Accounting for Change Blog

Sarbanes-Oxley: 10 Years Later

Ten years ago, Congress passed the Sarbanes-Oxley Act, which was signed July 30, 2002 by President George W. Bush as a “sweeping corporate-fraud bill” in the wake of corporate and accounting scandals at Enron, WorldCom, Adelphia and others.

Ever since, there’s been a debate about the cost-benefit of the bill, often referred to as SarbOx or SOX over whether it has:

• Increased transparency of corporate accounting issues, thus protecting investors.
• Increased the data companies need to have in order to run their companies more intelligently and effectively deal with risk.
• Increased regulatory costs and hassles with little return on investment.
• Increased potential compliance costs and criminal risks so that companies resort to listing on foreign exchanges, reducing our competitiveness.

We’re not interested in rendering what might be perceived to be a political judgment on SarbOx. That said, we will state that the recent $2 billion J.P. Morgan debacle will be used by both sides to make the case that

• J.P. Morgan’s $2 billion trading loss shows that we need more regulations to save banks from themselves,; or
• J.P. Morgan’s $2 billion trading loss shows that Sarbanes-Oxley can’t prevent blunders, and is therefore ineffective and should be repealed.

Writing in the New York Times, op-ed columnist and Nobel Prize-winner in Economics, Paul Krugman falls into the pro-regulations camp with his “Why We Regulate” column, noting “because the risks they take are borne, in large part, by taxpayers and the economy as a whole…even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on” and that “we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics.” 

The Wall St. Journal’s editorial board took the opposing stance, with “The Dimon Principle,” noting that “J.P. Morgan's failed trades may well have passed the Volcker rule.”

Our point is that as SarbOx’s 10^th anniversary approaches, we still have not settled the regulatory question: are the regulations in that bill cost-effective improvement or a hindrance to good business?

We don’t know what impact J.P. Morgan’s blunder will have – whether it will lead to more or to fewer regulations.  What we can say is that the one thing that has remained true over the past 10 years is that businesses have to accommodate change. From our perspective, that’s why it’s important that we make Coda Financials to be as flexible as possible to handle whatever changes occur – whether Congress decides to add more regulations or repeal parts or all of SarbOx.

Let us know what you think about the legacy of SarbOx 10 years later.

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It All Comes Down to the Data

It’s no wonder that companies are struggling with financial reporting and analytics.  Many companies are facing the same chronic challenges: disparate data from AR, AP and general accounting that is stored on different systems; information siloed across different departments and dispersed geographies; and ongoing changes in organizational structure.  All of this makes it extremely difficult for you to see what’s really going on within your business.

What’s the remedy?  It all starts with the data.  Before you can run accurate analytics, your accounting department needs to:

• Capture the right information initially
• Structure the data to support maximum accessibility and flexibility
• Get the data out – quickly, easily and consistently.

Also, you’ll need a robust financial information model as well as systems and processes that can effectively capture, store, and maintain financial data. It’s important to have a financial system that gives you one consolidated, real-time view of the data across the organization with drill-down capabilities. It needs to have the flexibility to accommodate complex corporate structures – including multiple currencies and geographies – and the ability for each business unit to measure business performance according to its own needs.  Lastly, with so many changes going on in corporations and the marketplace, it’s important that whatever system you choose today has the agility to easily evolve as your needs change.

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Financial Reporting and Integration Top CFOs’ Wish List

CFOs have spoken when it comes to the features and functionality they want in their financial systems.  According to a recent survey we conducted at the CFO Leadership Summit, financial executives said that the biggest challenges they face with their financial systems are a lack of real-time reporting and poor integration with other systems in their organization.  Other challenges include the system’s inability to adapt to change, the complexity of tables, poor ease-of-use, minimal support, and less than comprehensive features.

While reports and analytics offer critical insight into what’s going on across your business, they are only as good as the data that they are analyzing. The reality is that most finance departments today are struggling to get data out of many disparate systems within their organizations. And as the survey respondents noted, it’s been very difficult to get accurate and up-to-date data.  

CFOs’ wish list for functionality is in keeping with their frustrations.  Topping their wish list is having the ability to conduct robust reporting and analytics, followed by the ability to easily integrate with other systems in their organization.  CFOs also want to faster period closes, as well as better project management and workflow.   

The good news for you CFOs out there is that all of this is possible today.  With the right processes and systems in place, these wish list items are well within your grasp.

