Learning From Disaster | Part Two - Transparently Obvious

Learning From Disaster | Part Two - Transparently Obvious

Months before Enron declared bankruptcy an unidentified employee sent the company's top executive an unequivocal message.

Show Me The Problems

"What makes a good information system that can keep the company from collapsing?" asks Keith Skinner, chief operating officer Deloitte Touche Tohmatsu. "I think basically there's got to be good financial reporting information systems, and that means both from a planning stage - good budgetary systems that can do profit and loss balance sheet, cash flow plans and budgets - and then you need a good system to report against those financial systems. They've got to be flexible, in that you can continually update them, and do continuous planning and forecasting; good variance or exception analysis that shows where there are problems, so those can be investigated. That's the financial accounting side, if you like.

"Then there's management accounting systems that, depending on what business the company is in, can give you things like client profitability; product profitability, if there's standard costing, variance from standard. I could go on and on, depending on the type of corporate [entity] . . . but basically, it should be a system that can measure the key performance factors that really measure the firm's success and profitability."

Skinner advises CIOs to carefully examine their business and determine the critical performance factors: what needs to be measured and monitored. They should make sure their systems are not only capable of addressing those needs but of presenting meaningful reports. CEOs should do a risk analysis, either internally or with the help of an outside consultant, he says, to determine the key success factors for the business, communicate that to the CIO and then have them devise or purchase the appropriate system that will deliver that.

"They [CIOs] should really concentrate on reports. These systems can spit out voluminous reports that are very difficult to use and to read, and probably then people overlook the real issues because of that. So I think really communicating with the users of the information as to what their requirements are, so that you get reports that are very focused and highlight what the issues might be, is extremely important," Skinner says.

"In order to restore investor confidence, CFOs across all industries need to go beyond regulatory compliance and provide additional disclosure of financial and nonfinancial information," says Alan Landis, research director, Working Council for Chief Financial Officers. "As pressure to disclose intensifies, many CFOs are looking for automated solutions to improve external transparency to investors."

Gartner notes disclosure of financial information will affect back-office accounting systems. Many enterprises have adopted a "make do and mend" policy and patched legacy finance and accounting systems. In all likelihood, those systems will be unable to respond to frequent and detailed financial reporting.

Enterprises that have implemented financial applications from one of the ERP vendors will be in reasonable shape, but they will not be invulnerable. Although most ERP systems support the concept of a "virtual" close (that is, financial transactions are continually updated in real time or near real time), feeder systems that pass financial transactions to the ERP system may be sources of weakness. They may not pass sufficient detail (to support more detailed reporting) or they may work on fixed batch intervals.

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