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Caught in the act
by Barb Swartz
You can navigate the rules of the Sarbanes-Oxley Act of 2002.
One year has passed since the Sarbanes-Oxley Act of 2002 was
enacted to restore investor confidence in corporate America through
the reinforcement of corporate financial accountability. Today,
businesses are still trying to determine how they will meet the
standards set forth by this act and the resulting rules that
have been issued by the Securities and Exchange Commission (SEC).
Regardless of what a company’s core competence is, Sarbanes-Oxley
has put the finance function under a microscope. An SEC inquiry
can be devastating to the company’s valuation and corporate
reputation. As a result, it is no longer enough to use “standard
operating procedures.” According to Aberdeen Group, “Sarbanes-Oxley
now requires corporations to report on their business at a new
level of depth and with a higher degree of clarity … In
short, boilerplate financial reporting is no longer adequate.”1
What’s more, the act applies to
all companies publicly traded on a United States national exchange,
as well as any company
that has registered to become traded on one of these exchanges.
This could include companies that are actually incorporated outside
of the United States and listed on both a non-U.S. and an U.S.
exchange.
In addition, there are provisions that apply
to both private and public companies. One such provision is the
whistleblower protection for employees. Because of the scrutiny
given to good corporate governance practices at all companies,
be they private or public, stakeholders such as venture capital
investors, lenders, equity interest holders and insurers are focusing
greater attention on compliance. Thus, privately held companies
that borrow money from banks or have insurance policies protecting
directors and officers are indirectly affected. As noted by META
Group, the Sarbanes-Oxley Act “should be on the agenda of
every publicly traded company as well as any firm that plans to
go public.”2
Raising the bar
Essentially, the Sarbanes-Oxley Act redesigns the federal regulation
of public companies’ corporate governance and reporting
obligations; tightens accountability standards for directors and
officers, auditors, securities analysts and legal counsel; and
specifies particular securities violations as crimes. It is composed
of eleven titles with more than 1,100 sections. There are four
key areas that present the greatest impact and challenge to finance
and associated support areas. (Click
here to see figure 1.)
Companies have quickly learned that changing
accounting processes alone will not address these areas sufficiently.
The technology and systems to support finance’s efforts
also need to be examined, and that is what companies are doing
today. In a recent survey conducted by META Group, more than 75%
of the respondents were researching, evaluating or implementing
projects to address Sarbanes-Oxley. 3(Click
here to see figure 2.)
Enterprises are turning to technology to make their financial
information readily available, auditable and analyzable. If you
are launching IT projects in response to the Sarbanes-Oxley,
be sure they meet the following requirements:
• All summary and detailed financial data
resides in a single repository (single book of record).
• The system supports the approval and results certification
process.
• Accounting close and reporting can be completed quickly and
accurately.
• The system provides visibility of the internal controls at
all consolidated and/or reporting levels.
• The project uses a dashboard/KPI environment for visibility
of close and reporting.
• The workflow process is automated.
• The system provides visibility and awareness of in-period
and closing adjustments.
• The audit trail is visible and can easily be tracked.
• The system can handle structured and unstructured data.
Meeting expectations
Companies need to determine the appropriate technology and
environment that best meets their particular needs while
keeping in mind
the Sarbanes-Oxley regulations finalized by the SEC and those
that will be refined in the future. So where do companies begin?
There are many vendors and consultants with various products
and services that can help companies comply with the act. The
offers can be grouped into three areas: enterprise resource
planning (ERP) solutions, business intelligence (BI) offers
and other
unstructured processes or niche solutions.
ERP solutions have given many companies
great returns and improved efficiencies with their core accounting
processes. Key players
in this market space are PeopleSoft, Oracle Financials and SAP.
