The disappointment and disenchantment with corporate fraud, misrepresentation and loss of shareholder value over the last two years has led to a backlash of enormous proportions.
External compliance should begin with internal controls and systems, which points the way to strategic investment in business performance management (BPM) systems.
Marc Scheepbouwer, CEO, Global Technology Business Intelligence
This backlash means CEOs and CFOs today are required to sign off financial statements in "blood", thereby certifying them as authentic and binding. And they must do this against the backdrop of a bewildering array of new regulatory compliance requirements and frameworks:
* GAAP, or Generally Accepted Accounting Principles. (This, as against the insidious pro forma method, which led to the loss of credibility of much corporate reporting in the dot-com and post-dot-com era.)
* The Sarbanes-Oxley Act, named after the two senators who promulgated and brought into existence the legislation which sets new standards of governance and accountability for executives in companies, and attaches severe penalties for violators, including jail sentences.
* The new concept of the "triple bottom line", in terms of which companies must report not only their financial performance, but also their social and corporate responsibility and their sustainability.
* IAS 2005, the accounting standard set by the European Union, designed to ensure consistent procedures, processes and structures across borders and boundaries, for all companies listed in Europe.
While it may be argued that some of these new compliance initiatives are geared only for international markets, it should be clear to any observer that South African financial reporting standards and requirements will ultimately be influenced by international standards.
Compliance with all of these new and emerging requirements will be way beyond the capabilities of organisations which have not invested in the appropriate internal systems. For instance, a study conducted by the Dutch Ministry of Economic Affairs in 1999 concluded that a change in external reporting is valuable only if it based on sound internal reporting.
IAS 2005, as an example, will have a significant impact on companies` balance sheets and earnings. While on the surface of it, a change in accounting standards might not seem like a strategic imperative, it will fundamentally change the way in which success is measured and the information and records companies need to maintain.
At the heart of IAS 2005 lies the highly contentious concept of fair value of a company`s assets and liabilities: the value of assets is the availability of resources that generate future incoming cash flows; liabilities can be designated as future outgoing cash flows. This will have a decisive impact on the way companies report today and in the future.
Juxtapose this with Sarbanes-Oxley, which places burdensome requirements on CEOs and CFOs:
* They need to have reviewed the quarterly and annual report; to be able to certify that it represents the company`s financial position; they are responsible for disclosure controls and procedures; they must certify that they have evaluated the effectiveness of the controls and procedures within 90 days of the report; they must certify that they have disclosed any weaknesses or changes in the controls to external auditors.
* Each annual report must contain an internal control report; and this report requires a company`s external auditor to attest to management`s assertions about internal controls and procedures for financial reporting.
* They must have a solid control environment, one which lays a foundation for sound internal controls.
* They need to file annual reports in 60 days, down from 90, and quarterly reports must be filed in 35 days, down from 45.
It should be patently clear that the pressures and requirements will become ever more burdensome. They will be applied consistently, worldwide, and they will not be relaxed any time soon.
What is also clear is that external compliance should begin with internal controls and systems, which points the way to strategic investment in business performance management (BPM) systems.
As I`ve indicated in the previous Industry Insights in this series, BPM is about compliance, corporate governance AND competitive advantage; or, conversely, companies which fail to invest in BPM today will not only fail compliance requirements, but will be at a competitive disadvantage.
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