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March 8, 2002

Bad Reputation

Corporate accounting's credibility is in free fall. Can new analytic software help?

by Justin Kestelyn

It happened faster than you can say "Big Five": In a few short weeks, the accounting profession destroyed the public perception that it serves as refuge for timid bean-counters — rolling back a stereotype that dates back centuries almost overnight is an impressive feat — and created a new reputation as the career of choice for swashbuckling type A personalities with a talent for deception. (My favorite term to reach the public consciousness during this period is the formerly oxymoronic "aggressive accounting.")

How did things get this bad? The Enron Corp. scandal is the obvious turning point in this process, but as I wrote in a May 15, 2000 column ("The Dorian Gray Economy"), its origins lie in the creative accounting techniques that sped the collapse of the New Economy, although "collapse" may be the wrong term for something that never existed.

This problem is hardly confined to high tech, by the way: In a January survey of its member companies by the National Investor Relations Institute, 57 percent of respondents said that they reported pro forma figures "with prominence" in Q3 2001 press releases, despite the fact that such reporting, which deviates from generally accepted accounting principles (GAAP), has been subject to SEC scrutiny. Furthermore, according to BusinessWeek (Jan. 8, 2002), corporate restatements doubled between 1997 and 2000. Numbers may not lie, but they certainly bend the truth.

Corporate accounting has a long way to go before it restores public confidence, with most of the necessary measures involving self-regulation and a reevaluation of how "professional integrity" is defined. However, many observers also agree that GAAP has simply become too complex, leading some companies to take unnecessary risks: Dubious forecasts are made, earnings are missed, and panic sets in. And in accounting, panic is the mother of invention.

The emergence of new collaborative, analytic software solutions for financial management is a timely development and a good start. But it's just that: a start.

Guiding Light

Financial management is not only becoming a new lodestar for enterprise software vendors such as SAS Institute Inc., PeopleSoft Inc., and SAP AG (BI vendor Brio Software Inc. is also hanging its hat here) but also an increasingly attractive opportunity for companies such as Hyperion Solutions Corp., CorVu Corp., Comshare Inc., OutlookSoft Corp., and ABC Technologies that have been in the space all along. Implementations aside, these companies are united in several goals: to increase the customer's visibility in financial performance, make financial management more collaborative, and establish performance goals (expressed through models such as balanced scorecard, economic value-added, and activity-based costing) that resonate across the enterprise, not just in the finance department.

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These goals are a salve for the typical financial management function, which, like many other parts of the corporate hierarchy, is beset by endemic miscommunication and a lack of available, quality information. Indeed, until recently, financial management may have been the most ignored corporate function in terms of available enterprise analytic solutions. In most companies, the sun still rises and sets on locally stored Excel spreadsheets, and employees are ignorant of corporate financial goals and benchmarks. Sadly, Enron offers an extreme example of the latter.

Just One Answer

If your company falls into the category I've described, it will take a lot more than technology to solve the problem. As we at Intelligent Enterprise have so frequently intimated, technology is just a means, not an end. (None of the imperatives listed on the IntelligentEnterprise.com home page are tied to specific technologies.) Rather, corporate principles such as information availability, teamwork, and integrity must supercede short-term fears. There is no software substitute for courage.