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Sarbanes Oxley : Technology : Financial Controls
Relieving The Heartburn of SOX Compliance
Adequate Internal Control Structures and Real-Time Rapid Reporting
By
David Vandagriff
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David Vandagriff
Vice President of Marketing
Corda Technologies
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In the wake of a series of corporate financial scandals, including those affecting Enron, Arthur Andersen and WorldCom, Congress began establishing regulations that directly affect corporate governance, financial disclosure and the practice of public accounting for U.S. companies. The purpose of these new regulations, which are now known as Sarbanes-Oxley (SOX) is to restore confidence in both the investor community and the general public.
Two sections of the new regulation are providing severe cases of heartburn for executives at publicly traded companies. Section 409 deals with real time disclosure issues requiring companies to report changes in the financial condition or operations. Section 404 requires that companies have a public accounting firm prepare an assessment verifying that the company has established a valid internal control reporting system thereby making the company and the auditors responsible for the accuracy of the financial status of the company.
With auditors closely monitoring the actions of publicly traded companies, CEO?s and CFO?s are being overwhelmed by the demands of being accountable for everything that happens within their organizations. Historically, the stock market itself has naturally imposed penalties on companies that have been neglectful about their accountability issues by the inevitability of the stock price dropping. Now, the penalty for being unaware of how your company is doing has taken on a new dimension. In addition to market pressures, executives now fear the Justice Department seeking criminal indictments for leaders who do not have clear knowledge about what is happening inside their organization.
It is estimated that large companies will spend around $35 million dollars this year to become SOX compliant. Even with financial resources being allocated towards SOX, companies are still struggling to understand what it takes to be fully compliant. According to the industry newsletter, Compliance Week, 119 companies publicly reported finding weaknesses or deficiencies in their internal controls, up from 11 in the same month a year before. Many problems involved closing books, reconciling accounts, or dealing with inventory.
Section 404 originated in the Foreign Corrupt Practices Act of the late ?70s. This Act required companies to have internal controls, and auditors that test the controls before signing off on financial statements. Because of its origin, 404 was expected to cause some internal controls issues, but a problematic reality has far exceeded anticipation.
A leading SOX analyst, John Hagerty, states in an AMR Research Report, Planning for a Sustainable Compliance Architecture, "Companies are turning increasingly to systemically managing governance, risk, and compliance throughout the business. Planning for a sustainable, repeatable compliance architecture should begin now to capitalize on existing SOX momentum and set your firm up for an agile, active approach to governance and compliance."
Executive Dashboards Serve As An Early Warning System
The traditional C-level executive usually relies on subordinates to tell him or her when important action is required or an event must be reported to the SEC. SOX puts a more stringent obligation upon executives, requiring that they know what is happening and when it happened. The standard ?nobody told me,? excuse is not a viable defense anymore. There is an mandatory obligation for the executive to reach out and understand exactly what?s happening.
The mass of information and numbers that large organizations generate can overwhelm any executive. An executive learns quickly that mounds of tabular data are not the best way to get a clear picture of what is happening.
The ultimate responsibility for the success or failure of a company falls on the CEO?s shoulders. The buck stops there. The CEO?s main duty is to set the strategy and vision for the company. The amount of data involved in providing a sound basis for that strategy and vision can be staggering. Which markets will the company enter and why? Which competitors pose the greatest threats? How can the company differentiate itself from others?
Some experts believe section 409 also requires that a CEO understand emerging trends that may be necessary or useful for the protection of investors and in the public interest. Discerning trends is very difficult when looking at a large table of numbers. On the other hand, trends can often be easily understood when looking at a proper visual representation of those numbers.
One of the key tools to cut through numbers and discover meaning is to assimilate data into an executive dashboard. A dashboard can place real-time information about every aspect of the company at the executive?s fingertips, facilitating better-informed decisions.
An executive dashboard is similar to the dashboard in a car, recording the performance or behavior of an organization in the form of charts, graphs and maps, which display how well or poorly the business is performing. A dashboard is a graphical display that compares performance against predefined goals and prior periods to disclose trends and whether the company is on track to meet those goals. A dashboard allows you to drill down and examine what areas are on-target and which require improvement in order to meet projections.
