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Sarbanes Oxley : Technology : Section 404
Scorecarding Tied to Corporate Governance
Demands for greater transparency and good corporate governance will not go away, and will only increase.
By
Doug Barton
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Doug Barton
Vice President Product Marketing
Cognos
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In today?s modern, connected business environment, the pace of change is torrid and the pressure to keep up unprecedented. Business today is about visibility and responsiveness ? the ability to change actions fluidly to react to movements in the marketplace.
Compliance, with regulations, is a modern-day reality and has evolved into a core pillar of overall corporate governance. Faster cycles of scrutiny on performance against expectations are increasingly demanded across tactical, operational and strategic business measures to uncover potential risks.
In particular, Section 404 of the Sarbanes-Oxley Act requires public companies to document all significant business processes and systems that impact their financial statements. They must also ensure that effective controls are in place to mitigate any risks within these processes that could result in a material misstatement.
For most companies, meeting first-year Section 404 requirements has been a long and costly road?with substantial resources, time, and effort directed to the cause.
From a purely financial perspective, the costs of compliance continue to skyrocket. Financial Executives International found that companies will spend an average of $3 million. For companies with revenues above $5 billion, the first-year compliance cost jumps to $8 million. What?s more, 88 percent of companies surveyed expected to maintain or increase those spending levels.
As these companies now settle in to the long-term view, they must shift their focus to finding an ongoing, low-cost approach to meeting regulatory mandates while providing a more transparent view into disclosures and financial results, the processes that produce these results and the operational data ? the how and the why ? that drives the results.
Internal control is not simply a matter of clamping down; it means making data, processes, and accountability transparent and open. This transparency requires coordinating strategic and operational plans, monitoring performance against strategy, and understanding what causes good and poor performance. CFOs and other senior executives can then make decisions with confidence.
Solutions exists today to support these interconnected performance management processes and let organizations comply with Sarbanes-Oxley, gain transparency into data and processes and have both the historical-view and forward-looking visibility required by visionary CFOs.
Technology solutions can effect more than IT infrastructure; it can communicate awareness of issues and be a catalyst for change in organizational behavior. These solutions are imperative to gaining time and cost efficiencies as well as making processes repeatable, accurate and transparent in the new age of compliance.
POINT SOLUTIONS FOR MANAGING CONTROLS
Point solutions automate the internal controls process. They provide document management, workflow, and project management capabilities to support your controls documentation, assessment, testing, and remediation activities. These solutions streamline the procedures performed by the front-line people in your organization.
They also eliminate the inefficient and error-prone inputting of information
in spreadsheets. While these capabilities fast-forward your controls monitoring capabilities, they don?t provide real-time information flow, nor do they offer extensive reporting or analytics capabilities.
Business intelligence and financial reporting solutions exist that enhance and extend customer?s compliance data framework. These platforms help customers:
? Track the status of controls.
? Report on risk control activities and tasks.
? Identify redundant controls for process improvement.
STATUS TRACKING AND REPORTING
One of the central issues facing organizations is the difficulty in tracking overall compliance program status across thousands of controls and business units. You need a timely, enterprise-wide view of where exceptions and failures are occurring and who is resolving them. Scorecards and dashboards let organizations monitor internal controls in real time.
To distinguish between the two technologies, think of the term dashboard associated with those found in automobiles. All cars contain dashboards, which are used primarily as visual displays to let the driver know how various aspects of the vehicle are performing. In information system terms, this usually translates to a visual, compound report.
The term scorecard, made very popular as a business term in early 1990?s by Drs Norton and Kaplan is best understood relative to the game of golf. A scorecard is record of how well the golfer does on a hole-by-hole basis relative to ?par?. In information system terms, this usually translates to a list of metrics that are ?scored? with visual indicators such as traffic lights.
In both cases, the point of these tools is to let the user know how well they are doing relative to target. The difference comes in the types of targets. In the dashboard, some of the targets are explicit (little fuel), implicit (check engine light) or rely on the user to get the target from somewhere else (maximum speed signs by the side of the road).
