Public companies are in the process of completing their initial Sarbanes-Oxley section 404 compliance, identifying and correcting control problems. Ventana Research believes that this year both public and private companies will turn their attention to escalating audit fees and addressing the factors that drive them. We think finance executives and audit committees should investigate to what extent deficiencies in their companies' IT systems are making audit fees higher than they need to be. Greater automation and integration of processes can decrease vulnerability to fraud. Reporting systems should enhance control and facilitate audits. Well-designed document/content management systems can make documentation more complete and timely.

Assessment

Public companies are in the process of completing their Sarbanes-Oxley compliance initiatives. For many of them, complying with the law proved to be a big distraction. The time spent investigating, formalizing, and recording financial control systems was time not spent on other efforts. Private companies also are feeling the impact of the more stringent regulatory environment as well in the form of higher audit fees and the need to provide greater transparency to lenders.

Having come over the hump of initial compliance, companies are now facing the task of executing the ongoing certification, auditing, and filing process. "Our audit bill is going to double" according to the CEO of a large company. This is not an isolated comment. Almost all CFOs expect their audit fees will rise because of the annual attestation requirements of the law. In one mid-year FEI survey, the average increase for 2003 was estimated to be 35 percent, and additional increases were anticipated for 2004.

On the other hand, since they have put their audit and control processes under a microscope, finance organizations have a much clearer picture of the nature and source of the audit and control issues they will be facing in the future. Consequently, today they are in a much better position to understand how they can improve process, reporting, and document/content issues related to the audit and control functions. The question is - will they do something about it?

Ventana Research asserts that finance departments must address the entire span of audit and control issues they confront along multiple software dimensions: process, reporting/consolidation, and document/content management.

Process: The core issue CFO organizations must address in Sarbanes-Oxley compliance is quality in financial processes. There is an analogy to manufacturing processes as it involves applying rigorous standards in a structured fashion to achieve quality results. As in manufacturing, high quality financial processes involve executing the right steps in the right order using the right tools and techniques at the right time. Quality processes are always controllable and are inherently more adaptable. Quality in financial processes has four main benefits:

1. Accuracy - There are three important dimensions to accuracy: the original entries amounts are correct to "six-sigma" levels, classification and measurement are correct according to accounting standards, and there is only 'one version of the truth;"
2. Visibility - The connection between final reported numbers and original entries is explicit and traceable, the accounting methods explicit and according to accounting standards, making the statements easy to audit;
3. Speed - Reliable publication of financial statements is made within time constraints; auditor/audit committee inquiries can be answered promptly and completely; useful financial data for internal management purposes are readily available and available quickly; and
4. Lower Cost - Achieving greater accuracy, better visibility, and faster reporting cycles should entail less cost than current methods.

Although adoption of dedicated software tools will accelerate and improve the process, Ventana Research contends it will take several more years for a majority of finance organizations to adopt best practices such as rolling quarters planning and budgeting, exception-based reviews, external benchmarking and goal-setting, etc. As hard as it may have been to convince senior finance people to change software tools and begin the reformation, organization-wide process changes such as moving away from the annual cycle are harder to implement. Our research in 2004 will focus on how companies can increase the effectiveness of the planning and budgeting process, and how IT can address these issues.

Reporting/consolidation: CFOs and Controllers must investigate the adequacy of the systems they are using. They should determine and whether the systems are delivering verifiable and timely information. Beyond simply assessing adequacy, finance organizations should be looking for novel ways to leverage their existing IT infrastructure to see if more internal audit processes can be automated or supported with existing data and systems. If new IT systems are being put into place for compliance purposes and these collect new data, the finance organization should examine how information from these systems might be used for internal audit and verification purposes.

Document/content management: Finance groups must examine how to integrate document management into their audit and control processes. The first step in addressing this question depends on the specifics of the financial reporting systems, as well as any existing software currently used in the company. Some companies will conclude that rigorous process execution documentation, extensive compliance manuals with periodic training, and deeper integration of business documents with financial systems, among other remedies are necessary. Others will simply want to automate the process of managing audit and control documentation from creation to archiving.

View

Making last year's Sarbanes-Oxley investments pay dividends in 2004 is a focus of our research agenda this year. Ventana Research is not confident that finance executives fully understand how they can leverage information technologies to effect improvements to their audit and control processes. They may be cobbling together solutions unaware of how technology can be used to address their issues more effectively and more completely. They may not be considering how a range of audit and control process improvements (such as cutting audit fees, shortening the monthly close, responding faster to a more active audit committee, etc.) can be facilitated with IT investments.

Ventana Research advises its clients to follow up their Sarbanes-Oxley compliance initiatives with a project that identifies factors driving audit costs, lengthening the close cycle and so on. The ultimate purpose will be to identify ways to address these factors with management, process design, and information technology assets.