The law that binds us

New regulations require companies to establish and document business controls, procedures for tracking and reporting material business information, and procedures and systems for ensuring compliance and auditing.

Behind every large organisation is a big whip meant to keep that entity functioning in an orderly and ethical manner and keep human error and avarice at bay.

In public sector entities, the large whips are the PFMA - the Public Finance Management Act (number one of 1999 amended), and the Auditor General. In the private sector, the whips that are wielded are the Companies Act and King II (King Report on Corporate Governance for South Africa 2002).

Whips or no whips, around the world and locally, business scandals continue to stick out their ugly heads. The latest: a rogue trader in the highly respectable French bank Soci'et'e Generale committing an estimated 4.9 billion euros worth of fraud.

Worldwide, new regulations require companies to establish and document business controls, procedures for tracking and reporting material business information, and procedures and systems for ensuring compliance and auditing.

Locally, the PFMA actually overrides financial legislation. It was promulgated because financial administration was rule-bound and allowed accounting officers to be passive, focusing on inputs rather than outputs. The PFMA recognises that there is a need in the public sector to improve the value obtained for money spent, and address the problem of non-compliance with existing legislation -unauthorised expenditure, fraud, theft and wastage.

The desired outcomes of putting the PFMA in place, according to SAICA (Carin Strickett, SAICA, February 2005), were sound financial management systems and processes, effective management of revenue, expenditure, assets and liabilities; and timely, accurate reporting that reflects the actual financial and delivery situation. In short: accountability, transparency, output focus, expenditure control and performance measurement.

Moreover, the PFMA places a heavy responsibility on the CFOs of public entities. They are responsible for all of the above, and also the adoption of new technologies, systems integration and the replacement of legacy IT systems.

The office of the Auditor General mostly deals with the Audit of Annual Reports and Financial Statements according to GRAP (Generally Recognised Accounting Practice) - in a manner of speaking, the results of an entity's corporate governance.

Whips or no whips, around the world and locally, business scandals continue to stick out their ugly heads.

Paul Maddison is MD of Realyst Software.

Accountability, transparency, output focus, expenditure control and performance measurement - these aims are similar to those of the Companies Act (1973) and King II which govern private sector business. In SA, company law describes the minimum requirements for proper corporate governance. These requirements have been expanded and given practical form by the recommendations of King II.

The aim of King II is to improve corporate governance and accountability on a voluntary basis for affected companies, although all organisations are encouraged to adopt the code. In any case, all listed companies, financial institutions and public sector enterprises, agencies and government are classed as affected companies.

So, if no business entity or organisation is exempt from the legislative requirements, and corporate governance is a legal imperative - why then do so many organisations place themselves at risk by not managing their contracts properly?

The answer might be that they have never thought about it, or they are resistant to change, or they are used to their legacy systems, or they are making do with a cobbled together solution for automated contract management (CM). They may never have considered a solution which looks at CM from a life cycle point of view - in other words, managing the contract from creation to archiving.

Certainly some organisations, such as cellphone service providers, can manage their client contracts through their ERP or billing systems. If the user does not pay, the contract is terminated. However, organisations that cannot do this due to the complex nature of the goods or services they provide really need automated CM to achieve those critical corporate governance goals.

According to a report from research organisation the Aberdeen Group (The Contract Management Solution Selection Report 2005), organisations that have high-value contracts that are paper-based face huge risks.

These include fragmented CM procedures, labour-intensive management (not to mention the waste of time and materials), poor visibility into contracts with management information hard to extract, ineffective monitoring and management of contract compliance (with the resultant problems with corporate governance) and inadequate analysis of contract performance.

And the flipside of this coin is that the benefits of automated CM are obvious and substantial: compliance management improves by 55%; rebate and discount management improves between 25% and 30%; materials and service costs are reduced by 2% to 7%; contract renewal rates improves by 25%, administration costs are cut by 25% to 30% and revenues improve by 1% to 2%. Effectively, automated CM cuts contracting cycles in half.

Having explained that automated CM really is an imperative for good corporate governance, would it not make sense to critically appraise your organisation's CM system?

* Paul Maddison is MD of Realyst Software.