The SEC wants quicker financial information, but some companies aren't ready.
More information. Better data. Faster. And with greater frequency.
Is that the motto of some new market-analysis firm? Not quite. It's the agenda facing publicly traded companies as the Securities and Exchange Commission, Congress, and the business world look to restore investor confidence in the wake of the Enron and Global Crossing debacles--and as new questions arise over blue-chip technology stalwarts such as Microsoft and EMC. Companies will have to be more forthcoming with data that indicates, for better or worse, how they're doing. "Trust in the numbers and financial markets is what we need, or we won't have a free flow of capital," says Todd Naughton, VP and controller at bar-code printer manufacturer Zebra Technologies Corp. Insider stock transactions, product shipments, supply-chain glitches, severe weather--all that data feeds into corporate IT systems, giving top managers health reports. Now, public companies may need to use those same systems to reveal more of their business-performance data, more frequently, to the rest of the world. Are they ready?
"The good news is that we're talking about this, especially the larger corporations," says Lee Geishecker, a Gartner analyst specializing in financial-management systems. The bad news: "Companies aren't there yet."
Trust in financial numbers and financial markets is vital to a continued free flow of capital, says Zebra Technologies VP Naughton.
They better hurry. Last week, the SEC proposed more than a dozen disclosure rules to give investors a better picture of publicly traded companies sooner. Among them are requirements to accelerate the filing of 10Q quarterly statements from the current 45 days to 30 days from a quarter's end and 10K annual reports from the current 90 days to within 60 days of fiscal year's end. The SEC also proposed that companies report sales of stock by executives within days of the transaction, and it wants to expand the list of "significant events" (such as those that might trigger a loan default, including changes in debt ratings) that companies must report.
In testimony this month before the House of Representatives' Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises, SEC chairman Harvey Pitt also spoke of the need for companies to regularly provide data on trends so investors can assess changing financial postures and offer easier-to-understand financial statements. He also outlined changes to accounting-profession rules and guidelines governing analysts' stock recommendations. These changes could take place within months.
The House committee that oversees the financial-services industry also is considering legislative action on accounting rules, such as requiring companies to immediately report material events that could affect a company's stock value. That legislation would incorporate the goal of a bill spearheaded by Sen. Jean Carnahan, D.-Mo., requiring executives to report their company stock transactions to the SEC within 24 hours; now, the earliest they are required to report a sale is 10 days after the end of the month in which it occurs. The Financial Accounting Standards Board, which sets U.S. accounting rules, said last week it will enact a regulation by next month to make companies include financial results of partnerships in earnings reports, so deals can't be used to hide debt and inflate profits.
Not all companies are caught flat-footed. At Allstate Insurance Co., the software tools have been in place for a couple of years to help the Northbrook, Ill., insurer accelerate its closing process. "It's most beneficial from a business perspective to be able to make some important decisions using the real numbers rather than the estimates," says Tom Krempley, the $29.13 billion-a-year company's director of financial and statistical systems. Allstate uses SAP's enterprise software as a central collection point for financial data, and 95% of the data needed to close is fully automated and available by the third or fourth workday after the end of a month. Small streams of data arrive later because they're still delivered manually, but Krempley says that's a minor issue and meeting shorter or more frequent filing deadlines shouldn't be a problem.
The SEC plans a host of new disclosure rules; chairman Harvey Pitt wants to give investors a better picture of a company sooner.
Zebra Technologies, with annual revenue of $450 million, is installing Web-based financial consolidation and reporting software from Hyperion Solutions Corp. that it hopes will help cut the time it takes to integrate financial data from its business divisions into one database. "We were trying to build our new system in a way that gives us flexibility for our own internal use," says VP Naughton, noting that Zebra wants more time to focus on analyzing data to make business decisions for upcoming quarters. "But most of that flexibility will cover a lot as we need to adapt to things that the SEC requires."
But some companies have concerns. Deluxe Corp., a St. Paul, Minn., check-printing company with $1.28 billion in sales last year, uses Adaytum Inc. software for internal financial reporting, planning, and forecasting, and pulls data from its SAP financial applications for SEC reporting purposes. Senior VP and CFO Douglas Treff backs SEC proposals to improve the visibility of financial data as a way to improve investor confidence, but says "there may be conflicts between the stated goals of increased transparency, improved disclosure, and increased accuracy of all the numbers." Shortening reporting times, Treff says, could reduce data accuracy in some firms.
