Sarbanes-Oxley: The Next Y2K?

AMR: Accounting reforms offer justification for companies to consider systems overhaul, process improvements

Boston — May 30, 2003 — Just as many companies used the Y2K problem as an opportunity to upgrade their information technology infrastructures a few years ago, so too should they be viewing the need to comply with new U.S. financial accounting regulations as a strategic justification, even mandate, to invest in standardization, process controls, performance management and other tools that can improve overall business performance, according to a new report from technology consultancy AMR Research

But AMR, which has been researching the challenges and issues affecting companies struggling to comply with the Sarbanes-Oxley Act (SOA), warns that companies looking to information technology to solve their SOA compliance issues will find a no-size-fits-all solutions landscape, and they must evaluate IT projects through the lens of compliance and risk-mitigation in order to effectively prioritize.

The Sarbanes-Oxley Act is the cornerstone of U.S. federal regulators' financial accounting reform. The act seeks to protect investors by holding executives of public companies directly accountable for any misrepresentation of a company's financial information.

The AMR report, "Prioritizing IT Investment for Sarbanes-Oxley Compliance," indicates that companies are prioritizing projects that help define, record and standardize processes, especially enterprise resource planning (ERP) instance consolidation. In AMR's last survey on SOA compliance, results revealed that 85 percent of companies are planning for changes to their IT systems to support compliance efforts, and Fortune 1000 companies will spend $2.5 billion this year both in planning and executing against SOA-related efforts.

"Companies have the opportunity to use SOA as a justification for long-awaited IT projects that push systematic change and improvement throughout the organization," said John Hagerty, a vice president with AMR. "Our analysis shows that there are a number of potential remedies to bring firms into compliance with SOA while at the same time getting the maximum benefits out of their existing investments."

AMR concludes from its survey results that Sarbanes-Oxley compliance is analogous to Y2K. Companies can take advantage of the compliance challenge and turn it into an opportunity to invest in new strategic systems such as ERP. Just like Y2K, SOA provides companies the necessary gravity to promote systemic business changes already in evaluation and planning phases for months.

In the survey, nearly 65 percent of companies indicated they are strongly considering ERP instance consolidation as a remedy, while 39 percent of companies will evaluate the existing features and functions of applications and platforms already in place and configure their controls to take advantage of the built-in but ignored functionality.

More than 40 percent of companies are evaluating enterprise performance management (EPM) initiatives in 2003, with or without the SOA. AMR says that EPM initiatives will give companies better visibility into current operations and future projects, aligning them with overall corporate goals.

Finally, survey results revealed that only 3 percent of respondents would consider changing their existing financial systems and implementing products from a new vendor, while 13 percent are considering upgrading their current systems to the latest release.

Fortunately, companies will have a little bit longer to decide on their SOA strategy since the U.S. Securities and Exchange Commission (SEC) this week extended deadlines for compliance by nine months. As it stands now, publicly-traded companies with a market capitalization of $75 million or more will have to comply with these new regulations by June 2004, while smaller companies and foreign-owned companies have until April 2005 to comply. "The nine-month delay in SOA enforcement announced by the SEC this week is great news for companies to thoroughly evaluate their options," said Hagerty.