Right now, U.S. corporations and their treasurers are working hard to comply with the Sarbanes-Oxley Act and all its requirements. This is no easy task, considering that compliance with the requirements in Section 404 of the Act could mean a complete overhaul of internal financial reporting and procedures for most corporations.

In general, Section 404 of Sarbanes-Oxley (and new Item 308 of Regulation S-K) require management to prepare an annual report on the company’s “internal control over financial reporting.” This term is defined as a process, under the supervision of the company’s CEO and CFO, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. In addition, the company’s external auditor must provide an attestation report on management’s assessment of internal control.

What’s more, the new legislation not only applies to U.S. companies, but to all companies listed on a U.S. stock exchange or registered with the SEC. This means that adequate internal controls which satisfy both the CEO/CFO and the external auditor will have to be put in place — and then rolled out to any overseas subsidiaries. These requirements become effective for “accelerated filers” with the first annual report for fiscal years ending after June 15, 2004 and for non-accelerated filers and foreign private issuers with the first annual report for fiscal years ending after April 15, 2005.

The Cost of Compliance

It is estimated that U.S. corporations will spend $2.5 billion to comply with Sarbanes-Oxley, and even more to stay in compliance, according to AMR Research. The requirement to have external auditors certify management’s assessment of internal controls will certainly increase their fees. In addition, consider the added hours CEOs and CFOs may have to spend to sign off on internal controls each quarter. Although the SEC estimates that this will only take an additional five hours of a corporate executive’s time, many feel this number could be 10 to 100 times as much.

So is there any bright side to the new legislation and the changes it will bring to corporations? Absolutely!

The Silver Lining

The Sarbanes-Oxley Act has a big upside. It is forcing every company to take a more structured approach to internal audit and control. It offers corporations the opportunity to improve their internal controls — and manage processes that stretch across departments and locations more cost-effectively.

CFOs will need to move further away from static reporting capabilities and invest in real-time information resources, creating what The Economist magazine has called “the real-time organization.” The process and systems improvements driven by Sarbanes-Oxley will be beneficial to corporations and treasury on many levels. But there will need to be some drastic changes before treasurers will start reaping the benefits.

What To Do Now?

Most experts agree that Sarbanes-Oxley will have an ongoing rather than a short-term effect. Consequently, corporations and treasurers have a critical decision to make in the coming months. Should they just comply with the minimum requirements and leave existing systems unchanged to save money, or should they take a more active, in-depth approach that builds the infrastructure for long-term compliance?

Although the band-aid approach will reduce upfront investment, it will almost certainly increase recurring expenses such as auditors’ fees.

Consider Straight Through Processing

One area where a more in-depth approach and investment in systems improvement should pay dividends is straight through processing (STP).

Unlike manual, paper-based payment processes that are inefficient, costly and fraud-prone, STP provides an instantaneous and electronic audit trail with greater control and security. The immediate availability of processed information also simplifies compliance with the new requirement that CFOs provide a Form 8-K to the SEC within five business days if their company issues an earning release. Thus, STP offers the potential for more real-time disclosure as required by Sarbanes-Oxley.

Integrate Enterprise Resource Planning Systems

Most multinational corporations use a variety of Enterprise Resource Planning (ERP) systems. Even when they use one ERP vendor, there are often discrepancies between versions. To make matters worse, no single department or budget has to take responsibility for ensuring a consistent, integrated ERP system.

As a result, a real-time, enterprise-wide integration of systems and information has not been considered a priority and is a rarity in most corporations. Information is often collected manually and critical decisions made based on outdated, invalid or inaccurate data. Up until now, this has certainly not been a sound or efficient way to run a company and a treasury.

With its demands for accurate and timely financial information, Sarbanes-Oxley offers incentive after incentive to integrate ERP systems as quickly as possible. The old way of doing business just won’t cut it anymore, especially now that treasury is becoming automated and staff numbers are shrinking. Complying with the new requirements also makes it easier to justify the costs of better systems integration.

Simplifying Acquisitions

Acquisitions will be easier to handle if ERP systems are integrated. Companies that standardize and integrate processes right from the beginning will find that compliance with Sarbanes-Oxley is simpler no matter how many acquisitions they make.

On the other hand, corporations that continue to depend on manual, paper-based information collection or allow acquired companies to maintain their own systems and controls will find that complying with Sarbanes-Oxley becomes more difficult with each new acquisition. The requirement to provide financial disclosures after an acquisition will be extremely burdensome and costly if systems aren’t integrated.

Positioning the Treasury Strategically

Once ERP integration is achieved, positioning the treasury between the corporation’s operating units and its banks can provide the ultimate in simplicity and control. For instance, creating a payment/receivables processing center would allow the treasury to standardize and automate financial transaction processes throughout the corporation.

In addition to reducing the time and effort needed to document and implement financial controls, this would make fraud detection easier. Such a set-up also could identify material changes in a company’s financial position faster, making it easier to provide the “rapid and current basis” disclosures required in Section 409 of Sarbanes-Oxley.

Improved Risk Management

The process integration and standardization imposed by Sarbanes-Oxley can have a positive impact on many areas of business and treasury, including risk management. With ERP integration, STP and other improvements, the treasurer can have an enterprise-wide view of the corporation’s various exposures and be in a better position to manage risk both nationally and globally.

Better Contingency Planning

Companies will be forced to improve their internal controls under Sarbanes-Oxley, which can benefit their business continuity planning. Treasurers will be able to map out financial processes and determine where the critical risk points are. Then when there’s a business emergency or catastrophe such as the recent SARS outbreak, treasurers will be better prepared to handle any resulting financial crisis and have business continue as usual or with minimal disruptions.

Enhanced Working Capital Management

Consider how most companies currently deal with their Accounts Receivables (A/R) or Order-to-Cash process, which includes order management, credit analysis and approval, invoicing and billing, cash collections, dispute resolution, cash application and financial analysis, and reporting. Although these functions span and impact many business areas, they are not organized and managed as a single, integrated process. In fact, there is often very little cooperation between departments.

However, the process and systems improvements required by Sarbanes-Oxley offer treasurers a perfect opportunity to remedy the situation. Treasurers can create internal controls for the individual Order-to-Cash processes and determine how each interacts with the other.

By showing all those involved in the Order-to-Cash process how their functions affect other departments throughout the company, treasurers can cultivate cross-process cooperation in resolving disputes, hitting Days Sales Outstanding (DSO) targets and other critical working capital management challenges. The result could be a more efficient working capital management system.

On the other hand, if a company’s A/R management process is overlooked, it will lead to increased risk and liability with inaccurate DSOs and write-offs, lack of visibility into cash flow and customer transactions, increased potential for fraud, the inability to provide timely and accurate financial reports, and lengthy dispute resolutions.

Acting on Sarbanes-Oxley

There are a couple of points that Sarbanes-Oxley compliance will make immediately apparent to the treasurer:

  1. Effective control cannot be achieved with manual, paper-based processes, and
  2. Maintaining compliance will be costly without automation, standardization and streamlining processes throughout the corporation.

To comply with the new rules, corporations can either increase the cost of maintaining their existing procedures or change their processes so that they’re automated, standardized and streamlined — an investment that will serve companies well in the long-run.

This article appeared in September 2003. (BA)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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