June 30, 2003

The Fear All of Sums

Visibility, transparency, and complying with onerous new regulations such Sarbanes-Oxley are burning issues on the minds of CFOs, CIOs, and other corporate executives. In a roundtable discussion, we hear a variety of perspectives on addressing the challenges

by David Stodder

Corporate governance issues are driving intense activity — if not anxiety — in the realm of IT and the C-level executive officers responsible for reporting numbers. The Sarbanes-Oxley Act of 2002 and other regulations, both in the U.S. and abroad, will continue to test the abilities of BI, analytics, data warehousing, data integration, and related solutions — and IT's strength in deploying them. What follows is an edited transcript of a roundtable discussion held on March 31 at the SAS Users Group International (SUGI) Annual Conference in Seattle.

Led by moderator Randy Guard, vice president of Solution Strategy at SAS, the roundtable participants offered a varied set of perspectives based on their responsibilities. Jonathan Karpoff is the Norman J. Metcalfe Professor of Finance at the University of Washington School of Business. David Klementz is senior vice president and chief financial officer of Progress Rail Services Corp., a subsidiary of Progress Energy. Irving H. Tyler, CIO of Quaker Chemical, oversees all information services on a global basis. He was promoted to CIO in 1999 and previously held a variety of positions, including director of finance for Quaker's U.S. operations. Robert Walley is a principal in Deloitte & Touche's Global Markets group and leads the Technology Architecture Service Line in New York, focusing primarily on clients in the banking and securities industry. Phillip G. Strand is global strategist and program director for SAS Financial Management Solutions.

Guard: Financial integrity is no longer a catchy marketing phrase; it is a matter of corporate survival. We've all seen the senior executives on the evening news handcuffed and taken to federal court; we've seen brand-name companies disintegrate before our eyes. Integrity is not an option. Companies must make decisions based on fact and information that they gather throughout the enterprise. Corporate integrity is the alignment of people, process, and technology so that from the senior executives on down, the organization is thinking and acting properly but still managing an aggressive business in a competitive market.

Jon, please give us a brief introduction of some of the recent regulations and their impact.

Karpoff: The Sarbanes-Oxley Act of 2002 is the 800-pound gorilla right now. It's a sweeping federal attempt to increase transparency and accountability at the corporate level. Some provisions try to tighten up corporate governance. For example, one requirement is that the firm's audit committee should consist of only independent directors. Other provisions require new reporting duties of corporate managers and the firm, which are really what have been keeping everyone scrambling and sweating and staying up late at night. The Act has provisions that increase criminal penalties for some existing accounting misrepresentation rules and create new criminal penalties for securities fraud. And then there is a set of new rules that attempt to structure or guide in different ways the auditing and securities analyst industries.

As of September 2003, Section 404 of the Act requires that the firm's CEO, CFO, and auditor certify the adequacy of the firm's internal control processes.

Section 404 requires firms to, first, figure out their internal control monitoring and accounting counting processes — and document and fix them, all within a pretty short time horizon.

These are just some of the regulatory effects — I would be remiss in not mentioning nonregulatory effects, which will play out in the market for companies that are unable to meet requirements for greater ethical behavior. However large the headaches of compliance might be, the market penalties for not doing it right will be far larger.

Guard: David, what is the CFO's perspective? What has been the impact at Progress Rail?

Klementz: Well, first off, data integrity has always been important to sound business. The marketplace has never been tolerant of restatement or errors in financials. When I got to Progress Rail, we had done 28 acquisitions of varying sizes in three years, with very little integration. We had multiple financial systems, reports, and performance measures — a lot of information. The company did most of its reports in Excel just to get them done. I spent a chunk of my time just looking at the data and trying to understand the variances. I would ask: "Why is this report different? They should be the same." The answer was, "Because." As CFO, that didn't give me a lot of comfort.

So, my first priority was to figure out what our data sources were for all financial information — and all of our business analysis and financial preparation. I got the group together to focus on standardizing for our business plan; strategic plan; financial systems, sources, and records; and ultimately, our performance metrics and measuring so that they would all be based on fact, not intuition. We decided to go with a SAS solution for our forecasting, planning, and consolidation tools, and to automate our performance scorecard. Now I was able to get financial data faster, with better transparency to sources. But the key point for me was that we were shifting the organization's thinking from being a transaction-based, "get the reports done" organization to one that provided business analysis and could look forward. This put us in a better position to react and make sound decisions about changing market or other business environment conditions.

With more accurate and timely data, we were able to go from a consolidated financial standpoint in 11 days down to six days, and we are going to bring it down further. I can get information and react more quickly, and my team is able to focus on forecasting, better planning, better management, and explaining variances. As an organization, we should be focused on operating better, not on questioning the integrity of what we're looking at.

Guard: Irving, what is the CIO's perspective?

Tyler: Well, I heard through what Jon and David said concepts that have become bread-and-butter for our IS component and what we're supposed to do to enable our business strategy — things like "valid," "faster," "more immediate," and therefore, "more relevant." At Quaker Chemical, we haven't seen any conflict: In fact, we've seen increased interest at various levels in the organization, including the board of directors. Everyone is definitely more interested in how pieces of information are delivered around our enterprise.

Quaker Chemical has operations all over the world — and yet, as a small company, our people are concerned about things happening abroad that they are responsible for but don't understand. And so the visibility we've been trying to deliver over the last five years, using various data warehousing techniques and business analytics, has been able to empower business managers — and reduce their fear of not knowing what's happening. With the visibility we've been able to deliver, there's less opportunity for mistakes, either intentional or otherwise, to crop up and cause integrity problems.

We are now seeing a greater emphasis on internal control, much as Jon mentioned. But again, that's been part and parcel of every system that we've ever put into our enterprise. We've become more of a process-based organization that, by design, tries to empower people by giving them more access to more information across the enterprise. We don't want to have certain silos of only financial data going only to financial people.

We are starting to see some conflict in the sense that part of our organization wants to increase control over that information, while another part wants to leverage it for strategic purposes. I think our IS role is to educate and be a strategic partner by helping the organization find the right balance between these two schools of thought.

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