New rules about data accuracy have many companies hurrying to adapt in response. Although some have gone back to paper reports in response, such a drastic step doesn’t need to be the norm. Let software save the day instead.
CEOs and CFOs of large companies today have access to the most sophisticated software, computer technology, and oceans of data. But when it comes to dealing with important financial data, many resort to old-fashioned paper reports.
Surprising, you say, considering the speed of the Internet and the security of encrypted documents? Not really–at least, not according to many corporate execs around the nation.
As a result of the Sarbanes-Oxley (SO) Act that was signed into law in 2002, C-level executives at publicly traded companies are now personally responsible for the accuracy of their employers’ financial numbers. And as primitive as it sounds, some might resort to only using original hard copy printouts to ensure the numbers are not manipulated–or at least, it’ll be easy to see whether they’ve been changed with a ballpoint pen.
The SO Act was passed as a direct response to the debacles at Enron and WorldCom, in which top company management allegedly manipulated financial statements, and–probably more important–the criteria for creating those statements, resulting in vastly inaccurate pictures of the companies’ financial health. When the real facts began to surface, it was apparent that new rules had to be put into place to ensure that shareholders and investors have confidence that the companies are being honest in their earnings statements, and are using the right rules to determine their numbers.
In essence, the SO Act was created to restore public confidence in corporate America. The problem, however, is that applying the regulations of the law is a daunting task.
Many companies have admitted taking no action thus far, as they await further guidance from the Securities and Exchange Commission as to how the new legislation impacts them specifically. Some have expressed concerns about how they will accurately comply with the new regulations, and what IT tools they will need to do so.
Fortunately, improvements in business intelligence (BI) technology over the past couple years have given CIOs and CFOs the tools they need to ensure compliance with the law. Starting in September, section 404 of the SO Act will require principal executives and financial officers to certify the accuracy and integrity of their publicly traded companies’ earnings statements. Traditional spreadsheets are reasonably easy to manipulate–even unintentionally–so having BI software tools designed to keep information consistent and secure gives key personnel the confidence to comply with the new rules.
Consistency is key
There’s a joke in accounting circles in which a professor is asked what one plus one equals. Her reply is, “Do you have a number in mind?” Different rules result in different numbers. This is very true among many companies today. Even the most well intentioned, law-abiding accountants might come up with completely different financial statements than their colleagues within the same company. This is because they did not use consistent rules in determining their numbers and how they reported those figures.
If companies are to properly comply with the SO Act, they must use consistent criteria across the enterprise in creating their financial statements. There cannot be any debate from one division to another as to what constitutes a sale or how to apply generally accepted accounting principles in recognizing expenses.
With BI solutions, consensus rules based upon requirements from the SO Act and the SEC can be locked in place and used to formulate every financial report consistently across the organization. There is a central definition of the rules so everyone is using the same math.
Principals within the company can have a lot more confidence signing off on the integrity of the numbers when they know managers across the enterprise–sometimes on the other side of the globe–are using one application and one set of criteria in developing their reports.
The key value with BI tools is that they provide an instant view of how a company is doing at that precise minute, and enables executives to immediately drill down to problem areas anywhere in the enterprise. They can watch every breath their companies take, on a daily basis, down to the micro level.
Previously this was simply not possible, since top company managers have traditionally had to wait for one of their direct reports to come to them and alert them to what they viewed might be an issue in their area. And because BI solutions can be viewed by virtually anyone within the organization who is approved to access them, the key personnel see the same numbers. Everyone knows the truth about the financials across the enterprise. It is much more difficult to “cook the books” when everything is out in the open.
The ability to drill down to the micro level is complemented by event-driven notifications that should alert users even if they haven’t had time to do the drilling down themselves. If any key performance indicators are not within preset guidelines –forecasted sales have been significantly lowered in Europe, for example, or liabilities have increased broadly across the company–an alert will be “pushed” to management, complete with a link, to the specific event that needs to be addressed.
This immediate action is particularly applicable to the SO Act, which will now require the company to report any change in earnings forecast or an event that could affect the final results–and within 48 hours. It is tailor-made for effective corporate performance management.
Worth the cost
The requirement of the SO Act will most definitely add costs as companies work through their internal financial and operational control systems to bring them into compliance. However, BI tools enable enterprises to automate much of this process by embedding consistent business rules across the organization and by making the reports and financial statements completely transparent and instantly available from any location within the company.
Reports cannot be manipulated and company management can drill down as shallowly or as deeply as they want to get the clearest picture on their companies’ financial health.
BI tools should ultimately be viewed as not a compliance mechanism, but more important, as a way to operate more efficiently and improve the company’s bottom line.
Mark Schwartz is a managing consultant with Accelerated Consulting Group, Inc., Plantation, Fla., specializing in business intelligence. Schwartz has previously spent time in senior and analyst consulting roles with Citicorp Global Information Network, Blockbuster Entertainment Group and [email protected] Inc.