As with Allstate and Zebra, IT systems that other companies use for strategic planning and performance management could help them meet new regulatory or legislative requirements. Hyperion Solutions' Hyperion Financial Management and SAS Institute's CFO Vision are consolidation and reporting tools that could be useful for that purpose. Budgeting and forecasting tools from SRC Software Inc. and FRx Software Corp. could be, too. There are strategic planning applications from Adaytum, Cognos, and Comshare, among others, and business performance-management tools such as CorVu Corp.'s Balanced Scorecard software. Enterprise-resource planning vendors such as PeopleSoft Inc. and SAP offer tools to coordinate data from general-ledger, accounts-payable and-receivable, billing, and other applications.
Some companies have built their own sophisticated reporting systems. Cisco Systems, the networking powerhouse, has developed the processes and technology to track its $22.29 billion in annual sales day-by-day. Software it built with KPMG Consulting, and which both vendors now resell, leverages corporate extranets and Web-based application processing to provide a continuous flow of financial data and nonfinancial indicators. The information lets managers consolidate worldwide quarterly financials in one day, complete a full analysis of major accounts the next day, and sign off on a final analysis the third day, according to the vendor.
But that's more the exception than the rule, Gartner analyst Geishecker says. Although companies have implemented various financial-consolidation, budgeting, reporting, planning, and analysis tools, they've done so largely in isolation rather than integrating their systems to provide a comprehensive view--or the details the SEC or Congress might require.
No technology vendor offers all the pieces to easily accomplish such integration, and aging computer systems make it even more complicated. "Companies have a lot of legacy processes, including old client-server versions of consolidation software, and there's typically a lot of manual intervention during the consolidation process," says John Van Decker, Meta Group's program director of application delivery strategies. Problems are exacerbated when companies have disparate ERP systems, he says.
Internal and external business processes may have to be upgraded to support new rules, says Rita Iorfida, VP of financials product management at PeopleSoft. For example, real-time financial reporting is impossible if back-end systems collect data from business partners only on a monthly basis, so better coordination with those partners will become essential. Internal processes need to be put in place to account for organizational change, too--and IT can't be a roadblock, says Delbert Krause, product marketing manager for Cognos financial applications. "If finance people need to build a five-year history report on a Friday afternoon, they have to be able to do it without putting in an IT request," Krause says.
Gartner's Geishecker expects to see IT resources strained as big companies without comprehensive financial and performance-management systems struggle to meet the new requirements for more timely and better-quality data, especially in multinational companies that add language and currency-conversion problems to the mix. "There will be a cost associated with this, and it will be manpower-intensive," she says. Even CFO Treff, who says Deluxe could meet earlier filing deadlines with its current system, says doing so will take some work. "Accuracy is nonnegotiable," he says, but getting there in a tighter timeframe might require reprioritizing the SAP system's workload--rescheduling other tasks, like producing analytical reports--and making employees work extra hours.
Allstate expects it would have to reprioritize jobs, which could delay its ability to generate internal analytical reports. But Krempley isn't too worried; the delay would be only a few days, he says.
Many smaller companies haven't had the budgets to implement sophisticated financial-management tools, and they fear new requirements may lead to big expenses. Chuck Schwartz, the newly named CFO at Hometown Auto Retailers in Watertown, Conn., a group of auto-sales and -services franchises with $280 million in annual sales, says proposed regulations may not be easily managed by smaller companies: They're typically using spreadsheet technology to handle their financials; their budgets may not allow for large software investments; and they have smaller corporate accounting staffs. "There's only so many hours in a day to get things accomplished, so you'd probably need to hire more people," he says.
Unscrupulous individuals can always subvert the rules and the technology that can help enforce them. Nonetheless, the proposed changes are a step in the right direction, says Andrew Albarelle, principal executive officer at Remy Corp., a Denver professional-services firm that's considering an initial public stock offering when the economy warms up. Remy uses PeopleSoft's Enterprise Service Automation application and financials to close and consolidate its books at the end of each day. Albarelle is convinced that the proposed requirements for more prompt financial reporting could have revealed problems at Enron much earlier.
"These guys were on a collision course 24 months ago," he says. "Better reporting could have saved a lot of people a lot of money."
-- with Steve Konicki and Sandra Swanson
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