In order to achieve the levels of transparency of operations demanded by recent corporate governance legislation, companies must look to the heart of their business processes and to the applications that underpin those processes. This means their enterprise resource planning (ERP) packages that handle financials, manufacturing, customer relationship management, human resource administration and other core areas impacted by the new rules.
Take Section 404 of the Sarbanes-Oxley Act as an example. It specifies that enterprises are obliged to “evaluate any change in the company’s internal control over financial reporting”. Thus any changes that a company subject to Sarbanes-Oxley makes to its ERP system will have to be assessed for its impact on the regulations.
For example, should the ERP software vendor issue an applications patch, which either changes the way financial process will operate going forward or casts doubt upon previous reports, the company will have to report those changes and, in the latter case, republish previous, corrected reports.
It is not the Sarbanes-Oxley Act alone that will have an impact upon ERP software.
The International Financial Reporting Standards (IFRS) set, launched across Europe as a new set of reporting best practices for accountants in January 2005, has the potential to cause even greater upheaval.
While less punitive in their tone than Sarbanes-Oxley, IFRS is similarly aimed at promoting greater transparency in financial reporting, and that means major changes to the underlying financial applications – both bespoke and package – that international companies use.
The British Accounting Software Development Association (BASDA) lists just under 50 areas in which the introduction of IFRS will impact accounting procedures and the IT packages on which they depend, spanning from employee benefits to ‘intangible assets’.
Under IFRS, for example, packages will now have to be capable of tracking the value of currencies held by companies on a daily basis – rather than just record their value at the beginning and the end of each reporting period.
Many companies, warn analysts, will find that existing processes have to be modified and new processes put in place to comply with IFRS. In most cases those will be supported by new features in the financial modules of the enterprise resource planning packages they use.
But in the case of custom programs that reflect existing accounting standards, significant re-coding will be necessary to meet the demands of new IFRS-related processes and to handle the additional data that IFRS requires. The alternative, of course, is to migrate to packaged applications that are IFRS-compliant.
Users of systems from major vendors, such as SAP or Oracle, are likely to face relatively simple IT upgrades, argues John Sinclair, the European director of product marketing at Oracle’s PeopleSoft unit.
And Dennis Keeling, CEO of BASDA, indicates that while UK companies are well placed to cope with the demands of IFRS, having “converged on international accounting standards as they evolved over the last few years”, there are further complications to the problem in the pipeline.
“Even in the UK, the Inland Revenue has not decided to accept IFRS and therefore tax reporting and computations will be different. This means that in most cases the IFRS reporting requirements will be in addition to existing local tax reporting requirements, so this will mean dual reporting,” says Keeling.
It is important, therefore, for companies to be aware of how the regulatory requirements with which they must comply impact upon their ERP products.
A company that is subject to both Sarbanes-Oxley and IFRS, for example, may find that it is obliged by the latter to implement changes to the underlying financial controlling processes run by the relevant modules of the ERP implementation, and by the Sarbanes-Oxley Act to make sure those changes are open to public scrutiny.