Reality Check

Despite the vendor hype over compliance with IFRS, Sarbanes-Oxley and Basel II, there is no rush to upgrade systems.

An ICAEW survey found that IFRS was only cited as the reason by 12% of respondents who were enhancing or replacing their software.

Even among large businesses the figure was only 17%.

Compliance with a wide range of legislation and regulation has historically been handled by a combination of manual and automated processes.

The more enlightened organisations have used their workflow systems to provide an overall compliance infrastructure.

Some accounting systems vendors have produced specialist modules that provide workflow and collaboration, often with document management.

These provide not just the functionality to support the review and approval process for financial statements, but also the security and audit trail needed to prove they are effective and have been followed.

John Taylor, managing director at reporting software company Cartesis, explains that audit trails are important because they record the various changes, adjustments and corrections made from original input to final report.

They also record the control and logging of the processes through which data passes, particularly who authorises the completion of each stage in the reporting cycle.

Most of all, audit trails provide the ability to reconcile data from source to final report to ensure its integrity.

Office equipment supplier Ricoh UK uses Lotus Notes for workflow – not just to sign off financial data, but also other data in the business that impacts on it.

‘It makes the whole process of getting approvals fast and efficient,’ says John Gittins, the company’s finance manager, ‘so people are more willing to abide by those styles of controls.’

Maintaining a two-way audit trail is vitally important for complying with any government regulation. But many organisations use various combinations of general ledger, financial consolidation package, multidimensional reporting tool and spreadsheet, and their auditors may have their own accounts preparation software.

‘The biggest challenge for 2005 is to link all your systems together to provide a backward audit trail from the final figure,’ says Dennis Keeling, director of the Business Application Software Developers Association (Basda).

‘It is the corporates’ responsibility, as no single vendor can do it.’

As senior vice-president for finance at disaster recovery specialist American Power Conversion, Don Muir has been deeply involved in preparing for Sarbanes-Oxley compliance.

He advises that all adjustments should be made by a journal entry directly into the general ledger.

‘You must have appropriate controls over backup, review and approval process for journal entries,’ he says. ‘So I don’t see the audit trail as an issue.’

Basda is also concerned about providing the segmentation analysis of profits and revenues by geography and business area, direct from the general ledger.

‘Although accounting software has the necessary analysis capabilities, very few customers have bothered to use it,’ says Keeling. ‘It is even more complicated, because very few companies have the same accounting package in all of their subsidiaries, and each different package has to be similarly set up. It is a major challenge and organisations need to be working on the analysis requirements now.’

The process is much more straightforward for organisations that use multidimensional tools for management reporting. As well as effortlessly producing segmented figures, they are also ideal for producing figures on two different accounting bases to ease the transition to IFRS.

Ricoh UK uses Cognos Enterprise Planning to report in both UK and US GAAP.

‘Without it we would have problems,’ Gittins admits.

‘It allows us to take two different slants on the data. Also, the “slice and dice” functionality makes it very quick to segment the data.’

Although compliance mainly affects listed companies, its impact will eventually be felt by organisations of all sizes.

‘The regulatory burden is a bit lighter for us,’ says Roger Barker, financial director at privately held malt specialist Muntons.

‘However, we do “tuck in” behind the big boys and implement best practice reporting as soon as sensible.’

Influenced by the Turnbull Report, Muntons reviewed its risks at the same time as it implemented SAP. The company wanted to build basic risk-management processes into the new system, such as credit risk, currency risk, materials procurement risk, market risk and fraud.

‘The improvement in risk management actually paid for the new system,’ says Barker.

Daniele Bonfanti, a programme manager for analyst IDC, advises organisations to be flexible and responsive in order to cut the overall cost of compliance.

‘It isn’t like the year 2000 or euro projects that had a fixed deadline,’ he says. ‘You have to adapt to continuous changes in regulations.’ It seems that most software, especially workflow, is flexible enough to meet new compliance requirements, but only if used properly.

Multidimensional reporting tools help transition to IFRS and segmentation analysis. They also help to compare actuals with plan, in order to implement the more “real-time” reporting required by Sarbanes-Oxley-type legislation, as well as providing all the figures required to explain the changes to the analyst community.

‘Software can cope, but much of it rests with the finance director,’ concludes Keeling. ‘Most of the work lies in the analysis and the coding of their general ledger and consolidation system and to compare it with this year’s figures.

Vendors can’t give customers a fix that will make them IFRS compliant.

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