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Overcoming compliance disruption

30th October 2007 > ITWeb

 

Everyone hates compliance: here's how to embrace it.

 

Compliance is a word financial managers hate. Just when they think they have all their compliance issues sorted out, along comes another set of statutory or listing-related compliance requirements.

What they have in common is that they are non-negotiable, they are complex, and they arrive thick and fast, tying up the time of executives who would far rather be running the business.

There are so many compliance requirements, they can make an executive's head spin: Sarbanes-Oxley, King II, Basel II, IFRS, GLBA, FISMA, HIPAA, AML ... and the list grows each year.

These regulations are often an over-reaction to malfeasance on the part of a few companies: Enron, Global Crossing, Tyco, Adelphia and WorldCom-MCI, to name the most prominent five which caused havoc on US and world markets in the early years of this century.

The fact that they are in the minority and that most businesses conduct themselves in a responsible manner did not seem to have any bearing on the thinking process of senator Paul Sarbanes and representative Michael Oxley when they enacted their onerous legislation which bears their names, and president George Bush signed it into effect in 2002.

This piece of legislation caused enormous disruption at first, forcing companies to change their processes as they were required to report faster and more comprehensively than ever before, with greater consequences for mis-reporting, including jail time for executives. It has had other, unintended consequences, in adding more than 1% to the running cost of US companies, making more risk-averse, slowing down the economy, leading to capital flights to other markets, such as the US.

 

Arduous requirements

 

Part of the problem with Sarbanes-Oxley, and the other regulatory compliance frameworks, is that each brings an onerous obligation on company processes, which have to be changed to accommodate each new framework. Sometimes the changes take years, as in the case of Basel II.

Increasingly, executives are finding that the way to deal with various forms of regulatory compliance is through a carefully and systematically implemented financial consolidation system. As a consequence, thousands of companies worldwide have turned first to financial consolidation as the cornerstone of their enterprise performance management (EPM) suite.

Having understood that there will ultimately be great benefits in committing to the EPM way of doing business, they invariably invest first in financial consolidation (in my experience, this is a 100% track record), as this is where the greatest pain is felt.

Financial consolidation, as its name implies, is the process whereby sets of accounts from multiple companies are rolled up from many group companies, departments, divisions or otherwise geographically diverse entities, into one set of books which the board can easily accept, interpret and sign off.

At heart, this is a tortuous process, involving multiple currencies, complex holdings, time zones, reporting periods, and regulatory frameworks in each country. The picture becomes ever more complex if the group decides to enter a new territory, as groups tend to, and if it acquires another company or group, which occurs on a regular basis.

Constant change


With such complexity, and ongoing, unanticipated changes needing to be accommodated, the clear answer is to implement an automated system to help deal with the process. Such a system confers multiple benefits:

  • Easier consolidation of multiple accounts, no matter how complex, and the ability to easily accommodate new accounts from decisions taken in line with strategy.
  • Workflow-driven management of accounts, with full auditability and traceability of all actions, decisions, inputs and outputs.
  • The ability to view all consolidated accounts against one, unquestioned, business intelligence-informed view of the truth.
  • Elimination of rekeying of data from one system to another, something that always carries significant risk of error, rework, and duplication and redundancy of effort.
  • Freeing up of costly financial managers from manual management and consolidation of accounts, to be more strategic and actually run the business.

Above all, financial consolidation systems, correctly implemented, can help companies and groups of companies take compliance from something that is a drudge and make it a competitive edge. This occurs through management embracing the realities of compliance, making them a daily part of life, and embodying the strength and sound practices involved in financial consolidation, and using them to improve business processes.

Finally, financial consolidation lays the foundation for the many other applications involved in an EPM suite, setting the scene for better managed, answerable and strategically managed business.