In the scorecard, on a hole-by-hole basis, there is a target. For a scratch golfer, the target is par. For a handicapped golfer, the target can be easily determined based on the handicap rating, also on a hole-by-hole basis.
If they are the same, why do we need both? Different circumstances require different media to communicate.
It is important to recognize that it is circumstance and not user that determines this need. Dashboards are effective if the user has to quickly consume a lot of related data points at once (control-chart for example) and scorecards are effective when the user has a need to see a lot of unrelated ? based on measurement not business relationship - information in one place (a balanced scorecard for example).
In a compliance context, dashboards and scorecards, provide live displays of compliance data, allowing customers to see the current status of controls across the organization and the processes and cycles that roll up to it.
If score-card indicators are off, business users can drill through to the underlying data and discover why. They can easily see who is responsible and what assumptions led to them. From there, those accountable can take the appropriate remediation steps.
Distributing accountability throughout the organization, with a system such as scorecards to control it, increases an organization?s speed in recognizing risks. It also provides a means to manage the full scope of business processes across the enterprise in compliance with regulatory guidelines:
At the tactical level, employees and managers use scorecards to monitor performance against targets for discrete, specific projects. At the strategic level, scorecards are part of a corporate-wide performance management system that executives use to map corporate strategy and communicate it throughout the organization.
Solutions 101
From a technology perspective, decisions and tactics can easily be aligned with strategy with leading scorecarding capabilities for reliable, consistent information as follows:
Understand key relationships
Use strategy maps and impact analysis diagrams to understand the cause-and-effect relationships of your key processes and metrics. Administrators can create these maps and diagrams directly within the application using intuitive wizards and design tools.
Build metrics and scorecards easily
Metrics can integrate a range of cross-functional data. Intuitive wizards guide administrators through the metrics and scorecard design process. Administrators can build metrics using data from any source, including
OLAP and dimensionally aware relational data, ERP and CRM systems, spreadsheets, flat files, and user entered.
Focus on key issues with varied viewing options
Scorecarding functionality let users organize and view their scorecards in different ways to ensure they focus their attention on key issues. Users can group metrics and scorecards:
? By status to quickly identify problem areas.
? By owner to understand accountability.
? By strategy map to see how processes and metrics support corporate strategy.
Immediate awareness of issues
Users can choose to be notified when a metric changes status. you can create and deliver Alerts can be created and delivered through email to a user?s desktop, remote location, or PDA.
Ensure ownership and accountability through metric ownership
Every metric has an identified primary owner to ensure everyone understands who is accountable and that performance issues are not overlooked.
Manage corrective actions
Use embedded initiative tracking and collaboration capabilities to help manage the actions or projects you undertake when a metric turns red or trends downward.
Initiative tracking with embedded business intelligence capabilities
Access business intelligence reports, analysis, dashboards, and other content from within the scorecarding environment to get the details and understand the factors that affect metrics. You can also access MS Word documents, Web sites, and other information without leaving the scorecarding application.
Scorecards for the Board
With Sarbanes-Oxley?s emphasis on the Board?s role in corporate governance there is an even greater need for the Board, and in particular, the Audit Committee of the Board, to have greater transparency to discharge their various roles more effectively.
Rather than providing a barrage of PowerPoint slides or stacks of coil-bound Board books, management can report to the Board through data-rich, integrated scorecards. With truly connected scorecarding technology, the Board can determine what key metrics it must monitor and make them the basis for management?s report.
Board members and senior management can go from a high-level metric to the lower-level metrics that underpin it. Further, they can drill-through to actual reports against live transactional databases to find out what drives the numbers. The result is transparency and enhanced confidence.
NET GAIN: GREATER TRANSPARENCY
In the new age of compliance, companies are under pressure to manage risk, improve business processes, and be accountable. Demands for greater transparency and good corporate governance will not go away, and will only increase.
Smart companies know they need to build the systems now to gain time and cost efficiencies; makes processes visible, repeatable, and accurate; and achieve greater control of company performance. Scorecarding technology is a key component to this process.
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