SOX hits bean counting software for six

New accounting regulations, such as Sarbanes-Oxley, could spell trouble for software makers that sell corporate accounting systems to US companies, according to a securities research firm.

Public companies must certify their compliance with a key section of the Sarbanes-Oxley Act when they close this year's books, noted JMP Securities analyst Patrick Walravens. The law, which Congress passed in 2002 following financial scandals at Enron and WorldCom, is supposed to make corporate accounting procedures more transparent to investors and regulators.

Ironically, the law was supposed to be a gold mine for software developers that introduced special programs to help corporate clients comply with it. Instead, Sarbanes-Oxley work may delay software purchases over the next few months, Walravens said.

As the compliance deadline draws nearer, companies will freeze plans to purchase and install new financial software, fearing that major last-minute changes to business systems could compromise their compliance efforts, Walravens predicted. The clampdown should begin in October and could last about six months, causing certain software companies to miss first and fourth-quarter earnings targets, he said.

SAP, the world's biggest supplier of corporate accounting programs, will be hit particularly hard by software spending disruptions, in Walravens' opinion. JMP Securities lowered its fourth-quarter and 2005 earnings estimates for the German company in a report it issued this week. Walravens' firm also lowered its rating on SAP from "market perform" to "market underperform," saying SAP's stock is set to tumble by as much as 19 percent.

"While we believe this fiscal-year-end deadline could impact licence revenue for many software companies, we expect the impact to be the greatest for up-market enterprise resource planning vendors, of which SAP is the largest," Walravens said in the report.

SAP spokesman Bill Wohl disagreed with the report. "SAP continues to see strong demand from customers to invest in solutions that address the challenges of meeting regulatory requirements, like Sarbanes-Oxley," he said. "We have not seen any slowdown, nor do we anticipate one."

Oracle, PeopleSoft and Hyperion Solutions are also likely to be affected by the looming deadline, but not as acutely as SAP, according to Walravens.

Alorie Gilbert writes for News.com