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Sarbanes Oxley : Marketing : Sarbanes Oxley
Is your marketing department strategic to your company?s success?
Is it properly staffed and equipped with technology? Does it have executive support and guidance to enable achievement of goals and objectives?
By
Terry Coulter
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Terry Coulter
EMK3
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Most U.S. independent oil and gas producers have viewed marketing as merely an administrative function, overlooking it when investing in additional resources and technology. However, two major industry-changing events have transformed marketing into a mission critical activity.
The first is the decline of the intermediary role that energy merchants provided, and more critically, the collapse of the marketing infrastructure in the United States that the industry witnessed following the demise of Enron. Prior to this event, producers could simply market production at the well, passing along responsibility, but also associated profit. Marketers now fill this gap by taking responsibility for price discovery, credit, managing gathering and transportation, developing new buyer relationships and the burdensome administrative processes. The good news is that if properly managed, there is opportunity to capture the value along the value chain.
Directly related to the Enron debacle was the implementation of Sarbanes-Oxley (SOX), the second major industry-changing event. While this is a broad and far-reaching issue, it has a direct impact on marketing departments. With virtually all revenue managed and reported by the marketing department, the investor community and the ?C? suite have a new level of concern and interest. Not only is there a need to assure the efficiency and effectiveness of marketing activity, but also it has become extremely important to assure the effectiveness, accuracy and documentation of internal controls.
Top Priority
With chief executive and chief financial officers now personally responsible and accountable to certify the accuracy of financial reports and the effectiveness of internal controls, it is no small wonder that Sarbanes-Oxley compliance is one of the top priorities in the industry today. With the viability and integrity of every public company on the line, companies are investing heavily to properly deal with this involved and complex issue. While there is no need to go into the well-documented misgivings at the root of these new U.S. Securities Exchange Commission requirements, it is important to note that oil and gas producers can attain a significant return on this investment.
The stakes are high and SOX compliance has the full attention and support of the C suite. While companies seemed to struggle earlier without clearly defined SEC guidelines, SOX compliance projects are now moving rapidly forward to meet the impending deadline. To assure no stone is left unturned and no effort is wasted, extraordinary efforts are undertaken to define, document and execute every project detail.
Successful implementation of SOX compliance is requiring the time and focus of the company?s most talented resources. Starting with executive sponsorship, to highly skilled project team leaders who could be anyone from the controller to someone in the C Suite, teams of five to more than 100 project members, not to mention the direct involvement of the business units and outside advisors. Internal resource costs alone are running in the millions.
These new SEC filing and control requirements present new challenges and complexity to information management and systems. While the vast majority of companies will rely heavily on computer system controls, the effectiveness of current systems is proving to be a very difficult issue to overcome. The problem is that most company?s current systems are actually many disparate standard and/or customized computer systems, electronic spreadsheets and paper, which inherently leads to a lack of control and errors.
Lax Internal Controls
Experts on information technology controls and auditing point out that internal controls within many businesses?both inside and outside the oil and gas industry?are surprisingly lax. Few companies have invested in systems capable of tracking changes to financial data as they move from one internal department or user to another, and although many companies have invested heavily in enterprise resource planning (ERP) and customer relationship management (CRM) systems, the data those system collect are often simply fed into spreadsheets, which are prone to human error. An information flow control problem exists anywhere the flow of data ends at a spreadsheet or other program reliant on human processes.
The key to solving this problem is to eliminate the dependence on manual spreadsheets, and standardize core business processes and computer systems across all departments and locations. Management faces the choice of either relying on a constant human effort to manually manage and review controls, or automating these controls proactively within the structure of standardized computer systems. While even the manual choice might be somewhat effective, this approach exposes control weakness and has considerable, on-going impact on resource allocation and focus.
Virtually every oil and gas producing company in the United States utilizes an army of spreadsheets, manual processes and file cabinets full of paper to track their revenue generation activities. Sarbanes-Oxley compliance demands careful evaluation and remediation to this vital area of the enterprise.
