The Impact of Compliance on Finance Operations

- RevenueRecognition.com

Financial Executive Benchmarking Panel - Compliance Edition

www.RevenueRecognition.com and International Data Corp. (IDC) conducted a survey of 118 business leaders in May 2004. The results show that financial executives understand the risks associated with manual accounting processes and that the majority plans to dramatically reduce their reliance on spreadsheet based accounting processes. That's in order to increase the reliability of key financial information and tighten up audit trails. Interestingly, even privately held organizations not bound by stringent government regulations, such as Sarbanes-Oxley consider this a major initiative in the next 12 months.

Shifting from Manual to Automatic

Today, companies commonly rely on spreadsheets to perform key accounting processes such as revenue recognition, contract management, purchasing, inventory, billing and payroll. However, many businesses plan to move to more automated systems that offer tighter internal controls as well as greater transparency and insight into their companies' financial health. According the RevenueRecognition.com survey, 80 percent of respondents indicated that they believe spreadsheets should not be the foundation for these critical accounting processes.

In your opinion, should spreadsheets play a larger
or smaller role in your accounting processes? (n=118)

"It is clear that spreadsheets play, and will continue to play, a role in the analysis and reporting of information, but are not the basis for auditable accounting information and related processes," said Kathleen Wilhide Research Director, Corporate Compliance Applications and Business Performance Management Software, IDC. "This trend is even affecting smaller, private companies as they begin to implement stronger internal controls in the face of more stringent audits. The survey by RevenueRecognition.com and IDC shows that SMB organizations plan a dramatic shift from spreadsheet-based accounting activities to automated applications in the next 12 months."

According to the survey, companies are particularly concerned about several key tasks. Forty percent fewer expect to be using spreadsheets for closing the books. Companies also plan to reduce spreadsheet use by nearly one-third for tasks such as reporting, forecasting, and handling deferred revenue. Similar drops are seen in the areas of revenue recognition, budgeting and planning, and billing schedules.

Calculating Risk

When asked what major risks are associated with spreadsheet-based processes, 63 percent pointed to the fact that they are prone to errors, 58 percent cited the lack of audit trail and 56 percent said they lacked internal controls. Only 5 percent claimed that no risks existed. "It is clear that finance organizations rely on spreadsheets as a key tool. However, market trends indicate that users are beginning to demand a foundation of information that is auditable and supported by applications that automate these key processes," says Ms. Wilhide.

"Spreadsheets can get lost or corrupted," said Al Flores, Revenue Manager at ArcSight a leading provider of enterprise security management software that reduced its reliance on spreadsheets with a revenue management solution. "Maintaining and reconciling the data from a spreadsheet back to the accounting system can be very time consuming. It may take the same amount of time to put the information directly into the accounting system, but what we get out the back end is a lot more analysis. Now we save a lot time because we don't have to maintain a very large spreadsheet—making sure links and calculations are correct."

Recognizing Internal Controls

The survey also revealed that companies find it substantially more difficult to establish internal controls in two key areas—36% indicated revenue recognition accounting was most difficult, and 29% said contract administration and management. Other areas such as purchasing and payables, inventory, fixed assets, order processing, billing and accounts receivables, payroll, treasury, and general ledger rated no higher than 8%.

In your opinion, for which area is it most difficult to establish internal controls? (n=118)

Conclusion

The survey revealed that an important change is taking place in terms of how finance organizations are automated. This change, even among privately held companies, is largely being driven by government regulations such as Sarbanes-Oxley. As they consider possible mergers and acquisitions, or even going public, these regulations come into play and executives want to be sure the books are in proper order. The best way to do that is with a financial infrastructure that eliminates the potential for erroneous, undocumented events especially where revenue is concerned.

The survey was conducted during May 2004. In all 118 high-ranking finance officials including CFOs, controllers and vice presidents of finance were surveyed.

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