Internal controls: data day grind

Internal controls: data day grind

With investors demanding more transparency from finance heads, today's FDs are more akin to chief executives than number crunchers

In association with KPMG

For many large companies, the challenge of meeting the internal control
requirements of
Sarbanes-Oxley, as
well as the fiendishly technical transfer to international financial reporting
standards, is over. Time to relax, pat yourself on the back and pour yourself a
large whisky, perhaps? Not a chance, say the experts.

The worst may be over in terms of compliance, but the challenge of getting
the most from your finance function has only just begun. ‘If you remember the
late 1980s and the early 1990s, the focus in finance departments was on taking
out costs,’ says Scott Parker, a partner at
KPMG and head of its
financial management business.

‘In the mid-to-late 1990s, people were increasingly focusing on finance
becoming a business partner – not just counting the numbers but getting more
involved in the business and decision-making process. Recently, there has been a
huge focus on control and compliance. We are now at a pivotal point,’ says

It’s a compelling story, and a neat way of looking at how the modern role of
the finance director and chief financial officer came about. They are not just
number-crunchers, but strategic heads, focused as much on cost control as on
counting costs, and responsible for the governance challenges of the post-Enron
business climate. It’s enough to make any finance head sweat. ‘The reality is,
the CFO has got to do really well and excel in those areas at the same time,’
says Parker.

So what is driving those changes? Parker says the increasing involvement of
investors in seeking clarity about what they are investing in is one such
challenge. ‘Investors are looking for greater insight into the business in which
they are investing. CFOs are spending a lot more time talking to investors and
analysts than they did in the past. As a rule of thumb, CFOs can now expect to
spend as much as 20% of their time talking to analysts and investors,’ says

In part, that has come about because FDs are uniquely placed. With concerns
about the potential gremlins that could be hidden away in a business, investors
want to get some reassurance from finance, which looks scrupulously at cost
control, and is most likely to be first to spot the weaknesses, know where the
cost overruns are likely to be, and perhaps identify growth areas.

‘An area of particular concern is the accuracy of forecasting,’ says Parker.
‘CFOs are rebuilding trust with the capital markets.’ Company directors are
likely to be knocking on the finance director’s door, too. ‘The board is
increasingly going to want more of your time thinking about the key decisions.’

The strategic role is something that observers have been seeing across the
board. BAA, until its recent sale to Spanish group Ferrovial, is one example.
Margaret Ewing, the company’s finance director, split the airport group’s
finance function into two: a group looking at compiling the numbers, and a group
making key decisions and looking at it strategically.

Those splits are fairly evident, Parker says. One development has been
towards getting stronger people into the finance function itself. ‘There’s a
growing importance on a really strong number two,’ says Parker. After all,
someone needs to run the department on a day-to-day basis if the finance
director is unable to, advising the board as well as investors. Today’s second
in command is doing the job the finance director did 15 years ago.

Parker believes that finance functions are under a lot of strain at present.
‘Finance people are spending an awful lot of time trying to collate data,’ he
argues, when really they are capable of doing much more. ‘The phrase we use is
that a lot of finance functions are full of acrobats with their feet stuck
firmly on the ground.’

The question is how to achieve this more strategic role to get information to
people quickly so they can use the skills and experience they have to produce
the insights they are capable of.

And it’s going to get worse in some senses, according to Steve Maslin, head
of assurance at Grant Thornton.

Having had a degree of success in controlling the remuneration of directors
by pushing for disclosure and influence on the remuneration committee, investors
are now thinking of doing the same for audit committees. ‘There’s a big push by
investors to have a vote on the audit committee report,’ says Maslin. ‘I think
that they are going to push it over the next few months.’

Parker has a few ideas on how to meet their demands. In many cases, better
use of technology could be one solution. Many people, he says, are still using
Excel when more powerful tools are available.

Another challenge is the across-the-board demand for people to raise their
game. ‘The real priority is to upskill people. You need to increase people’s
capacity so they can accomplish more,’ he says.

Finance functions have to do more analysis too. ‘In a lot of organisations,
doing finance is still seen as people looking at financial information. The
reality in most businesses is that the financial information is only part of the

‘You also need to know: where are we on market share, on investment returns,
and on advertising? It’s not pure financial returns. If you want to understand
performance you need a wide range of key performance indicators,’ says Parker.

‘Finance is well placed in that it has got skills and expertise, the
discipline of making sure that any information is pulled together with a high
degree of integrity.’

And then there is compliance – the increasing rigour of which has been the
story of the profession for the past few years. Accounting firms have grown much
richer from advising on those issues as companies have paid soaring fees to deal
with new demand.

Maslin says there is a need to embed the principles and use them to
understand the business. Far from seeking to slim down finance functions after
having met the compliance challenge, businesses are keeping people on to
maintain their systems and to make the best use of them, he says. ‘You have to
know the control systems are living and breathing,’ Maslin says.

The cost of doing so can be reduced, though. ‘In my experience, most
companies are trying to figure out how to comply more efficiently and reduce the
cost of compliance,’ explains Parker. A new KPMG survey shows that FDs are
expecting compliance to cost more going forward, not less, and this is a worry
for many.

Businesses need to reduce the cost of compliance to standardise, he thinks.
Some businesses will be complying, but not in a standardised way. So they might
have 50 businesses, and 50 purchase-to-pay systems associated with each one.
‘The risk in that environment is greater. There’s no reason why you can’t have a
single, standard global process enabled by a single piece of technology,’ says

The shared services model is also worth considering. Shared services centres
consolidate activities from multiple business units into one low-cost location.
Such centres are often based in Eastern Europe more than in India and China for
European multinationals.

‘The low cost of labour in other countries is one incentive. The other thing
is access to multilingual labour forces. The difference between US corporates
and UK/EU corporates is that the US companies can open offices in India because
English is spoken by many. A more complex range of languages is needed for
European businesses, and the number of countries in which you can access those
language skills is not as common,’ says Parker.

The shared services model is four times as popular as straightforward
outsourcing at the moment. And where it used to be simply back-office functions,
we’re increasingly seeing regular reporting activity centralised in such places.

Drinks company Diageo is one company that has led the way with shared service
centres, having set one up in Budapest, Hungary. It does much of the reporting
and analytical types of activities, Parker says. ‘Finance has to balance three
things: maintaining and consolidating trust internally and externally, running
an efficient operation, and providing insight to business performance.’

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