IMGCAP(1)]While Congress and accountants continue to fight the Sarbanes-Oxley 404 requirements for small filers on what seems like an annual basis, those in the private sector continue to deploy SOX-related policies and procedures as best practices. This trend will continue as the cost of compliance becomes more efficient.
For example, the American Institute of CPAs issuance of Statements of Auditing Standards No.s 104 to 111 currently requires the use of risk-based audit methodology by auditors. As a result, private companies are seeing more controls-based questions and requirements from their auditors.
In the wake of Enron and assorted other accounting scandals, President Bush signed into law Sarbanes-Oxley Act of 2002, the most dramatic change to federal securities laws since the 1930s. Specifically, Section 404 of SOX requires that management document, test and adequately support the effectiveness of its internal controls. It also states that such documentation, testing and support be audited and reported on by its external auditors.
Certifying officers face penalties of $1million for false certification and/or up to 10 years imprisonment for knowing violations, and $5 million and/or up to 20 years imprisonment for willing violations. A new era of transparency was born.
Now that SOX requirements have been in place for seven years, its safe to say those requirements are here to stay. As such, companies have absorbed the costs of complying and are looking for more sustaining tools and processes to make that burden a simple process, not an annual project.
Excessive Cost of Compliance
In pursuit of risk mitigation and compliance, as well as fearing significant fines and jail-time, public companies hired additional full-time employees and attempted to comply by throwing large quantities of man-hours at compliance. Generally, this meant that companies deployed a firefighting approach to compliance, which when combined with the newness of the regulations, significantly increased compliance costs. Such costs have been well documented well over $5 billion annually.
The vast majority of companies have accepted the higher costs internally and externally, but continue to look for ways to reduce them. We all recognize that inefficiencies occur any time auditors, whether internal or external, test what finance and accounting professionals do every day, such as internal controls. Companies must reduce the number of controls subject to testing and leverage only the most efficient controls to test. This reduces the amount of testing by shrinking the possible population.
Some companies have completed control optimization projects, but the key is to get the external auditors to approve your different approach and then persuade them to reduce their hours as well. While this may be difficult, the cost savings are substantial.
Many of you may already be there, but challenge yourself to find more efficient ways to reduce testing, such as leveraging the absence of deficiencies in a certain process and denoting that the process owners have not changed. This will help lower testing volumes in a process.
Documentation Requirements
Compliance is about documentation and not just process documents or narratives. Many finance and accounting departments find it difficult to spend time operating the business and analyzing results because of overwhelming paperwork and documentation requirements, in addition to countless information requests from auditors. Supporting documentation required for compliance efforts is extremely cumbersome, duplicative and costly for companies, as many employees are forced to print files stored on the server simply to manually sign-off as evidence that a review had been performed.
To that end, many companies have regressed in the migration from paper to electronic records. The added workload and time commitment created a stressful work environment and caused many companies to hire more personnel. Retaining documented evidence of controls is vital to accurate financial reporting, as evidenced by a common slogan used by auditors: If it isnt documented, it isnt done.
In todays economy, finance professionals are smothered by decreasing margins and personnel, increasing costs and burdensome regulations. Many are scrambling to find ways to do more work with less people. For the average company, 75 to 85 percent of its controls are manual. As a result, most accounting departments spend their time memorializing such manual controls. Time studies have estimated that accounting department employees spend anywhere from 15 to 25 percent of their time printing, reprinting, copying, bindering, filing, signing, tracking down signatures and performing administrative tasks. Would it not make sense to eliminate that time?
Unlike external auditors, who migrated to a paperless environment more than a decade ago, accounting departments have held on to their paperwork and binders. It is time for a change. As public accounting firms have learned, the efficiency gains can be enormous.
Accounting departments need to deploy paperless solutions for their financial close and other facets of their manual controls. Simple solutions allow for electronic files to be signed off, shared, edited and tracked electronically, thus eliminating the need to print and store them.
Paperless can be done cost effectively, but recognize there are many ideas on paperless. Some departments claim to be paperless because they do all their work manually and then scan it for storage and recall, which just adds a step to the process. Why not work with the electronic files from the start? Finance departments should look for solutions that are quick to implement, eliminate the need to deal with paper for manual controls, and monitor such manual controls for completion, or more importantly, monitor for those that are not complete. Accountants by nature are checklist dependent, but there are easier alternatives.
Departmental Silos Impede Efficiency
Monitoring and testing of financial processes resulted in employees traveling to numerous locations to hunt for supporting documentation, which could be located in a file cabinet, binder, desk, server, hard drive or e-mail. If they werent hunting for the evidence themselves, they were interrupting others to pull it for them. Unfortunately, this is the nature of the game. Once the correct version of the evidence was located, the internal auditor copied and filed it in more binders of supporting documents, or scanned it into their own system which only internal auditors use. This redundant and inefficient process continues to plague companies today, but it does not have to be.
As more finance departments move to paperless options, internal auditors need to be ready to leverage those solutions across multiple silos. Companies should consider comprehensive solutions that integrate with existing systems. Doing so will allow supporting documents to be available for auditors to test without having to ask for them, bother someone on the finance team or travel to multiple locations.
Often, companies select a different solution for each department for a specific need. Before you know it, you have 10 different systems with data, documentation and support, which need to be tested, and none of them directly feed information and documents to the internal auditor. The solutions that drive the most savings are the ones that help companies across multiple departments by leveraging, connecting and sharing information seamlessly.
Manual Workflow
Manual and IT internal controls may be performed at various frequencies (daily, weekly, monthly, quarterly, annually, etc.) and continuously generate documents and evidence in a variety of forms (paper, electronic, etc.). Such information is passed continuously from hand to hand, department to department, back and forth and up the chain for approval or review only to be filed and pulled for internal auditors and re-filed and pulled again for external auditors. These manual processes are innately inefficient and expensive. Further, evidence is often maintained in hard copy and electronic form by multiple people in multiple office locations, which further complicates oversight and control while increasing costs.
Software solutions have historically focused on the automation of high transactional areas such as number crunching performed by general ledgers, detailed wage, tax and other withholding calculations by payroll systems or even imaging solutions to manage accounts payable automation. But few focus on the automation and simplification of the large volume of repetitive manual tasks performed via spreadsheets, printing, bindering and filing evidence. Automation of the accountants workflow is an area of opportunity for companies to save costs and be more efficient, but the key is to have a workflow solution that connects to both the paperless initiatives and that follows the evidence from initial creation through the final audit conclusion and testing.
Manual workflow is simply unavoidable in the financial reporting and compliance process. Solutions allow typically cost-creating projects like SOX to move into a source of ROI and productivity. Affordable solutions exist today to make this a reality.
The combination of the recession and the overwhelming costs of compliance represents an urgent need for a better mousetrap. An everyday software solution used by multiple levels of employees that reduces the costs of compliance; documents, stores and links critical evidence to processes; and provides increased employee productivity through workflow solutions can greatly relieve the burden that many accountants have come to recognize as the standard.
Companies must look for solutions and vendors that understand paperless accounting closes, manual controls monitoring, the accountant workflow, process documentation, internal audit requirements and how they interrelate. By providing the missing link among these typically disparate systems and replacing the file cabinets, binders and various stored server data with more efficient electronic ones, accounting and finance departments can learn what every large accounting firm has learned in the past 10 years working electronically in a collaborative and shared environment is the most efficient way to work and comply.
Jeff Reibel, CPA, is founder and CEO of