With proper business intelligence systems fronted by dashboards, a zero-latency enterprise is no longer a dream. Dashboards can provide an early warning system for problems. SOX compliance can?t coexist with a system that only reports last quarter?s bad news.
A dashboard creates an ideal red flag environment to immediately communicate to executives that something is wrong, out of line or out of compliance. No one does a busy executive a favor by delivering a 40-page spreadsheet that contains ?everything you need to know.?
One of the key benefits a properly designed dashboard provides is the ability to bring everything from multiple applications into a common visual framework and interface so users can very quickly see if there are inconsistencies. Jumping from application to application while trying to maintain a mental picture of what data from different sources amounts to a recipe for disaster.
Accurate reporting of yesterday?s catastrophes no longer suffices. SOX is proving to be a driving force to drive reporting into dashboard systems. Dashboards empower management to look through the windshield instead of the rear-view mirror.
Top reasons for using a dashboard to become SOX compliant:
1. Real-time information. Dashboards can accept any company data and put it into easily understood charts, maps and graphs as fast as a company can produce the information.
2. Speed. Properly designed Dashboards quickly identify potential performance and reporting issues as they occur rather than at the end of the day, month or quarter.
3. Accuracy. Dashboards gather information directly from a company's data sources. Accurate information allows executives to easily identify areas that need immediate action to nip potential problems in the bud.
4. Drill down features. Dashboards allow an individual to enjoy a ?30,000 foot view? of the company drill down into a department?s activities or even an individual?s performance.
5. Mobility. In today's business culture, executives are more mobile than ever. Whether at the airport, at a client?s office or on the golf course, dashboards can be loaded onto a cell phone, Blackberry or a PDA, enabling mobile managers to have constant access to key company reports.
6. Can collect data from virtually any data source. The most useful dashboard software will enable users to draw data from virtually any data source. Studies show that on average a company has as many as 68 data sources storing data on its network.
Conclusion:
The mandate of SOX is to ensure discovery of performance that deviates from the corporate plan or standard. A dashboard is an ideal solution for sending up the red flag when something is not right within your organization. Once the red flag has been raised, a dashboard allows executives to quickly and accurately assess the problem and resolve the issue before it is too late.
While SOX imposes some uncomfortable deadlines and very uncomfortable penalties, an intelligent response to compliance issues can yield a far more effective organization. Zero-latency in discovering problems is a worthy goal even if there is no threat of criminal or civil penalties. Dashboards can alert executives on a current basis to changes in key performance indicators large and small. Staying out of jail and making more money at the same time sounds like a win-win proposition for any CEO.
David Vandagriff
Vice President of Marketing
Corda Technologies
David Vandagriff is Vice President of Marketing at Corda Technologies. Corda Technologies is the global leader in innovative data presentation solutions. Corda's family of products and services are the leading choice for fast, flexible, and scalable interactive graphs and maps as well server-based HTML to PDF conversion solutions. Corda's software displays data as images allowing customers to explore relationships, perform analysis, and more easily understand their data.
David was previously Executive Vice President for Neighborhood America, a publisher of Web-based collaboration software. At Neighborhood America, he was responsible for developing and executing strategy to move the company's products into multiple vertical markets, including manufacturing, aerospace and entertainment.
Prior to Neighborhood America, David was Chief Revenue Officer for MyFamily.com, the largest network of family sites on the Web. He also served as the General Manager of the MyFamily.com web site. During his time at MyFamily, David rapidly increased revenues from business development, advertising sales and e-commerce activities and negotiated major contracts with Kodak, Disney, America Online, and Hewlett Packard.
Prior to working at MyFamily, David worked at LEXIS-NEXIS, where he was responsible for developing and marketing the company's first Web-based research product. He created much of the company's Internet strategy, managed technology alliances, proposed and created a knowledge management consulting practice. David is a licensed attorney and has held positions with the J. Walter Thompson advertising agency and CNA Insurance.
For more information, please visit www.corda.com.
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