Risk & Compliance

Are These What You Call Worst Practices?

Survey finds monthly close still a five-day deal for most; lots of data correction going on, too. Elsewhere: Barrick promotes former CFO to CEO, Va...
Stephen TaubFebruary 13, 2003

According to a major research report from consultancy The Hackett Group, most companies still have sizable weaknesses in their financial operations. This even though publicly traded companies now face increased scrutiny from government regulators.

The Hackett Group survey found that most corporates have little confidence in their ability to predict future financial performance, are using outdated and inefficient budgeting tools, and still have extended closing periods. (To find out why some companies are ditching long-term corporate planning, read “The Five-Year Itch,” a CFO exclusive.)

Conversely, the world’s best corporate finance operations have made significant progress implementing best practices and are reaping real benefits, particularly in the area of reducing the cost of low-value transaction-processing activities. They have also improved the quality of information they capture, enabling them to forecast more effectively and provide more strategic analysis to their companies, according to the study.

The statistics in Hackett’s “2003 Profile of World-Class Finance” research report were compiled by identifying Hackett clients that showed the greatest overall efficiency and effectiveness in their financial organization across a wide range of metrics. These “world-class” performers were compared with average companies in Hackett’s best-practices database. Nearly 2,000 companies have participated in Hackett research, including all of the 30 Dow Industrial companies.

Hackett found that despite pressure from government and regulatory agencies to improve accountability, just 9 percent of average companies believed they had confidence in their forecasting and reporting outputs.

Average companies are also using inefficient spreadsheets as their primary budgeting tool nearly half the time (47 percent), rather than relying on more-sophisticated software that automatically draws financial information from a data warehouse or centralized repository.

The study also noted that, while most companies have adopted balanced scorecards, only 6 percent of average companies rely on balanced-scorecard metrics with a mix of financial and nonfinancial metrics as a basis for decision-making. “This is a proven technique that enables all levels of the company to more effectively set targets for productivity, quality, and cycle times to support overall business-level strategy,” Hackett pointed out in its summary analysis.

Hackett added that these average companies still take a full five days to close their books each month.

The so-called world-class financial organizations do substantially better in all these areas, but still show some clear deficiencies, the study found.

For example, just one-third of the respondents at world-class companies said they think forecasts and reports are reliable and accurate. Twenty percent of these companies still use spreadsheets as the primary budgeting application, and only 33 percent are fully leveraging a balanced scorecard.

Even so, these world-class performers have made real improvements speeding up the monthly closing cycle, cutting closing time to just one day, Hackett noted.

Nevertheless, world-class finance departments still have a long way to go to reach full best-practices compliance, according to Hackett.

“The best finance operations are only half to two-thirds of the way through their best practices deployments, leaving tremendous room for improvement,” the consultancy asserted.

According to Hackett, world-class finance operations still rely on an average of 1.7 enterprise resource planning (ERP) systems for their information. While this is significantly less than average companies, which use 2.7 ERP systems, the lack of a single companywide ERP system represents a roadblock that can handicap critical business processes and decision-making, it added.

Hackett Group president Bruce Barlag noted that the research report revealed a tremendous accountability gap for average companies in the financial area, despite the fact that most of the CEOs and CFOs at those companies now have to personally vouch for the accuracy of their quarterly results.

“The combination of factors is exceptionally disconcerting: little to no confidence in forecasting tools; budgets created using outdated, incomplete, and often inaccurate data; and up to a week spent simply closing the books,” said Barlag. “With these kinds of problems, companies are literally operating in the dark without a clear picture of where they are, where they’re going, or how to get there.”

Hackett said its research also showed that world-class finance operations have used a combination of best practices and technology integration to drive down costs and error rates within the transaction-processing portions of their operations. This has provided them with a base of accurate information from which to provide their companies with more-accurate guidance

By reducing the time and effort that is expended simply capturing and verifying financial data, world-class companies have also been able to free up staff resources to dedicate to strategic analysis and other higher value-add activities, the Hackett research found.

Specifically, world-class companies show significantly lower transaction-processing costs and error rates, according to Hackett.

For example, world-class companies now spend only 0.19 percent of revenue on transaction processing, while average companies spend almost twice as much (0.34 percent of revenue).

World-class companies also spend only 8 cents per line item, compared with 23 cents at average companies.

It should be noted that The Hackett Group offers best-practices consulting to corporate clients.

Can Former CFO Restore Barrick’s Glitter?

Barrick Gold Corp. is the latest to turn to a finance-type to turn around its company.