We’d love to hear about the challenges you’re facing with your financial system and what’s on your wish list.  Please let us know.

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Doing Business in Canada Part V

As you consider expanding into Canada, consider if your company plans to enter other countries or is already operating in other countries. If so, you’ll want to find an accounting solution that is flexible enough to handle what we call “multi multi” – multinational operations, multiple currencies, multiple languages, and multiple regulations across multiple countries.  

For example, TransCanada Pipelines connects Coda Financials to 26 operational systems. Coda Financials’ API connectivity is huge for them. Canadian logistics giant Livingston International uses Coda Financials because of the company’s high transaction volumes.

Step #7: Automating currency rebalancing can save significant time at the end of the month. Companies should look for a solution that can import currency rates and pull together those numbers automatically. This can save several days’ work. Some companies have deployed a separate solution, but that shouldn’t be necessary.  Also look for a solution that can handle inter-company transactions via different policies – the original rate (at the start of the month, for example), the rate at the time of the transaction or the rate at the time the transaction posted – you don’t want rate changes to impact the profitability of either the local or the international unit.  That’s why you should also look for a solution that will let you to override the scheduled rates to enable you to keep things balanced.

That wraps up our overview of doing business in Canada. As with the countries we’ve previously profiled, some of the tips can be applied to other countries where you’re considering expansion.

Watch for our next blog in our Going Global series, “Doing business in the United Kingdom.

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Doing Business in Canada Part IV

Now that we’ve addressed taxes, we’ll tackle the transition from GAAP to IFRS. While the U.S. has delayed transition from Generally Accepted Accounting Procedures (GAAP) to the International Financial Reporting Standards (IFRS), Canadian companies had to complete that transition last year. That means U.S. companies establishing operations in Canada will be required to comply with IFRS in Canada while simultaneously following GAAP reporting requirements in the U.S.

Step #5: Understand the IFRS process and find experts in Canada who can help establish good IFRS policies.  The challenge with a transition to IFRS is neither at the start nor after its completion. The most difficult part of the process is in the middle of the transition, when the companies have to report in GAAP and IFRS at the same time.  That’s true for U.S. companies filing IFRS in Canada and GAAP in the U.S.  Therefore, U.S. companies will need to get advice on how to set up IFRS for their Canadian operations.

Step #6: Find a solution that can handle IFRS and GAAP simultaneously. Until U.S. companies are forced to transition to IFRS, if ever, managing operations in Canada and integrating the results with the home office in the U.S. means perpetually operating in that middle phase – the one in which a company needs to file in IFRS in Canada and GAAP in the U.S.  Look for a simple switch for adjusted or unadjusted reporting – without the need for a separate module.  Start posting everything as if it were IFRS, and then apply them to GAAP.  Accounting staff can book the information correctly.

We'll wrap up tomorrow.

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Doing Business in Canada Part III

Today's step focuses on understanding the implications of Canada’s sales tax. Both Canada and the U.K. have similar consumption tax systems, namely, both use value added tax.  This is different from the U.S., which uses sales tax.  

Step #4: Understand Canada’s four different levels of sales taxes – and make sure that your software can handle them. Just as each U.S. state has its own sales tax, each of Canada’s 10 provinces has a different sales tax policy. Pick accounting software that allows the tracking and separation of value added taxes at all transaction levels in order to process input tax credits.  Input Tax Credits are the vehicle for recovering different level sales taxes on purchases and expenses related to your commercial activities.  Pick an accounting solution that enables you to easily set your system to know when to apply:

• PST: The Provincial Sales Tax is a sales tax levied by each province. Manitoba, Prince Edward Island and Saskatchewan collect PSTs, set at different percentages and applied to different types of purchases. In Quebec, the PST is called the Quebec Sales Tax (QST) or the Taxe de vente du Quebec (TVQ).
• GST: The federal Goods and Services Tax. Also known as the Taxe sur les produits et services (TSP) in French, the GST is a 5 percent federal value added tax applied to all good and services purchased in Canada except for items such as groceries, prescription drugs, medical devices, etc.
• HST: The Harmonized Sales Tax combines the GST and the PST into a single value sales tax, which currently is used in five provinces – British Columbia, Ontario, New Brunswick, Newfoundland and Nova Scotia. The HST is collected by the Canada Revenue Agency, which then distributes the appropriate amounts to the provinces in which the sale took place. However, please note that each province sets its own PST rates within the HST structure – so the HST on a purchase in British Columbia may be different from a purchase of the exact item purchased in Nova Scotia. Also, BC and Ontario started using HST less than two years ago, starting July 1, 2010.
• None: One province (Alberta) does not collect a PST and none of the three territories (Yukon, Northwest Territories and Nunavut) levy a PST or an HST. However, purchases in the territories are subject to GST. 

