Planning and Sarbanes-Oxley Compliance

Mature planning systems provide many benefits.


Planning and budgeting does not play an explicit role in Sarbanes-Oxley compliance, but Ventana Research expects auditors will pay closer attention to this function, once companies pass the initial round of section 404 certification, for two reasons. First, companies that execute the forecasting, planning, and review cycle typically have a more mature control infrastructure (which was the prime motivation for section 404). Second, managers that plan and forecast accurately have less of a reason to commit fraud than those that fall short of their projections.

Ventana Research advises senior finance executives to evaluate their forecasting, planning, and reporting processes to determine the maturity of these systems. The goal of this evaluation will be to have a system that first improves corporate performance by doing more effective planning and budgeting, and second facilitates ongoing section 404 compliance. We believe the payoff from improved planning is greater control and more consistent, predictable results. Public companies that hit their revenue and earnings forecasts typically have richer valuations than those that do not.


The purpose of Sarbanes-Oxley Section 404 is to promote greater corporate control and make it difficult for individuals to commit fraud that has a materially adverse impact on the company. Companies with relatively mature control environments have completed (or are close to completing) their initial 404 compliance initiatives. Ventana Research advises companies at this stage to begin implementing the next level of financial process and systems improvements that will facilitate audits and improve the effectiveness of financial performance management systems. In our judgment, auditors will steadily raise the bar for section 404 compliance over the next several years. Companies that want to minimize their audit costs and enhance their control environment should expect to refine their processes on an ongoing basis.

Almost everything in the various sections of the Sarbanes-Oxley Act is backward-looking because financial reporting is all about the past, not the future. However, auditors are concerned with how companies forecast, plan, and review, for two reasons. First, companies that adequately plan, budget, forecast, and review exhibit a more mature level of internal control. Second, a company's inability to perform these functions well can play a major part in motivating financial fraud. A CEO that guides investors and analysts to expect certain results based on faulty forecasting and planning processes is more likely to be wrong than one with well-designed, robust processes. Faced with the risk of falling short, some managers will succumb to the temptation of committing fraud. Ventana Research advises senior financial executives to begin assessing how well their company executes its planning and review cycle. We expect it will be an area of focus of auditors once they complete their first round of section 404 compliance reviews.

As part of their overall assessment of the maturity of a company's financial controls we expect auditors will expect (or hope to find) several characteristics in forecasting, planning, and budgeting systems including:

  • Operating units have predictive business models that identify and track the key factors driving business results (both revenues and costs). Companies with many projects or businesses lines with significant variability frequently reforecast, as well as track and assess the relationship between drivers and results.
  • Operating units use predictive business models to forecast profitability in future quarters on a rolling basis.
  • Operating units can quickly identify the drivers of variances during the periodic review process (i.e., they can drill down to elements of original plans).
  • Finance organizations that manage the planning process solicit sales and expense projections to the lowest level of budget authority on a bottoms-up basis to promote accuracy.
  • Finance/treasury organizations integrate operating plans into rolling cash flow forecasts.
  • Treasury groups frequently measure sensitivity of profits to changes to exchange rates and interest rates for both on- and off-balance sheet items.


Although almost all Global 2000 companies have adequate planning and budgeting systems in place, Ventana Research asserts few have achieved a high level of maturity. Companies improvise around faulty planning processes because the consequences are rarely severe and the impact is diffused. However, the results are less than optimal and corporate performance suffers, particularly in a difficult economic or competitive climate. We do not expect auditors will single out inadequate planning as a "serious deficiency," but we think more mature planning systems will facilitate audits and therefore reduce these fees.

Our research has found a majority of Global 2000 companies continue to use simple spreadsheets as their core planning and budgeting "platform." Ventana Research believes these spreadsheets are a barrier to more effective, mature planning and budgeting processes. We assert that companies that want to use planning and budgeting more effectively to improve performance must replace simple spreadsheets with dedicated software.