Hardly a day goes by without news on the controversial financial instruments standard IAS39. It’s ironic that a step intended to reduce uncertainty in capital markets has so far achieved the opposite effect.
Although many of the standards do not represent a major departure from current European generally accepted accounting principles, IAS32 and 39 have encountered considerable resistance from European banks.
Opposition voices anticipate a major impact on the volatility of reported results. In fact, a prominent bank recently reported a net income difference of £1bn when reporting its results to GAAP in the UK and US (where FAS133 is similar in nature to IAS39).
One thing is sure: the impact of IAS on firms’ results will be significant and only by fully planning for change will businesses reap the benefits.
Many UK firms are daunted by the scale of the accounting changes now under way, particularly as they form part of wider regulatory change and corporate governance programmes.
IAS is not the only piece of legislation confronting financial directors.
Other regulatory burdens include Basel II for financial institutions, Sarbanes-Oxley for companies listed in the US, and the proposed introduction of the operating and financial review, as well as sector-specific legislation.
Most affected companies still do not fully understand the nature of the risks, and as a result are not implementing strategic management frameworks.
As these reforms are mandatory, firms are not applying the cost benefit and project justification analyses they otherwise would. This has led some firms to adopt a short-term, tactical approach to legislation, which will ultimately prove more costly.
While it is easy for firms to view legislation as an obstacle to be overcome, compliance should be viewed as a catalyst for better performance.
The increased emphasis on compliance and improved governance gives senior managers a chance to make a significant difference to their company. It is down to them to showcase the wider benefits that compliance can bring, namely improved internal processes and controls, and greater shareholder returns.
One of the most positive aspects of IAS is that transparency is back at the top of the agenda. This can only be a good thing. Improved information management and better internal control systems are critical to providing investors, lenders and stakeholders with greater levels of confidence, thus fuelling a healthier economy.
Research conducted by GMI last November revealed that firms with good governance were delivering greater shareholder returns. The subsequent transparency that the legislation demands will give firms better access to capital, which in turn can boost their bottom line.
Greater transparency means CEOs and CFOs must be absolutely certain that the right controls are in place and that the data is arrived at in accordance with the latest accounting regulations. This is where the finance director and senior managers take centre stage.
Section 302 of the Sarbanes-Oxley Act imposes executive certification on a quarterly basis, and an organisation’s systems have to reflect this.
IT systems must support the CEO and CFO signing off this vital financial data. They must support transparency and embedded internal controls.
Accompanied by stringent business processes, the appropriate systems can eliminate the chances of faults or discrepancies passing undetected.
Transparency will mean that when examining the books, the CFO will be able to drill down into minutiae, such as which manager approved a particular expense report.
This can only be achieved when FDs drive the change through the organisation, maximising the benefits compliance brings, while reducing ongoing compliance costs, such as audit fees.
If firms are to achieve timely IAS compliance, while managing an increasing overall burden of regulation, they need to consider a wider transformation of their systems and business process. They need to embed policies, processes and infrastructures into their systems to bring them in line with the requirements of each new piece of legislation.
The most dangerous route firms can take is a piecemeal approach, where they address each change by reconfiguring disparate systems and establishing separate regulation-specific data warehouses.
A piecemeal approach results in the storage of millions of individual transactions and leads to an extremely onerous reconciliation task. It is also an astronomically expensive and high-risk strategy that inevitably leads to multiple versions of transactional data and the cost of compliance spiralling out of control.
Point solutions are expensive and perpetuate the very problems they set out to solve. With increasing globalisation and harmonisation of accounting and auditing standards, the best solution is one that minimises the cost of compliance, automates and controls processes on a global basis and provides complete transparency.
FDs therefore need to look further than solving the immediate problem. Shared service centres have wider benefits than transaction processing centres and can be used as a tool for establishing global standard processes and controls, and achieving greater transparency.
Global systems provide superior controls, increased transparency, improved reporting and ultimately result in better-governed companies and more confidence in capital markets. Which is, after all, the very goal IAS legislation is seeking to achieve.
LEGISLATION PUT INTO PRACTICE
- Review the impact of IFRS on your business systems
- Perform a systems compliance audit
- Review the costs of compliance in terms of people, processes and systems
- Review other regulatory requirements and projects
- Group the requirements and establish any inter-related projects/relationships
- Investigate increased standardisation of processes
- Automate processes and controls where possible
- Evaluate a corporate performance management framework
- Design a systems strategy that establishes a common compliance platform
- Evaluate the strategy against the costs of a piecemeal approach to compliance and implement.
Michelle Maden is head of finance and compliance solutions at Oracle.