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Financial scandals at some of the world's largest companies have thrown a spotlight on corporate reporting processes. A common problem is that senior managers often do not have access to accurate financial data on which to base key decisions.
For years, Iceland dominated its particular sector of the British food retailing market. But when management decided on an audacious shift in strategy, the frailties of the company's reporting systems were quickly exposed.
Iceland decided to take a gamble on organic food. If this move paid off, executives reasoned, it would help the discount retailer to bump up margins and attract higher-spending customers. Instead, the strategy simply persuaded the retail chain's less affluent customers to shop elsewhere - a fact of which Iceland executives were unaware for some time until management reports revealed plunging sales.
City analysts such as Merrill Lynch's Andrew Fowler blame not only Iceland's management, but also the poor quality of the company's reporting systems, which repeatedly failed to alert senior managers when their strategy went awry - even as they were loudly proclaiming its success.
Financial scandals at some of the world's largest companies have thrown a spotlight on corporate reporting processes. But concerted dishonesty of the kind seen at Enron and WorldCom is rare. A more common problem is that senior
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As a result, many companies risk being caught out like Iceland because the architecture of their financial systems limits them to management reporting on a monthly basis - at best.
The management reporting process of pharmaceuticals giant AstraZeneca, for example, is typical of the way that many major multinational organisations share financial and operational data among key decision-makers.
AstraZeneca - which has sales operations in over 100 countries, manufacturing in 20 and major research centres in five - uses Hyperion Enterprise to consolidate financial and trading data from units all round the world on a monthly basis for the purpose of management reporting. Because of the vast, sprawling nature of the company, different country units use different financial systems.
As a result, the uploading of financial and trading data from some countries is performed manually, which frequently introduces errors that must be ironed out before the reports are compiled.
Group financial director Tim Watts has tried to reduce discrepancies by introducing targets for accuracy and, longer term, is considering whether the organisation's current Europe-wide implementation of SAP Financials could be rolled out globally.
Local difficulties
Nevertheless, a multinational such as AstraZeneca faces a number of other complicating factors that must be overcome if it is to get a clear picture of how successfully - or otherwise - it is trading across the globe.
First, financial and trading systems in different countries are primarily set up to ensure compliance with local laws and accounting standards. For example, says Mike Shelton, UK managing director of financial software vendor Hyperion, US regulators are set to demand that the cost of issuing stock options be reflected in company accounts. "But foreign subsidiaries [of US companies] may not do that automatically," says Shelton.
In addition, it is not unusual for discrepancies to occur when money is transferred between one subsidiary and another. "One company may show a transfer of a certain amount and another may show a transfer in of a different amount and you have got to get those to balance," says Shelton.
There are two ways this can be overcome. First, an organisation can introduce automated, system-to-system feeds - assuming the country unit's IT systems are sufficiently up-to-date.
At the same time, the data that is fed into the system can be automatically checked to make sure it adds up and, where necessary, cross-checked so that, for example, transactions between the company's units are correct.
Yet in many major multinational organisations, management reports might be as much as six weeks out of date by the time they hit the desktop PCs of senior managers. In a fast moving sector such as retail, even small delays in the management reporting process can prove critical, as Iceland found to its cost.
Audit trail
An equally serious problem with such a management reporting architecture is the inability of senior executives to trace back data from the consolidated reporting system back into the source systems of country units, says Simon May, chief technology officer of financial software vendor Systems Union.
Systems Union recommends that organisations roll out the same financial system globally, because this will simplify the management reporting and analysis process.
Uploading data into a consolidated system on a monthly basis "breaks the link" between the resulting management report and the source data. This limits management's power of investigation should it uncover something suspicious or simply want to track and analyse the sequence of events relating to a particular contract or set of transactions, argues May.
"There's nothing like being able to go back and see what happened at the transaction level, even go back to the source document," he says.
But Hyperion's Shelton says that the complexity of the average multinational company mitigates against the uniformity that Systems Union advocates. "A lot of companies have tried to go to 'one system', but in practice it has not worked," says Shelton.
This is because acquisitive multinationals buy and sell businesses at such a rate that implementing a new financial system after each purchase would involve too much time and cost.
May suggests that by using web services technologies, it will soon be possible for an organisation to more quickly and easily tie in recently acquired companies' financial systems into the consolidated reporting system at head office.
"What we are working towards is a particular piece of software that can invoke a web service on the Singapore system, for example, which would then go and get that particular piece of data," says May.
Doing this as a matter of routine will affect the performance of the source financial system, admits May. "But what we are doing is providing for those exceptional circumstances," he says. "If you want to do that on a regular basis then perhaps you should be looking at other strategies," he admits.
Emerging standards
Two key emerging standards ought to help organisations better manage the reporting process and provide both internal and external parties with greater transparency into their trading histories.
First, is the development of the International Accounting Standard (IAS), which will be mandatory across the European Union (EU) from 2005 and has been adopted by a number of countries outside the EU, including Australia and Singapore.
IAS is broadly based on US generally accepted accounting principles (US GAAP). The idea is that standardising accounting methods internationally ought to make it easier to compare companies based in different countries, as well as reducing the headache for multinationals consolidating financial data from a number of territories.
Potentially more significant is the development of the XML business reporting language (XBRL), a self-describing mark-up language for financial data.
Originally developed to make it easier to publish corporate accounts on web pages, May foresees XBRL being used to enable companies to electronically submit their accounts.
Furthermore, it will make it easier for a range of people to understand exactly what is going on in a set of corporate accounts because the self-describing properties of XBRL will enable them to have the data automatically formatted in the way that suits them best, whether they are internal auditors or external regulators.
In addition, XBRL should also enable them to run automated checks and compare corporate accounts, both historically and across sectors,
Business processes
Yet ultimately, says Hyperion's Shelton, technology represents just one part of the financial reporting 'system'. Equally important is the quality of the people, as well as the business processes that senior management lay down for them to follow, as well as their enforcement of those processes.
For example, Howard Evans, finance director of banking, healthcare and insurance software vendor Misys, recommends keeping a tight rein on the accounting process throughout the organisation by introducing rules that go above and beyond national accounting standards. The idea is to minimise the scope for individual interpretation.
"We certainly have internal audits go round and one thing they do is check that the various accounting rules that we have are followed," says Evans. "Accounting is not as exact a science as people think and what you are looking for as a manager is consistency," he adds.
However, AstraZeneca's Watts does not believe that more frequent reporting - or faster end-of-period closing - would bring significant benefits to his organisation.
Senior managers do not want to be submerged in data, nor do they want to 'micro-manage' far-flung parts of the organisation or get bogged down in inconsequential matters that country managers should really be dealing with, says Watts.
Evans agrees. When examining financial and trading data from far-flung subsidiaries, what Evans looks for is trends, rather than single anomalies. "Trend information is more important than looking at 'spot data'," he says.
In the worst case scenario, corruption in some far-flung corner of a multinational business empire can frquently be pinned down to lackadaisical auditing and a lack of suitably rigorous business processes. It is, arguably, these that need to be examined first.
