PA extract:
Bettina Pickering, of the enterprise solutions practice at PA Consulting Group, says:
"Poor data quality is a major compliance issue for most organisations. Many 'spreadsheet factories' exist to manipulate financial data, and these must also be made compliant. [But] organisations should not just aim to become compliant. Instead, they should embrace the opportunity to improve their corporate performance management. They must understand what they need to measure and track to keep costs down and give them a competitive advantage."
Full article:
Accounting and reporting systems - like the accountants and financial controllers who use them - have rarely hit the headlines over the past 20 years. But now there is nowhere to hide.
A rash of corporate accounting failures around the world, including big names such as Enron and WorldCom, has prompted new legislation and increased the emphasis on reviewing and approving financial reports. On top of this comes the move towards the adoption of common worldwide accounting standards.
Suddenly, company accountants and their bosses are wanting more from their accounting systems. These were designed for transaction processing, but have traditionally been poor at handling queries and doing analysis. Nor have they usually supported the critical review and approval processes of reports which companies now need.
Most companies used to transfer data, often manually or by re-keying, into spreadsheets. These have the flexibility to carry out financial consolidation of subsidiary results; prepare plans, budgets and forecasts; and present the financial reports in several ways.
However, the flexibility comes at a cost of being time-consuming to maintain, undocumented and prone to errors. Many large organisations have replaced them with separate packages for financial consolidation, reporting, analysis, etc.
A recent survey by Cranfield School of Management on behalf of Hyperion Solutions, a corporate performance management (CPM) vendor, showed that 45 per cent of organisations still use spreadsheets as the prime tool for reporting. Only one quarter of those respondents using spreadsheets felt that they worked well or very well as tools to measure and manage performance. Only 28 per cent use enterprise resource planning (ERP) systems; 15 per cent use packaged CPM applications; and 12 per cent use custom-built applications.
Because spreadsheets are unstructured, they lack the security and audit trails needed to prove compliance with legislation, such as Sarbanes-Oxley in the US and similar legislation that is being prepared by the European Union. Similarly, review and approval processes are also unstructured.
Peter Arr Woodward is European managing director at Lasata Software, a reporting specialist that has just been purchased by accounting systems vendor Systems Union. "If auditors went in now," he says, "the chances are that they would find a system which propagated keying errors, had synchronisation issues with associated systems, provided an inadequate data trail and drew no real separation of responsibility and management of process."
Some accounting systems vendors have produced specialist modules that provide workflow and collaboration, often with document management. These provide not just the functionality to support the review and approval process for financial statements, but also the security and audit trail needed to prove that they are effective and have been followed.
Frank Buytendjik, research vice-president at Gartner, the analyst, points out that ten years ago internal and external reporting were very different. Management reporting was about highlighting exceptions, while external reporting involved smoothing results between periods. "Current business pressures tell us that those two should now be the same," he warns.
The regulatory requirement to inform investors promptly of any material events means that more emphasis must be placed on forward-looking processes, especially forecasting. Indeed, this has always been a critical management process for corporate performance management.
"A lot of compliance is best business practice," points out Steve Miranda, vice-president of financials application development at Oracle, the ERP and business intelligence vendor. "Organisations need to move from compliance management to performance management. Those who take the opportunity to move to best business practice are going to be much better than those who produce a patchwork of compliance solutions."
Larger vendors such as Business Objects, Cognos and Hyperion are acquiring smaller specialists to provide a complete suite of corporate performance management (CPM) solutions, covering financial consolidation, query, reporting, modelling, planning/budgeting/forecasting, activity-based costing, business intelligence, data mining, etc.
The multi-dimensional databases that usually lie at the heart of these solutions are ideal for producing the sector reporting that is required under the new accounting standards. They are also very valuable for comparing the results under the new and old accounting standards, to ease the transition.
However, Butler Group, the analyst, is cautious about the success of these solutions. In a recent report, Corporate Performance Management, A New Approach to Business Control and Planning, it warns that businesses typically struggle to reach a single version of the truth. "Most organisations have significant cultural, process and technology issues when it comes to information handling and reporting," the report says. "These issues have been ignored for as long as possible, but the combination of regulatory compliance and the drive for increased process and performance visibility means that action is now unavoidable."
One of the cultural issues relates to autonomy of business units to build their own forecasting models and systems to meet their own local business needs. When these are loaded into a CPM tool at the centre there is no visibility into the workings of the model and the assumptions used.
"You need to standardise underlying business models," advises David Jones, financial management partner at IBM Business Consulting Services. "However, it is an important part of local management process and they can feel very defensive."
Most CPM and accounting systems vendors claim that their products comply with the new accounting standards and with the Sarbanes-Oxley Act. However, technology itself can never provide a solution on its own.
"All CPM and financial software has features and functions that can be used to meet compliance," says Mr Jones. "In particular, ERP systems have lots of built-in controls and audit trails. However, whether the organisation complies or not is entirely dependent on how it configures the software and uses those features and functions."
Glossary
Accounting standards: The International Accounting Standards Board in Europe is working with the Financial Accounting Standards Board in the US to produce a single set of high quality, understandable and enforceable accounting standards that can be adopted worldwide.
Corporate performance management (CPM): The processes, methodologies, metrics and technologies used to measure, monitor and manage business performance. It includes the use of end-user tools for financial consolidation, query, reporting, modelling, planning/ budgeting/ forecasting, activity-based costing, business intelligence and data mining.
Online analytical processing (Olap) servers: Multi-dimensional databases that lie at the heart of analytical and reporting systems.
Sarbanes-Oxley: The sweeping corporate governance shake-up in the US was led by senators Paul Sarbanes and Michael Oxley. It resulted in the Public Company Accounting Reform and Investor Protection Act of 2002. Section 302 requires CEOs and financial officers personally to certify the accuracy of the financial statements. Section 404 requires management to maintain an adequate internal control structure and section 409 requires "real-time" disclosure of information on material changes on a rapid and current basis.
What the experts say
Kevin Lloyd, chief technical officer at Barclays Bank:
"Centralising IT operations eases the cost of compliance and we now have about 80 per cent processing at the centre, compared to 45 per cent previously. Compliance will cost us £30m in 2003 and £140m in 2004. Compliance comes down to accurate provision of data in subtly different ways. It is not so much an issue of customising or extending existing packages, or buying purpose-built solutions, but managing data better. We look for a customer proposition angle to share the investment costs."
Frank Buytendjik, research vice-president for enterprise and business intelligence at Gartner:
"[The finance department's] Financeartificial way of constructing a budget has become the main driver for business, but business does not work according to budget cycles. Business cycles are much more about demand and the response time of the supply chain. Budgets are bad and people should get rid of them because they hurt the business. A continuous forecasting system that reflects how the business works is far more powerful and saves a lot of time."
John Oates, information systems advisory partner at Baker Tilley:
"People didn't buy into the 'software as a service' concept earlier because of the fear of relying on a third party. However, uptake of hosted systems is now happening, particularly with clients who are willing to think strategically. It will be used more and more, especially by smaller organisations that do not have a fully-fledged IT department. It will suit them to rent the software and rely on somebody else to deal with all the complexity of maintaining it."
Bettina Pickering, enterprise solutions practice at PA Consulting Group:
"Poor data quality is a major compliance issue for most organisations. Many 'spreadsheet factories' exist to manipulate financial data, and these must also be made compliant. [But] organisations should not just aim to become compliant. Instead, they should embrace the opportunity to improve their corporate performance management. They must understand what they need to measure and track to keep costs down and give them a competitive advantage."
