US accounting rules blamed for software slump

Chief financial officers rushing to comply with Sarbanes-Oxley accounting rules in the US may have little time to sign off on new software deals, contributing to the industry's general weakness, according to a recently released report by analyst Piper Jaffray.

That assessment comes in stark contrast to Wall Street's predictions a year ago that IT spending might get a boost from Sarbanes-Oxley.

“I've heard through the channel that CFOs are busy doing the testing and documentation they need in order to bring them into compliance by the end of the year. So if a sales rep brings them a contract to sign at the end of a quarter, they are overwhelmed,” Piper Jaffray analyst David Rudow said. “At some point, Sarbanes-Oxley may help software sales, but that's not the case now. The question, however, is when?”

Sarbanes-Oxley, a law the US Congress passed in 2002 following financial scandals at Enron and WorldCom, was designed to make accounting procedures at public companies more transparent to investors and regulators. This law has also resulted in CFOs and chief executives being personally accountable for the accuracy of the company's financial data, and requiring greater documentation and testing of the information, as a result.

Sarbanes-Oxley is among the top three or four reasons software vendors and consultants blame for sluggish sales, Rudow said. He noted, however: “You can't blame Sarbanes-Oxley as the only thing that is causing the weakness. It's just one of several things, but all this stuff adds up.”

Continued weakness in the software sector is expected to continue through the third quarter, with some improvement seen in the fourth quarter and next year, Rudow said. He noted the software sales environment may improve, as CFOs get their reporting systems compliant with Sarbanes-Oxley and begin signing off on the information.

And though companies will need to comply with Sarbanes-Oxley on an ongoing basis, the task should be less arduous in the coming years because CFOs will be more familiar with the process, Rudow said. That should stop the accounting process from getting in the way of signing off on larger software deals.

“I don't feel like these deals are drying up and disappearing,” Rudow said. “They're just getting delayed because of Sarbanes-Oxley.”

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