May 12, 2003 5:53 PM PDT

Can Sarbanes-Oxley rekindle IT spending?

U.S. companies are expected to spend more than $2.5 billion to comply with new accounting rules required by the Sarbanes-Oxley Act, with a significant chunk going to information technology projects.

According to analyst John Hagerty of AMR Research, which released a survey Monday on the impact of the law, $2.5 billion is just the tip of the iceberg.

Congress passed the Sarbanes-Oxley Act last year following the financial scandals at Enron and WorldCom. The legislation seeks to make companies' accounting procedures more transparent to investors and regulators.

Eight-five percent of 60 companies that responded to the AMR Research survey said Sarbanes-Oxley will require changes to their IT and application infrastructure.

Additionally, two provisions in the law that have yet to take effect may fuel new IT projects, said Hagerty. Section 404, which public companies must begin to comply with by the end of the year, pertains to the certification of financial reporting and controls. Section 409, which Hagerty said doesn't have a clear compliance deadline, calls for companies to report material financial events as they occur, rather than at the end of their financial quarter.

As companies update their business systems to help them comply with the law, they could "kick-start" corporate spending on IT the same way the much-feared Y2K bug spurred companies to install or update software programs in time for the year 2000 date change, AMR said.

"It's reminiscent of the enterprise resource planning software craze Y2K kicked off in the 1990s," the study stated.

Rather than patch aging business systems, many companies used the Y2K scare as a reason to install new applications from companies such as SAP, PeopleSoft and Oracle. Fueled partly by the Y2K boom, those software companies reaped big profits and reported double-digit growth during the late 1990s.

To be sure, Sarbanes-Oxley won't have as big an impact on the computer industry as the millennium change did, Hagerty said. And IT consultants will likely soak up much of the IT investment, he added. Still, compliance may spark some new activity in corporate IT departments, which have been idling for more than two years in response to a weak economy.

"This is the compelling event that chief information officers have been waiting for to justify process improvements," said Hagerty.

The point is not lost on technology marketers, who are incorporating Sarbanes-Oxley into their sales pitches. Amid a flurry of announcements last week from its Leadership Summit conference, PeopleSoft said its financial accounting applications can help companies comply with Section 404 of Sarbanes-Oxley. Hagerty said he expects to hear similar messages from PeopleSoft rivals Oracle and SAP in the coming months.

 

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