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Barrick founder Peter Munk, who’s now chairman, was reportedly unhappy with Oliphant after the company’s stock price fell while the price of bullion surged to a six-year high.

The company said in a statement that it made the change “to address its concerns over the company’s recent performance and to restore Barrick to the leadership position in the gold industry it has consistently maintained throughout much of its existence.”

Barrick is known for its sophisticated hedging strategies.

The company sold all the metal it produced in January on the spot market to take advantage of bullion’s surge, spokesman Vince Borg told wire service reporters. By doing so, Oliphant tried to make the point that Barrick can profit from higher gold prices.

Wilkins began his career with Barrick in 1981 and worked with Munk and Bob Smith, former president and chief operating officer, as Barrick grew to be a leader in the gold industry, according to the company.

Wilkins left Barrick in 1993 when he was CFO to become president and chief operating officer of Horsham Corp., which was Barrick’s controlling shareholder at the time. Horsham later became TrizecHahn Corp. Wilkins remained as president and chief operating officer until the planning of its conversion to a U.S. real-estate investment trust had been completed.

“I am pleased to rejoin Barrick in my new capacity and look forward to working with former colleagues and the many new members of the Barrick team who have become integral to its operations,” said Wilkins in the statement. “It is an exciting time in the gold industry and I intend to refocus the company on the core values which served it so well in the past.”

Meanwhile, over at the energy-services giant Halliburton, chief financial officer Doug Foshee has been promoted to chief operating officer.

He is being replaced as finance chief by C. Christopher Gaut, a 20-year energy-finance veteran.

“Doug Foshee’s leadership as CFO has been invaluable during the past 18 months, and in his new role as chief operating officer, we will be able to capitalize on his extensive oil and gas operating experience,” said Dave Lesar, chairman, president, and chief executive, in a statement.

Lesar is the one who replaced Dick Cheney in 2000 after the former Halliburton head was selected by the Republican Party as its vice presidential candidate.

“Cris Gaut has an excellent reputation with the financial community,” said Lesar in a statement. “He has a proven track record in corporate finance both as a financial advisor and strategist. He understands the energy business and will help drive greater shareholder value and continue to facilitate Halliburton’s growth and profitability.”

Prior to joining Halliburton, Gaut was one of three people sharing the role of president and chief operating officer of ENSCO International Inc., an offshore drilling contractor. In addition to these responsibilities, he served the company as CFO, a position he held since 1988.

Vail Resorts Announces SEC Probe

Now Vail Resorts Inc. is being investigated by the Securities and Exchange Commission.

The resort operator said the formal inquiry is related to the company’s October announcement that it would restate financial results for 1999 through 2001. Specifically, regulators are looking at the company’s accounting treatment for recognizing revenue on initiation fees related to the sale of memberships in private-member clubs.

The company indicated it has concluded its own internal review, and claims it found that the accounting treatment did not involve impropriety on the part of any officers or employees.

Vail added that its prior independent auditor—Arthur Andersen—approved the company’s past accounting treatment. It added that its new accountant, PricewaterhouseCoopers, audited its fiscal 2002 financial statements and reaudited the financial statements for fiscal 1999 through 2001.

The company said it expects no changes will be made to its financial statement as a result of the SEC inquiry.

Enron Creditors Could Fetch $5 Billion

Enron Corp. creditors could wind up recovering as much as $5 billion in assets that were allegedly transferred illegally off of the company’s books. This according to a bankruptcy examiner’s report obtained by Bloomberg.

Enron creditors such as Citigroup Inc. and J.P. Morgan Chase & Co. would be able to use recovered assets to satisfy their claims should unidentified “individuals, institutions and professionals” be sued for helping the former energy trader make the transfers to secret partnerships and other entities, the report apparently says.

The examiner pointed out that gas, oil, power plants, and pipelines worth as much as $2.1 billion might have to be returned to Enron by the partnerships to help pay $50 billion owed creditors.

Apparently the examiner’s report indicates that unspecified assets worth $2.9 billion might also have to be returned because they were transferred too close to Enron’s December 2, 2001, bankruptcy filing.

“Enron so engineered its reported financial position and results of operations that its financial statements bore little resemblance to its actual financial condition or performance,” Bloomberg quotes from the report, which it says will be made public this month.

Bear in mind that Citigroup and J.P. Morgan may be liable for some of the $25 billion in damages Enron investors claim because the two largest banks in the United States purportedly helped Enron hide debt in the partnerships by disguising loans as energy trades, Bloomberg noted.