Sarbanes-Oxley Reporting Continues to Challenge

Submitted by Ronald Tennant with Metrocities Mortgage:

MBA (5/20/2008 ) Palaparty, Vijay
Financial organizations primarily suffered a lack of time in completing Sarbanes-Oxley Act 2007 year-end close reports, resulting in late filings, according to a study by Deloitte & Touch LLP, New York. The shortened February 29 reporting deadline pressured organizations, increasing late filings.
“In 2007, 1,500 organizations in the study reported late filings, of which 12 percent said they were unable to obtain key information to complete reports on time, said Beth Kaplan, director at Deloitte. “Twenty-seven percent had insufficient time to prepare the report and 30 percent reported ‘insufficient time without undue hardship.’ Tighter deadlines and increasing complexity has increased risk in financial restatements which impact public perception and add workload to typically understaffed financial organizations.”

Deloitte reported 1,700 financial statement restatements in 2006, decreasing to 1,300 in 2007. “Most restatements can be traced back to infrastructure issues,” Kaplan said. “It results from a lack of GAAP [generally accepted accounting principles] knowledge, poor information, inadequate controls and manual, non-standard processes.”

In terms of material weakness in financial close and reporting, which are misstatements, study participants cited inadequate documentation of accounting policies and procedures as top reasons. Year-end adjustments also contributed to material weakness.

Eric Capron, senior manager at Deloitte, said a transformed closing process is optimal for organizations, reducing risk and time to close. “The transformed closing process is highly automated and tightly coordinated across participants,” he said. “It heavily uses preventative controls and is focused on high-risk areas. Additionally, it is supported with sophisticated analytics and involves a continuous monitoring of controls.”

“The closing process is part of a broader transformation,” Capron added. “Improvements to the closing process don’t happen independently. Organizations should think about overall efficiency perspectives including systems and organizational components. The closing process is really a jumpstart for transformation in other areas such as financial planning, reporting and even forecasting. The struggles of the closing process can help other areas.”

Capron saidclose improvement methods, which include sub-processes, are part of an effective methodology that includes interplay of different technologies, controls and processes.

“There is flow in how we look at the close process and sub-processes,” Capron said. “It involves data coming in and feeding into ledger close and then into management reporting. Once that is complete, all the information is consolidated at the corporate level. On this continuum, there are things organizations should think about and make happen to avoid risk. Activities should focus on high-risk areas and non-essential risk activities should be moved out of the close process flow. Those secondary activities should happen outside the close process.”

From a risk perspective, Kaplan said financial organizations have opportunities to achieve transparency by first identifying priorities and target areas.

“Understand your data—both where it is coming from and what you are doing with it," Kaplan said. "Establish a governance structure to align close process improvement opportunities with necessary core controls to help address process risks and control deficiencies to better enable sustained long-term compliance.”

Kaplan said organizations should focus outside of the controller’s group by engaging external stakeholders from the beginning of the process, adding that gains could be achieved by changes upstream. She also said that organizational needs should drive technology and not the other way around.

“Leverage technology to help enable process efficiencies," Kaplan said. "Eliminate spreadsheets and replace disparate systems versus designing new processes within the limitations of existing technology.”