Can any action born out of anger be productive?
If anything was birthed from outrage and frustration, it was what has come to be known as the Sarbanes-Oxley Act. However, its technical name, the Public Company Accounting Reform and Investor Protection Act of 2002, is more telling, hinting as it does at what needs to be reformed, who needs protection and what is now in the federal government's cross-hairs - publicly traded companies. All this because Sens. Paul Sarbanes and Michael Oxley, one from each major political party, acted on the anger surrounding the fraud scandals of Enron, WorldCom and others.
At its core, the Sarbanes-Oxley Act - or SOA, SarBox, or just plain Sarbanes - is about making sure that there are internal controls in every public enterprise that govern and document the information that winds up in financial statements. SOA also imposes a real-time reporting requirement in some instances, but like much legislation Sarbanes is fuzzy on the guidance it provides. So it is unclear just how real time real time is. One thing is clear, however. The onus of accurate public disclosure of financial information is on the CEOs and CFOs of public companies. They now have to personally sign off on audits, stating that the information is accurate. False declarations can merit jail time. That alone ensures that 'C' level managers are making sure that subordinates who pass information up the company food chain know what they are doing.
Can the anger that followed major corporate scandals produce anything good for business? Surprisingly, the answer is yes, according to interviews with experts and executives in consulting, technology development and research. They say the strictures of Sarbanes can only improve a company's business processes and supply-chain management.
Nevertheless, time is growing short. The first deadline for SarBox compliance is June 15, 2004. That's bearing down on many companies like a freight train. Will their supply chains be ready?
No, says Paul Matthews, vice president of supply-chain practice of the Americas at Cap Gemini Ernst & Young. "Clients that I deal with are so far behind with regard to their understanding and implementing," he says. "I get the feeling that when the deadline hits, there will be many companies in the Fortune 500 that will have underestimated what Sarbanes means to them."
That sentiment is common among consultants and others trying to prepare clients for the legislation's impact. Often the problem stems from the old "silos" mentality that has bedeviled management for years. Whose responsibility is SOA? Is it a finance department issue? Is it something for the IT people? The experts say it's everybody's baby, and Sarbanes certainly has a supply-chain management perspective to it.
"Very few traditional supply-chain executives really think about the financial area," Matthews says. For them, "it's very much on inventory balances, it's about on-time delivery, it's on procurement benefits, but rolling that up to the financial impact - there just isn't a true understanding of that."
He says it's no longer enough to know that your transportation management system is aligned with your warehouse management system. The act imposes an obligation on supply-chain managers to understand the financial implications of everything they do.
Accounting for Risk
Procurement exemplifies what Matthews is getting at. "At the end of the year, companies that buy a lot of material will be cutting deals and issuing contracts. And the traditional way of doing things is negotiating the deal for next year, and that deal could be anything from committing to a volume, some type of performance clause, some type of tiered pricing, or whatever, in the contract. Pre-Sarbanes, that was a fairly easy process: The procurement individual would negotiate the deal and project that next year there would be, maybe, a 15 percent saving on cost of goods based on these contracts. Well that's no longer acceptable. Because what's got to be reported is what are the risks and what are the actual implications of that contract over the life of it."
|"Very few traditional supply-chain execs really think about the financial area."|
- Paul Matthews of Cap Gemini Ernst & Young
|"With Sarbanes, when you're done, you're not done. It just keeps on going."|
- John Hagerty of AMR Research
Timely, incisive articles delivered directly to your inbox.