Silver Lining: Five Unexpected Benefits of Sarbanes Oxley
With US companies nearing completion of their Sarbanes Oxley section 404 documentation and testing exercises and Foreign Private Issuers now working to achieve compliance by the end of next year, a question that is now frequently asked is whether the benefits truly outweigh the costs. A recent survey of US companies (with $2.5bn average turnover) by Financial Executives International, indicated an average cost of compliance with Section 404 of $3m per company. Commentators have increasingly begun to question whether real shareholder value is being derived from these initiatives, and whether the capital markets will end up better off. At the recent Eurofinance treasury conference in Paris in October 2004, the audience was evenly divided between those who felt Sarbanes Oxley added shareholder value versus those who felt it did not. This is of course the key point and it will be interesting to see if and how the pendulum swings over the next few years. In the meantime though, treasurers are faced with the need to establish appropriate documentation of the controls surrounding their treasury processes, test those controls and remedy any weaknesses. So for those who like to take a more positive view of life, the question is really what benefit they can derive from the compliance process. Below are five suggestions of positive side-effects (other than pure compliance) that treasurers might find they can derive from their Sarbanes Oxley efforts.
Treasury activities are central to a company’s management of it’s risks and safeguarding of assets. This is reflected in financial reporting via the disproportionate amount of financial statements disclosure covering activities and risks managed by the treasury function. When combined with Sarbanes Oxley’s focus on financial reporting controls and on general principles of good governance, these drivers are likely to put treasury matters higher on the Board’s agenda than ever before.
In the past, the focus of senior management in many organisations has been on the need to control the treasury operations (notably in view of the high perceived operational risks involved in financial instruments activities), whilst keeping treasury as a low cost support function. This focus often obscured the more important discussion on how treasury adds value to the organisation. Treasurers would be well advised to use the opportunity of greater ‘airtime’ to educate senior management on treasury’s pivotal role in value creation, via good risk management and solid financial policies, and thereby raise their own profile and that of their department.
Many treasurers have been looking for years to secure budgets for investment in technology to enable them to automate their treasury departments and integrate them with forecasting and accounting processes, as well as with external banking solutions and with other partners. Could the new regulations be of help here?
Sarbanes Oxley section 404 requires the documentation and testing of key financial reporting controls. Manual controls are of course not the most efficient solution in this context. Establishing, documenting, operating and testing manual controls is a much more costly exercise in the long run than doing the same in an automated environment. Automated controls and procedures are validated when they are implemented. Thereafter appropriate controls over system change and procedures to ensure the control is still operating are designed are sufficient to ensure compliance. So automation is the best solution not only operationally, but also from a control perspective. Treasurers may want to use the added focus on control as a basis for justifying the budget to do with technology what they have been wanting to do all along.
One of the critical items in any section 404 project is the correct identification and management of handover points between one process and another, and the need to ensure that these handovers are supported by strong controls over data. Nowhere is this more evident than in the touch points where centralised process, such as FX risk management or cash management, meet the de-centralised operational processes of business units which generate exposures, forecast short and long term cash flow and account for hedging and pooling activities. The processes which provide treasury with its raw material, in particular the cash flow forecasting process, has been a sticking point for many companies. Treasurers regularly complain of the poor quality of forecasts from the business, citing problems in terms of accuracy, reliability, timeliness and lack of standardisation across different businesses. The internal control discipline which Sarbanes Oxley will force upon the entire end-to-end process, including cash flow forecasting and accounting by business units for their transactions with central treasury, should over time improve the quality of data which treasury receives from the business operations, yielding significant benefits for the organisation.
As part of their compliance projects, many treasurers have found themselves dealing with a range of business partners, some of them new and others not so new, with whom they had previously had far less contact. These business partners range from internal / external auditors who drive the testing of controls, accounting and consolidation teams responsible for financial reporting, to system vendors, accountants and consultants who support the process of documenting and enhancing controls. For these relationships to be effective, they have had to be based on a far more in-depth understanding of the company’s specific treasury and financial reporting activities than was ever the case in the past. This greater understanding will leave treasurers at the end of the compliance exercise with a broader group of partners who truly understand their operations and who will be well placed to support subsequent process improvement initiatives.
Last but by no means least, the Sarbanes Oxley project provides a genuine opportunity to learn new skills which go beyond the traditional competence set of most treasury departments. In particular, many organisations have found value in the learning experience afforded by the emphasis on treasury controls and accounting, as well as in the opportunity to revisit risk management practices. Staff in the treasury function have seen their experience broadened into these new areas, making them better equipped to take on further challenges either within treasury or in the wider finance function. Some have suggested in this context that, as the saying goes, it’s not the where you end up that matters, but rather the experience afforded by the journey itself.
To conclude then, these five possible benefits should not be viewed as purely theoretical. They stem from the actual experiences of companies which have looked to derive benefits from their 404 projects beyond pure compliance. Whether in practice treasurers and their organisations choose to recognise and take advantage of these, and other, unexpected benefits is ultimately up to them.