Keeping the Enterprise Honest

Forrester: Audit applications needed to give CEOs, CFOs accurate financial data

Tempe, AZ  July 17, 2002  Technology can play a role in keeping corporations honest, and at least one tech consultancy is calling upon chief information officers to provide CEOs with applications that can deliver continuously updated audit information on their companies' financial status.

Jim Walker, a senior analyst at Cambridge, Mass.-based Forrester Research, writes, in a report entitled "CIOs Can Help CEOs Stay Out Of Jail," that with the U.S. Securities and Exchange Commission drawing up tough new rules for financial accountability in the wake of multiple accounting scandals, technology can provide top executives with the information they need to be certain that their financial filings are accurate.

"The SEC is telling corporate officers that crime does not pay  and that they must provide the necessary and timely information to prove that a crime has not been committed," Walker wrote in the report, co-authored with Forrester's Laurie Orlov and Katie Carr. "To comply with the new rules, CIOs should provide CEOs with an app that intelligently captures and analyzes enterprise and business segment data  providing a daily audit of the firm in a continuously updated Form 8-K format." Form 8-K is a SEC financial disclosure form.

According to the Forrester analysts, the proposed new "electronic audit system" would draw data from other enterprise applications to monitor the company's financial performance and provide the kind of information that stock valuation analysts use. "For example, the electronic audit system should alert the [chief financial officer (CFO)] when operating cash flows remain constant but business-unit profits are increasing, suggesting that local controllers have changed their accounting policies to aggressively recognize revenue under the percentage-of-completion methodology," Walker wrote.

The system should also provide a repository in which to register "material events" required in the Form 8-K, particularly those that constitute such insider information as customer contact renewals. "CIOs should work with CFOs to develop a user portal and an organizing schema that captures this knowledge in a central location, providing leading indicators of looming problems," Forrester suggested.

Finally, the software should be able to monitor for trends that could point to fraud. For example, Walker said the system could look for an increase in product returns relative to revenue, "suggesting that products are being shipped to boost revenues, not to meet demand."

Forrester concluded that as CEOs and CFOs are forced to assume personal liability for their companies' financial reports, they will see to it that CIOs are given the funding they require to eliminate the manual, functionally fragmented processes that inhibit business analysis. Providers of enterprise resource planning (ERP) solutions will try to provide an "audit dashboard portal," even as startup companies move to provide pieces of the new audit system, Walker predicted.

Finally, Forrester warned that CIOs and software providers must be careful to configure the new systems so that they do not overwhelm top executives with too much irrelevant information. "Not unlike getting a full body scan, execs may end up learning about symptoms of poor health that are nonevents," Walker wrote. "Business analysts who configure the [new application] must find the right balance between reporting too much misleading detail that is just data noise and masking real trouble."