "by a factor of 10 to 20."

Longnecker estimates that he will spend at least an additional $50,000 this year on governance. But he believes that compliance is a solid strategic investment, just like marketing, good PR and other "softer" expenses that add to the business's bottom line. "Every one of those investments makes us better and helps us sell more," he says. "But that said, I will tell you: This does help me sleep better at night."

C.J. Prince is executive editor of CEO Magazine.

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This article was originally published in the December 2005 print edition of Entrepreneur with the headline: Smooth Moves.

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