Please note: British Columbia recently voted to return to PST. As of April 1, 2013, the PST in British Columbia will be re-implemented at seven percent, and all items previously exempted from PST will be reinstated. For those doing business in B.C., the PST applies to purchase or lease of new or used goods, goods brought into B.C. for use there, and the purchase of most services, including telecommunications (Internet, Wi-Fi) and legal services. 

What might be challenging for some accounting solutions is that in Prince Edward Island, you will pay both the PST and the GST, for an effective tax rate of 10.5percent. In Quebec, you will pay both the QST (or TVQ) and the GST, for an effective tax rate of 9.975percent. Meanwhile, in Saskatchewan, you are responsible for the PST and GST along with a separate 10 percent liquor consumption tax while the non-alcoholic portion of a restaurant meal is not taxed. 

Some systems require a separate module to handle this sort of complexity, but that may not be necessary. Coda Financials can handle this by setting a new tax rule. 

That’s enough for today. Tomorrow, we’ll look at IFRS and GAAP.

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Doing Business in Canada Part II

Today, we’re providing tips that often get overlooked as U.S. companies look to expand into another country. 

Step #1: If you plan opening operations in French-speaking Quebec or officially bilingual New Brunswick, make sure your accounting software is available in English and French.  It’s a bit of a mix whether companies need software to be available in both of Canada’s official languages. Legally, Quebec phone systems speak French first, English second. So if you operate in Quebec, your accounting software must also be available in French and if you operate in New Brunswick, your accounting software should be available in both languages.  Look for software that has a broad and flexible feature-set that could support the concept of NLS (National Language Support or Native Language Support.) 

Step #2: Look for an accounting solution that incorporates a country-specific localization package. That package should include local statutory reports as well as support for local electronic payment schemes (such as SEPA in Europe).  Your software should enable you to set regional settings –easily establishing your time zone, local languages and reporting. That way, two workers can work in the system at the same time and access it with their language.  Also look for a solution that can store information in both languages so that the account names can be in English and in French.

Step #3: For the parent organization, it will be important to be able to work in two currencies simultaneously.  Look for a solution that offers the ability to work in dual currencies – the Canadian dollar (or loonie because the Canadian loon, a native bird, appears on the back of the Canadian dollar coin) or le dollar as well as the American dollar.  This takes a bit more than having the system automatically use C$ to refer to le dollar. The system should also designate the home currency in U.S. dollars. This way, when the home office opens the books to oversee its Canadian operations – on a day-to- day basis, you can see your operations. An automatic dual currency system means you’re ready to go at the end of the month – you don’t need to scramble and manually convert loonies to American dollars because you’ll have a system monitoring two reporting currencies. 

By the way, a system that can handle dual currencies should be able to work beyond Canada, enabling you to manage operations the same way in the U.S. and Italy or the U.S. and the U.K. 

Tomorrow, we’ll tackle taxes.

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Doing Business in Canada

Welcome to “Doing Business in Canada,” the sixth in our "Going Global" blog series.  Designed for companies looking to expand globally, our  series has already covered China, the Czech Republic, Hungary, France and Italy.  This series is intended to address important but below-the-radar finance and accounting issues.  (Please note: this series is not intended to provide cross-cultural tips.) 

Despite being situated across the world's longest unfortified border from the U.S., it seems that many Americans know more about Europe than they do about Canada.  For example, Americans may not know how many provinces there are (10 plus three territories) or that its capital is not Toronto, Montreal or Calgary, the country’s three largest cities. Instead, Canada’s capital is its fourth-largest city, Ottawa, whose name is derived from the Algonquin word for “trade.”

That’s fortuitous because Canada is the U.S.’s largest trading partner (China is 2^nd, according to the Dept. of Commerce, ahead of Mexico, Japan, Germany and the U.K.), due to 1989 U.S.-Canada Free Trade Agreement (FTA) and the 1994 North American Free Trade Agreement (NAFTA).  According to the U.S. State Dept., Canada is “the leading export market for 36 of the 50 U.S. states and is a larger market for U.S. goods than all 27 countries of the European Union.” 

