Some of my best friends are finance directors. I work with them on a daily basis. Hell, I've even been one myself, from time to time. So don't take this the wrong way: some FDs have disappointed me lately. Why? Well, usually not much flusters your typical ED but I've been absolutely astonished at the amount of fuss that some of them are making over Sarbanes-Oxley. For companies with a US listing (or regulated in any other way by the SEC), and for European subsidiaries of listed US companies, the Sarbanes-Oxley Act is now a reality. The "Sox" industry is booming, with consultants, auditors and systems salesmen all making hay out of the most significant overhaul of US corporate governance rules in nearly 70 years.
The area that has provided the most pressure for companies is the part of the act that requires the chief executive and finance director to certify annual and quarterly reports. It's not surprising that the group CEO and CFO of Sox-affected entities have tried to find some reassurance by requesting (or rather insisting) that those further down the reporting lines – the MDs and FDs of subsidiaries –also sign on the dotted line.
While signing off financial reports has been standard practice in the UK for some time, a critical requirement of Sox is to guarantee that proper steps have been taken to support the certification process (section 404, the bit where you certify the quality of internal controls). It's this element that seems to have produced so much unhappiness on both sides of the Atlantic. For example, several hundred US companies reporting after the November start date of section 404, have already told the SEC that they cannot be certain their reporting processes are foolproof. And over here, finance teams are getting used to the constant "are you sure?" calls from their parent company CFOs across the pond.
Companies now have to provide an accurate and clear audit trail. There's also a shorter reporting cycle – the SEC requires filing within 35 days, while pre-Sox it was 45 – and at the same time some finance departments are dealing with the added complexity of IFRS.
So all this new red tape does mean finance teams are under pressure. however, it doesn’t mean the fundamentals of running a finance function have changed. It's this apparent ability to forget that we're talking about the basics that puzzles and disappoints me.
Signing to say that there are no errors in your accounts should not be a daunting task. What exactly is your accounting system meant to be doing, except telling you that the accounts are right and that there are no material misstatements? It should be a matter of routine that your team is taking every transaction, posting it in the accounts, performing the banking reconciliations and making sure that the purchase ledger, sales ledger and cash book reconcile to the general ledger.
At the same time, every sound accounts department needs to have a system of control that means that people aren't changing the numbers outside the ledger.
Before I am accused of being naïve about the pressures FDs are facing, I can see that there are tricky elements for many of them. Accounting standards have to be complied with, and life does become more complicated if you're dealing with transactions across boundaries. Such complexity will require the use of a sophisticated financials system or some other method of consolidation (though please not the Excel spreadsheet held together with the digital equivalent of string and sticky tape).
Some FDs also have to deal with areas where rocket scientists would be baffled – derivative accounting, for example. But be honest: these are few and far between. Most FDs do not, and should not, find all this difficult. What we are doing in terms of our basic accounting function is still just adding up the numbers. So why are so many people making all this fuss over Sox? The act has done exactly what it set out to do. ( Indeed, what we warned it would do back in Real Finance October 2002). It's been a wake-up call for companies to sort out problems in these basic processes.
It's not surprising that there are companies where they've slipped. Most FDs get caught up with the day-to-day hassles of helping every other part of the business run properly. It's a rare FD who only does finance and accounting. As a result, it can be tough to invest the time and money to ensure that the accounting function is running smoothly.
Sox (and all the rest of the governance red tape) allows you to go to the board with a copper-bottomed case for investment in systems that you may have known the organisation has needed for some time. Who on the board is going to veto an investment that you say is needed for compliance purposes? If you are directly affected by Sox, you're offering the CEO, quite literally, a get out of jail card (although it's unlikely to be free). My advice, even for those of you not caught in the Sox net, is that there has never been a better time to give your accounting system the once over and ensure that it's fit for purpose.