The modules contained in these solutions were designed for processing
the flow of business transactions through a company’s value
chain. These solutions meet various financial transactional needs,
including accounts receivable and payable processing, general
ledger and closing of the books. As a single database, there
are standard processes by which data can be entered, and there
are standard checks and balances that may be required before
the transaction is deemed valid. ERP modules can be instrumental
in driving business process consistency; however, reporting and
analysis capabilities and flexibility are limited.
BI or OLAP (on-line analytical processing)
vendors have developed various solutions to address the requirements
of Sarbanes-Oxley.
Offerings from Business Objects, Cognos, Hyperion and MicroStrategy
focus on providing a flexible analytic platform where users can
create queries, views and reports to enable financial transparency
and visibility into a company’s results. BI vendors do
this very effectively, but they do not stand alone. Access to
an integrated, cleansed source of detailed financial data makes
these solutions attractive.
Unstructured data analysis and content
processes are also useful. Since the signing of Sarbanes-Oxley
in 2002, there have been
a host of companies (both new and established) that have created “Sarbanes-Oxley
compliance management” products. These emerging products
have been primarily focused on Section 404, which is the documentation
of procedures and policies. This section is still being interpreted,
which is part of the reason for the push back of the compliance
deadline. Further complicating matters, the process of strengthening
internal controls touches many finance and business processes
along with systems. Some of these existing and emerging companies
are ACL Services, CommercQuest, DecisionPoint, Documentum, Nextane,
OpenPages, Softrax and Stellant.
Understanding the hype
What is the answer for Sarbanes-Oxley compliance? Industry experts
agree that there is no single technology solution that will place
a company in compliance. Solutions vary depending on a company’s
existing environment and business needs. And even though Sarbanes-Oxley
is the largest single act to impact a company’s finance
organization since the SEC Act of 1934, it is not the only focus
of the CFO. In fact, according to a recent Forrester Research
survey, only 20% of the finance executives surveyed cited “complying
with regulations” as their biggest challenge4. They need
to continuously focus on important business issues such as maintaining
shareholder value, improving corporate performance and reporting
accurate financial results.
For a CFO to meet business needs while
complying with Sarbanes-Oxley and other regulations, he or
she should strive to create a world-class
finance operation. Hackett Group, which provides unbiased, empirically
driven guidance on best practice-based improvements for the Fortune
2000, recommends that data warehousing be part of a company’s
technology investments. Top-performing organizations rely on
data warehousing not only to help with compliance, but also to
gain a competitive edge. The data warehouse enables companies
to integrate all of their summary and detailed financial data
from all of the systems throughout the accounting process, not
just the general ledger.
With a financial data warehouse, businesses can react in near
real time to everyday opportunities and threats. For example,
how quickly could your company assess the impact of one of
your large customers declaring bankruptcy? And is this event
of enough
significance to be a reporting requirement under section 409
of the Sarbanes-Oxley? Just going to the financial data in
the general ledger alone will not give you the information you
need;
you must assess the specific customer risk that can only be
found in detailed forecast revenue flows, inventories, receivables
and other related areas.
The data warehouse provides the necessary foundation for finance
to operate at top performance. With the data integrated on
one platform, nearly any analysis, from summary results to detailed
transactions, can be performed seamlessly. It is this analytical
platform that supports the necessary compliance areas of Sarbanes-Oxley,
including results certification, notification of material changes
and events, accelerated reporting, disclosure controls and
a
host of other issues important to market leaders.
Barb Swartz is Teradata’s
Financial Management marketing director. She can be reached via
e-mail at barbara.swartz@teradata-ncr.com
1 Sarbanes-Oxley: Tightening
the Link between Financial Analytics and the Financial Value Chain,
Alex Veytsel, Aberdeen Group, June 19, 2003
2 Jumping on the Sarbanes-Oxley Bandwagon, John VanDecker, July
2, 2003
3 Jumping on the Sarbanes-Oxley Bandwagon, John VanDecker, July
2, 2003
4 Solving Sarbanes-Oxley: The CFO Playbook, Jennifer Chew, Forrester
Research, July 2003
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