Keeping a lid on compliance costs
by Bob Mahan CFO, of Ajilon Finance
The positive aspects of the raft of new accounting and financial reporting regulations are numerous. In a recent Deloitte survey, companies report they have a far better understanding of their chief risks and associated control mechanisms than just a few years ago. In addition, companies say internal controls are now far stronger, with the likelihood of material misstatements moving forward greatly reduced.
At the same time, spurred by fear of noncompliance and requirements of senior executives to personally sign off on all financial statements, public companies are spending more than ever imagined on Sarbanes-Oxley-related auditing and consulting fees. According to a recent survey of 2 17 public companies with average revenues of $5 billion by Financial Executives International (FEI), total costs averaged $4.36 million in 2004 — a full 39% greater than the companies projected.
The figures cited in the FEI survey don't include internal staff hours diverted to compliance issues since the adoption of the new regulations — or even new positions created to handle the workload. With cost control a near constant priority in every organization and as companies move past the first year of compliance with SOX Section 404 provisions, it's time to overcome any hesitance to cut spending on compliance.
Simply stated, compliance activities — particularly those relating to Sarbanes- Oxley — represent one of the largest and most immediate opportunities for companies to reduce costs. In the final analysis, every dollar saved either falls directly to the bottom line or frees up capital for investments in growth and expansion.
To help accounting and finance professionals turn a critical eye inward and identify how to effectively and safely lower costs, Ajilon Finance recommends considering the following:
Shrink start-up and learning curve costs
As previously stated, the costs related to interpreting new legislation and reengineering internal processes to comply with the applicable laws should begin to decrease dramatically over the next few years. As the learning curve begins to flatten, it's a good time to get rid of all additional spending associated with both new and not so new compliance activities.
For example, areas where companies ought to realize savings in terms of cost and time include:
- The completion of documentation activities
- Less frequent tests of controls
- More efficient interactions between companies and auditors
Along these lines, during the readjustment period, companies should look critically at both external and internal spending on staff. Proactively manage the decline in engagements with consultants and third parties wherever possible. Look at the staffing structure of the accounting and finance department for opportunities to redeploy staff from areas heavily involved in compliance activities to more productive ones.
Rationalize inefficient processes.
The heightened expectations on companies to make financial data more transparent and timely — while at the same time complying with a new set of regulations — puts a tremendous amount of pressure on accounting and finance professionals. With the specific impacts of the new regulations largely realized, it's time to assess how to reorganize the department to optimize responsibilities and workflow.
Reengineer the company's financial systems for maximum efficiency and to eliminate any unnecessary or wasteful processes. For example:
- Segregate duties among staff
- Separate conflicts in reporting structures
- Eliminate silos between accounting and finance staff across all divisions and/or business units
- Do away with duplicative controls
- Cut out repetitive assessment activities
- Reduce the frequency of non-vital controls testing
Finally, harmonize accounting standards and practices enterprise-wide, and look to incorporate technologies that will allow the department to automate manual processes. Throughout it all, keep in mind that while most of the changes are in response to the new imperatives, increasing the department's responsiveness and accountability will enhance the company's overall flexibility and competitiveness.
Utilize outsourcing and temporary staffing
At its most basic level, outsourcing accounting and finance functions involves delegating back-office functions to a third party provider capable of providing the same quality services at a lower cost. While many of these tasks are critical, they are also often highly repetitive and labor-intensive.
These outside services can be of tremendous value to companies that are seasonal in nature, often take on short-term projects, or find it necessary to scale up rapidly due to growth.
Outsourcing poses the added benefit of giving valuable management time back to accounting and finance professionals. Where once accounting and finance professionals were responsible for day-to-day oversight of people, processes and technology, through outsourcing they manage only the relationship with the third party provider.
The temporary staffing option is often preferred by companies that find themselves in sudden need of well-trained professionals, yet prefer to keep direct control over accounting and finance functions in-house. Hiring temporary versus permanent staff, as Ajilon Finance will attest, can also keep recruitment and benefits costs for companies lower over time.
To gauge whether your business could benefit from outsourcing or temporary staffing, map out the department's periods of heavy activity during the fiscal year. Are there uneven spells — such as the quarter and annual closes or major presentations to directors and shareholders — that suggest a planned seasonal solution would be more cost effective? Also, to prepare in advance, devise a list of scenarios — such as a merger or expansion under which the department would need to quickly add capacity.
As the pace of globalization has increased, so too has the sophistication of the private sector in developing economies outside the U.S. For example, while once known primarily as a manufacturing center due to inexpensive labor and materials, Southeast Asia is now a capital of software development.
Likewise, countries such as India are home to well-educated populations with access to the latest in communications technologies that make geography less relevant as an issue. Indeed, for more than a decade, some of the world's most recognizable companies have been uprooting core functions — from calls centers to research and back office processes — and re-establishing them in India.
With the mystery and risks diminishing, how can companies considering offshoring explore their options? Be deliberate, for one thing. Before moving ahead, it's worth balancing the risks versus costs over time. Chief among the concerns — despite the potential for lowering costs — can your organization operate effectively using an offshore model?
If the answer is yes, look for examples of other companies that have successfully offshored accounting and finance functions. Develop the business case for the shift, outlining the risks and course of action to effectively mitigate them. Finally, plan to employ redundant systems throughout the pre-transition, transition and post-transition phases so that there are no disruptions of any kind to operations.
Establish mechanisms to accommodate future changes
In anticipation of future rules issued by the PCAOB, FASB, stock exchanges and other bodies — and to avoid excessive spending on compliance as a result — form an internal working group that focuses exclusively on implementation of new regulations.
Task the group with meeting quarterly, at a minimum, to review new rules, recently issued guidance, and current items under consideration by the relevant agencies. Give them the authority to create an implementation "roadmap" that lays out how best to comply with new rules — be they externally or internally mandated — and have those plans certified by outside counsel. Request an annual compliance report card, rating the company's performance on key issues.
It is important to note, skimping on compliance education and training is ill advised. In today's litigious society, the potential risks in terms of criminal and civil penalties are practically incalculable.
Evaluate costs and start preparing today
Now is the opportune time to examine how to cut costs associated with compliance activities that have quite understandably skyrocketed over the past few years. Of course, as with many things, this is an exercise in balancing risks versus costs over time.
To recap, the best way to prepare your department and company to realize savings is by considering the following:
- Where is the company moving past initial compliance with new regulations and are current staffing levels still needed?
- Given the new reporting requirements are there ways to reengineer staff, standardize practices and/or automate certain functions?
- Are there repetitive, labor intensive or seasonal functions that an outside partner can handle more efficiently?
Hopefully, as the pace of new regulations begins to slow down, accounting and finance professionals will begin to see the operational benefits of the changes in terms of added transparency, speed and responsiveness. move up in the world.®
AccountingWEB would like to thank Ajilon Finance for sharing this valuable information with our audience.