VideoLast year, in a speech before the American Society of Corporate Secretaries, the Securities and Exchange Commission's Cynthia Glassman took the corporate-governance group for a not-terribly-invigorating walk down Memory Lane. "The public eagerly sought stocks of companies in certain 'glamour' industries...in the expectation that they would rise to a substantial premium — an expectation that was often fulfilled," she said. "Within a few days or even hours after the initial distribution, these so-called hot issues would be traded at premiums of as much as 300 percent above the original offering price. In many cases, the price of a 'hot' issue later fell to a fraction of its original offering price."
Then she delivered the kicker: she wasn't quoting from an account of the dot-com bubble, but from an old SEC document about the mania for electronics stocks that dominated Wall Street in the late 1950s and early '60s.
Her point was that the current raft of regulations is not new, and it's high time that companies take corporate governance seriously. As part of that, she suggested they engage in "real self-examination and learning...."
All in the Timing
She meant it in the sense that the unexamined corporate life may ultimately be lived in jail, but other interpretations spring to mind. They especially spring to the minds of software companies and other purveyors of IT, which see in the Sarbanes-Oxley Act of 2002 and other recently enacted or proposed regulations a prime opportunity to sell products to their corporate customers.
Some of these efforts have to be chalked up to opportunism. As we noted in CFO in December 2002 (see "Partial Clearing"), there is nothing in Sarbanes-Oxley that unequivocally mandates a technology upgrade. While the technology sector would certainly benefit from another Y2K-like buying frenzy, this is not likely to trigger one. Longer term, however, regulatory pressure may have a substantial impact on a range of IT buying decisions.
Today most CFOs we spoke to agree with Terry J. McClain of Valmont Industries Inc., a designer and manufacturer of irrigation systems, utility poles, and other products. "Sarbanes-Oxley is a costly exercise for us, both in terms of time and money, but very little of that involves IT," he says. Consultants and lawyers, he says, are the current beneficiaries. "I can see a role for IT in providing some systematized checks and balances," he states, "and maybe we'd use software as a sort of checklist to keep us on track, but it's really more about your processes and governance structure."
Yet McClain also says the full implications of new regulatory requirements can be difficult to fathom because "they come out a spoonful at a time, and there haven't been any test cases that can shed light on areas that are wide open to interpretation."
That murkiness is at the heart of many IT companies' marketing pitches, which essentially argue that companies shouldn't focus too closely on the letter of the law, but rather on the spirit. And the spirit emphasizes visibility, accountability, and better governance. There's a strong role for IT, they say, in all three areas.
"Half of all the calls I get involve Sarbanes-Oxley," says John Van Decker, an analyst at Meta Group Inc. who focuses on financial applications, "so I'm certainly seeing signs that IT spending will get a boost from this." Most likely, he says, companies will view Sarbanes-Oxley as a catalyst, making long-delayed upgrades to financial systems in order to meet the faster reporting times now mandated, and to give them greater confidence that the numbers their CEOs and CFOs are liable for are accurate.
Some software companies are making their own upgrades, tweaking products to meet new regulatory requirements. PeopleSoft Inc., for example, had already started down the road toward performance management before Sarbanes-Oxley came along, but is now adding an investor portal to its Financial Management Solutions Blueprint product suite, as well as new workflow and approval capabilities to its financials modules to speed the preparation of 10-K and 10-Q reports.
"One prospect had set aside three to four months to review potential IT solutions," says Renee Lorton, senior vice president and general manager of PeopleSoft's financial solutions group, "but then met with us and said, 'We have to make a choice and begin implementation within a month — our board is demanding it.' "
While she says that such top-level pressure will boost sales, particularly among the many companies that still use older, "legacy" applications, she also believes such forthcoming rules as Sarbanes-Oxley Section 404, which would require management to state in annual reports how it has addressed a range of internal controls and financial-reporting procedures, "could be a huge driver" for financial software.
"Could be," because Section 404 is one of two provisions that have no specified deadline; the other, Section 409, concerns "real-time" disclosure of any material change in a company's financial condition. Thus, two of the mandates with the most potential to demand IT fixes will trail behind other provisions of the legislation. "Software companies would love to offer ready-made products for internal control," says Scott Bohannon, executive director of the Working Council for Chief Financial Officers, a membership organization that researches best practices in financial management. "But no one knows what the final rules are yet."
Reader Comments» Post a comment