MANAGEMENT

 

FROM COMPLIANCE TO CORPORATE PERFORMANCE MANAGEMENT

 
 
While regulatory, legal compliance typically applies to public companies, many private firms now view compliance as a considerable benefit

 

By Faisal Ejaz Khan
Sep 26 - Oct 02, 2005

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By now, enough ink has been spilled over the Sarbanes-Oxley Act that the legislation has essentially become synonymous with corporate governance reform. As companies hustle to meet the first Sarbanes-Oxley deadline in the U.S. in November, two trends have become clear: first, the mandate for good governance and systematic internal controls stretches well beyond Sarbanes-Oxley and U.S. shores; second, it is a mandate that affects companies not listed on any stock exchange. Global companies, especially those with global aspirations can use the resultant visibility, control and efficiency to focus on Corporate Performance Management.

While regulatory, legal compliance typically applies to public companies, many private firms now view compliance as a considerable benefit -- if not a requirement to stay competitive. Companies with plans to go public or those looking to be acquired need to preemptively establish and articulate internal controls and financial reporting practices. Even companies that rely on lenders or venture capital must now demonstrate effective governance practices and financial transparency in order to gain funding. Beyond this, many private and non-profit companies have established compliance programs simply because they see it as good business.

CLEARING COUNTRY COMPLIANCE

First, global companies need to understand what's facing them. Apart from Sarbanes-Oxley there are several country and region specific compliance regulations - the EU's Action Plan for Company Law and March 17 2004 Anti-Fraud Directive proposal, Germany's Cromme Kodex, Britain's Cadbury-Turnbull, Australia's AIX Code, and Italy's Borsa Italiana Code, just to name a few. EU countries alone collectively have over 35 regulatory codes.

While that may sound overwhelming, there are fundamental similarities between these laws that make compliance a less "nuanced" process. All of them essentially require managements to be accountable to stakeholders. All require companies to establish a reliable information system that allows them to report using international standards from all of their operations and comply with local legislation and good neighbor practices. And all, to one degree or another, require company management to articulate internal controls and manage the risks of financial reporting error and loss.

When a company faces regulatory compliance code, it is essential to go beyond the "checklist" of regional reporting mandates. Those that will benefit from compliance will do so by creating a pervasive and permanent "culture of compliance" throughout the organization. From the top down, companies must set the tone and "play by the rules." This means taking measures to ensure the sales force doesn't come under unreasonable pressure to augment the numbers. It means making sure the accountants don't view "cutting edge" accounting as a euphemism for outfoxing the standard setters. And it means assuring managers that they will never be asked to pressure an employee, customer, or supplier to bend the rules.

To traverse from mere compliance to active Corporate Performance Management businesses need to focus on

- strategic goal setting and alignment,

- planning, budgeting, forecasting and modeling, and

- operational analytics, reporting and consolidation.

Corporate Performance Management helps companies regain control of their businesses, increase organizational credibility and remove barriers throughout the enterprise.

SOUND CONTROLS IMPROVE BUSINESS PRACTICES

Although compliance may no longer be a choice for many companies, it can be a two-way street - one that boosts investor confidence while fostering leaner, more agile business processes and more profitable operations. Companies can leverage the rules of Corporate Performance Management as a benchmark to articulate and consciously redesign the way they do business.

Business executives who look at the broad picture of what regulations are designed to do often recognize best business practices. The new focus on control and visibility opens up avenues for business process improvement several ways. Documenting business processes creates a body of easily shared and enforced organizational knowledge. Visibility and transparency in reporting brings timely, accurate information - moving companies toward a "daily close" - that lets executives manage with today's facts rather than last month's information. Visibility also helps identify non-compliance and break downs in processes.

INTEGRITY OF IT OPERATIONS ESSENTIAL FOR COMPLIANCE AND CORPORATE PERFORMANCE MANAGEMENT

The toughest part of the compliance challenge for most organizations is not in finance - it's in technology systems. A recent study by Ernst & Young found that virtually all of companies surveyed placed significant reliance on controls in some or all parts of their businesses to reduce the risk of inaccurate financial reporting.

If the systems supporting the company's daily transactions aren't controlled properly, a distorted picture of the company's performance results. Many companies today operate in environments that make this distortion of reality all too easy. For instance, companies often operate varying systems to support different parts of the business - from Customer Relationship Management (CRM) to financials to manufacturing. Inaccuracies can result from data that is poorly managed as it passes through these multiple applications.

Establishing a compliant environment by unifying IT operations with integrated application suites improves control, reduces overall cost and increases the assurance of data quality. Further, with a unified technology model, companies gain an accurate and timely picture of business data, enabling better decisions and faster response to change.

CONCLUSION

Regulatory compliance is no longer a choice for companies conducting business on a global scale. Further, Corporate Governance and Corporate Performance Management will stay in the spotlight for the foreseeable future. However, embracing the spirit of these requirements - ethical corporate governance and reliable, timely reporting - can ultimately prove less expensive than grudgingly complying with the letter of the law. In fact, it can deliver measurable bottom-line results leading to sound Corporate Performance Management. Strategic companies will distinguish themselves by transforming regulatory compliance into corporate excellence - the excellence of success.

The author is the Regional Business Manager, Financial Services Industry, SAGE West, Oracle Corporation