In January 2012 alone, U.S. trade with Canada exceeded $48 billion – yes billion. (In contrast, the U.K. generated $8.8 billion in January.)  In 2010, 75 percent of Canada's exports went to the U.S., representing $277 billion, according to the State Dept., while 75 percent of Canada’s imports originated in the U.S., representing about $249 billion. The country’s major exports include: motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment; chemicals, plastics and natural resources.

Courtesy of the U.S. Census Bureau

Canada’s $1.389 trillion (2011) economy is doing well, and showed a 2.2 percent GDP growth rate in 2011.  It has “an affluent, high-tech industrial society” according to the CIA World Fact Book. (Its 2.2 percent growth ranked it 147^th in the world out of 214 world economies, ahead of the U.S. at 172 and the U.K. at 181.) Inflation reached 2.8 percent in 2011, 49^th out of 222 world economies. 

In 2012, the World Bank ranked Canada as the 13^th (out of 183 economies), based on ease of doing business there as determined by 10 different variables. In contrast, the U.K. ranked 19^th and Italy ranked 87^th. Although slipping from the 12^th spot in 2011, Canada ranked #3 in terms of starting a business, 5^th in protecting investors and 42^nd in trading across borders. 

Canada is rich in natural resources, and is estimated to have the world’s third largest oil reserves behind Saudi Arabia and Venezuela. However, for all that, 76 percent of its labor force works in the services sector, and unemployment in 2011 was 7.4 percent, ranking it 85^th in the world out of 200 economies, ahead of the U.K. at 94 and the U.S. at 105. 

As we look at accounting issues in Canada, there are similarities with the U.S., more so than with EU countries, despite the fact that Canada is a member of the Commonwealth of Nations, headed by Queen Elizabeth II, and that Commonwealth countries signed a framework of common values and goals. 

Now that we’ve provided some background on Canada’s economy, tomorrow we’ll tackle some tips about operating locally and integrating internationally.

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Ring of Truth – Big ERP Costs

When it comes to the high cost of change, the data is timeless. In fact, IT Jungle contributing editor Joe Hertvik just pointed that out in referencing our white paper, The High Cost of Change for ERP, in a blog post. 

The piece, which can be found at The Daily Truth - ERP costs, puts the annual costs of maintaining and changing an existing ERP system at $1.2 million. That figure, according to the data from CFO Research Services, includes internal costs such as training and IT salaries, external costs such as IT contractors, and annual software fees. Agreed Joe: “When you think about the cost of equipment, software maintenance, programmers, operations support, DR and HA systems, backup management, I can see where you can easily reach $1.2 million in a medium-sized company.” 

What does it cost to stay up to date?

In addition, Joe saluted the source of the data in the white paper, which came from finance executives and not IT personnel. Well, that makes sense. Go to the source of the information. 

For more on the high cost of change, check out The Daily Truth.  Don't miss Issue 3 of IDC's video with Michael Fauscette discussing the ERP Disruption Survey key points and how ERP systems can have a significant impact on your organization.   

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Making Impactful Decisions with Big Data

A century ago, retail chain founder John Wanamaker famously said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Today, accurate data to drive a retailer’s business remains a challenge.  The difference from Wanamaker’s day is that retailers are not suffering from a lack of data, but rather from an inability to identify the data that will make a difference in the business today.  Reports that have a backward view of last year’s results don’t supply the up-to-the minute information they need to make a decision today.  Roll-out reports attempt to standardize information from multiple databases, but are not perfect, and drill-down reports often can’t go far enough. Occasionally  retailers have “made do” with their technology investment until it is groaning under the weight of reporting and analyzing data; accounting and other departments have been known to do manual reporting from the data to address the disconnect between what the system can do and what the organization needs. Additionally, with the proliferation of smart phones, tablets and the like, some decision-makers craft their own reports to help them make decisions that have a direct impact on the organization’s bottom line. Analysts indicate that retailers will invest in big data in 2012, but it is not simply to create more data; rather, the investments will be geared toward making sense of the massive amounts of data they’ve already collected in an effort to have the right information they need at their fingertips to make both day-to-day and game-changing decisions.

Let us know what you think.

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