Motor for Compliance-Enabled Corporate Governance

Feature Article | July 21, 2005 by admin

Companies that are prepared to go without find themselves lagging behind the times. Software for corporate governance is no longer a mere luxury – it a standard tool. Enterprises benefit from IT support in reporting, for the analysis of customer and market KPIs, and in controlling. More and more companies are also turning to specially modified software solutions to help them meet legal requirements and new accounting standards such as the Sarbanes-Oxley Act (SOX), the Federal law for controlling and transparency in enterprises (KonTraG), or regulations such as Basle II. Another contributing factor is that the business world is becoming increasingly complex. Without IT, an immediate view of unstable factors such as raw materials prices, international supply conditions, or currency fluctuations is now unthinkable, and without this support the effects on production conditions and ultimately on the company’s success cannot be calculated either.
Comprehensive knowledge about all the influencing forces is the best basis for decision-making that management and user departments can have, but the question is how to achieve this. The key lies in the company’s controlling and information logistics, in other words, how different influencing factors are identified, merged, and evaluated. The strategy is known as corporate performance management (CPM). With CPM, data from all enterprise activities is analyzed and linked to the planned business objectives. This type of evaluation thus provides concrete action options for management. In short, software solutions for CPM reveal where and to what extent strategy and operational implementation coincide, and where they do not. The result is transparency.

Two birds with one stone

Enterprises gain twice the benefit from software solutions for performance management. On the one hand, CPM enables a comprehensive management view of the company’s performance. On the other, it provides access to all information that the company has a duty to disclose, and to all the company’s financial results. CFOs and financial experts thus kill two birds with one stone: reliable business figures are available and external reporting obligations fulfilled – an unavoidable necessity with regard to regulations such as the International Financial Reporting Standard (IFRS), US-GAAP, Basle II, or SOX.
The creation of balance sheets in accordance with these guidelines is complex and poses ever new challenges for financial experts. Basically, steps such as the consolidation of capital, debts, earnings, or interim results must be treated in such a way that all parts of the enterprise are included, and all postings must be traceable. In view of the data situation, this is trickier than it might first appear. The difficulty lies in finding a common denominator. Often, the KPIs in the various companies or divisions in a group are based on different currencies, the exchange rates of which tend to fluctuate. Alternatively, the concept of profit might simply be defined differently in the different parts of the company. It is not unusual for important sources of data to be scattered around the company, and to exist in different formats such as XML, MS Excel, or various database formats. In a situation such as this, some means of linking up the information is absolutely essential, because many of these sources play a decisive role in accurately representing the company’s situation.
When implementing enterprise-wide performance management, it is advisable to use a central, integrated application to ensure that the different threads brought together in the consolidation process are not lost. This is the only way to guarantee the consistency of the data obtained from the wide variety of sources and company departments. A further advantage of centralization is that it provides a reliable workflow, in which all involved in the process always have the most up-to-date information, because all changes are made known immediately and across the whole company.

Independent, yet still part of the whole

Centralization of data logistics accelerates consolidation and at the same time guarantees better quality. Highly fragmented companies are often faced with the challenge of merging increasingly complex data from different financial accounting departments in shorter cycles, and as a result, even the smallest irregularity can threaten to derail the consolidation process. To avoid this, an integrated solution also contains additional input information and makes it possible to tell who entered or changed specific data, and when. This enables discrepancies to be identified quickly, before the consolidation process goes off course.
Companies must also ensure that consolidation takes place in accordance with different accounting standards. For this, a common denominator must be found. For example, German companies with foreign subsidiaries need to draw up balance sheets both according to local accounting laws and in accordance with the German commercial code or IFRS. This means double the work for parallel financial statements. Professional consolidation tools support different financial statements and document transfer postings, and as a result, with company-wide consolidation, user departments can create and compare parallel versions of financial statements independently.

On the lookout for a common denominator

Information from two sources flows into every consolidation: from controlling and from external accounting. The problem of this is that the approaches and interests of these two areas have traditionally been in conflict. External accounting looks to the past, so to speak, and documents the closed business records in accordance with the legal basis for consolidation. Controlling, on the other hand, takes a management view into the future. This controversial view has long been accepted, but today, many companies are taking a new route towards a harmonization of internal and external accounting. The advantage of this is that it offers a comprehensive overview of all influencing factors and their effect on the profit and loss statement, balance sheet, or cash flow, and this ultimately enables more effective corporate governance.
For example, once both perspectives have been merged, the influence of currency fluctuations or other factors can be estimated in good time, which provides enough breathing space for a consolidation to be cleaned up before the whole process starts to topple. Software solutions for modern performance management support this harmonization and integrate the consolidation seamlessly into the context of enterprise control.
Compliance is a cycle that starts with planning – the preparation of the business results: “What is supposed to happen?” Scorecarding is used to evaluate the current targets achieved – “What happens now?”. Reporting provides a view of the business results (into the past), primarily used by external accounting – “What happened?”, while Controlling, or internal accounting, analyzes these reports – “Why did it happen?”. As a result of this tightly linked cycle, a company is able to react swiftly on the basis of the information gained, and adapt the strategy, so that the company targets are achieved as planned. A reliable view of operating performance, in the past, present, and future, is an achievable goal with solutions for CPM.

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Michael Kurc

Michael Kurc

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