Beyond deficient internal control, the lack of technology utilization within the marketing department also creates inefficiencies and lost revenue opportunities. Sure, the primary objective of SOX compliance is to implement effective and on-going internal controls, but suppose by doing so a company could at the same time significantly increase its efficiency, lower costs and increase revenue? Companies that solve internal control issues correctly within the marketing function stand to gain considerable benefits far beyond the assurance of sound internal control.
Understaffed and largely viewed as an administrative function, marketing departments are often relegated to only reactively dealing with the day?s most pressing issues without the proper technology tools. It is not by choice, but rather a matter of capabilities and focus. Studies indicate the use of manual processes and spreadsheets forces typical marketing departments to focus 70-80 percent of their time on repetitive gathering, posting and massaging of data, rather than focusing on valuable activities like analyzing ways to generate more revenue, reducing costs and managing credit risk.
It would be absurd to require accounting to manage thousands of transactions without a proven computer system, or to make drilling and production decisions without the latest technological tools. Yet, paper and spreadsheets are the norm for tracking oil and gas revenue transactions from the wellhead all the way through the accrual process. This practice causes devastating inefficiencies, lost revenue, inaccurate data and resource constraints in both the marketing and the accounting departments.
Maximizing The Investment
How can an oil and gas operating company maximize its investment in Sarbanes-Oxley? There are actually a number of ideas to consider as companies work to solve compliance issues in the marketing department.
First, marketing departments should be a hub of accurate and accessible real-time information for executives. With the new SEC rules imposing responsibility on executives to certify financial statements, the need for transparency into marketing transactions could not be more important. There must be complete assurance that financial statements reflect accurate revenue, liabilities, credit exposure and revenue forecasts. Executives also must ensure that the business is well managed and that objectives are achieved. Again, an open, real-time view of revenue activity is essential to making informed and timely decisions. Spreadsheets and paper are not the answer for accurate and transparent information.
Marketing departments should also secure value by ensuring contract compliance and transaction reconciliation. Accurately collecting and managing volume, pricing, contract terms in spreadsheets is nearly an impossible task?perhaps the most overlooked and difficult area to properly manage with manual processes. The time and effort required to perform this function manually proves overwhelming, so companies typically only catch the most obvious errors, since they do not possess the capability to verify compliance past that level. Beyond not having assurance of correct revenue and liabilities, this also exposes companies to potential problems with royalty owners and operating partners.
In addition, marketing departments should focus on maximizing revenue. Ask marketing department personnel about their greatest frustration, and they will talk about misdirected focus and effort. Marketing departments strive to focus strategically, but in reality, find themselves mired in manual process and the tedious task of managing spreadsheets. In the first quarter of this year, the average price producers received for each barrel of U.S. domestic crude production was $31.24 while the average price received per Mcf of gas was $5.24, with their actual received price for crude, before hedging, ranging from $24.38-$35.13 a barrel, and the price range for gas, again before hedging, at $4.41-$5.95 an Mcf.
Why such wide swings? Why were all producers not receiving the highest price? There are some obvious and legitimate reasons for these differences, but there are also some not so obvious reasons that significantly reduce revenue for the producer. To obtain the maximum value for production, marketers and executives require the deepest level of marketing data. Increasing the unit price by even a few cents has an enormous impact on operations and financial statements. It is imperative to have transparent, accurate and timely information to evaluate and execute the best marketing options.
If your company?s marketing department is operating on spreadsheets, are you confident in the accuracy of financial statements using error-prone processes? Can you be certain you are achieving the maximum value for the company?s oil and gas production? With the proper focus and utilization of technology tools, your marketing function can assure both accurate transaction data and maximum revenue.r
Terry Coulter
EMK3
Terry Coulter is vice president of sales for EMK3, located at the company?s sales and support office in Dallas. EMK3 provides marketing solutions and Web-based marketing applications designed for oil and gas producers to maximize their revenue potential across the marketing process. Coulter has more than 20 years of experience in technology sales and business development with Fortune 500 clients, as well as providing advisory services for business development and software application design. He joined the company in 2002.
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