Accounting software and corporate fraud

What role do financial or accounting packages play in avoiding fraud?

However, Oracle believes that a good accounting system, when judiciously implemented, can reduce the risk of improper accounting and increase the business transparency that all companies must now seek if they are to retain the trust of their shareholders. Here's how:

Control
A simple way of reducing risk is to limit the number of people who define and apply business rules. If a CFO leaves it up to his company's local finance directors to enforce local and group practices, the risks are quite significant. Companies understand this and usually have strict group policies that must be applied by local finance directors, and a regular internal audit makes sure this happens.

Such policies are much easier to apply when a company that has one single central system, rather than a typical set-up of four or five regional systems or a host of individual local accounting systems. A centralised system will act as a watchdog, ensuring that global policies are applied, rather than relying on internal auditors to carry out checks. With the centralised system, local policy changes can still be made, but they must be approved centrally first, so all exceptions are immediately known.

While some accounting software vendors strongly encourage their customers to have separate systems for each geographical operationg region, Oracle recommends a single centralised system, which, in addition to cutting IT costs, is the best tool for internal control and security.

Monitor
The same principle applies when it comes to monitoring daily operations. If companies are using multiple different accounting systems installed on different databases around the globe, monitoring can only be retrospective.

This kind of IT set-up is the reason why companies typically need more than two weeks to consolidate their results. Often, results are calculated using different principles and procedures, so transparency is very hard to achieve in such an environment.

Using Oracle's latest Daily Business Intelligence technology, however, companies can get the latest status of their operations on the fly. A comprehensive set of KPI's can be calculated on demand and even a draft consolidated Profit and Loss statement or draft consolidated balance sheet (excluding month-end journals) can be available in minutes.

Compare
Another way for management and the financial community to ensure that a company is not going out of line, is to make some industry comparisons. Rating agencies already do this to a certain extent, but they can only do it in a manual way and in most cases without sufficient data. One major reason is that there is no defined standard for the automated exchange of detailed financial information. After all, all companies have customers, suppliers, fixed assets, inventories, cash and debts, even if the actual way in which these are presented differ from company to company.

Oracle believes that enabling the exchange of such financial information would play a crucial role in making financial statements and practises more transparent. This is why Oracle is an active member of the XBRL (eXtensive Business Reporting Language) initiative and will incorporate the technology in our products when it is finalized. As an example, XBRL will enable analysts to make detailed analyses of fixed assets between telecommunications operators, possibly even down to the asset type. This type of functionality could maybe have prevented some recent alleged fraud….

Are there measures that can be built within the software that would increase the threshold against manual/human abuse?
Corporate annual reports and accounts are governed by legislation and have to be prepared in accordance with the relevant accounting standards. In order to do this, management need to establish policies and procedures which cover how transactions should be recorded and ethical and legal guidelines on what is acceptable. It is the existence and strength of these internal controls that external auditors assess and use to direct their efforts.

An essential element of these internal controls is up-to-date management information. For most companies it is a hugely difficult and time-consuming process to provide centralised reports and analyses from a variety of different and often unconnected financial systems. Without common and up-to-date information, management will not be alerted to potential problems or frauds being perpetuated.

What Oracle has therefore done with its E-Business Suite software is to have it run on a single database that records every transaction processed in the entire company. Having all the relevant data in a single location, and stored in an integrated, standard format, means that management can access this information whenever they need to. They can do this passively, through the use of portals that display the key reports and exceptions, or proactively by using the software's workflow engine to highlight and notify exceptions.

So while accounting software can in itself do little to prevent a determined management from deliberately falsifying accounting entries, a single integrated system using reporting and analysis tools, such as that provided by Oracle, can make it a lot more difficult.

If unethical practices happen in the most closely regulated economies, what should the public expect from less regulated markets?

Oracle is no more qualified than anyone else to predict when and where the next accounting scandal will arise. What we can say is that situations like those at Enron and Worldcom have shaken the business world and rocked the underlying principle of investment - the trustworthiness of publicly-disclosed financial information. One of the things listed companies need to do now is look at their accounting systems and see how they can be streamlined or tidied up to ensure that in future, they can be faster and more accurate in their financial disclosures, and spot any discrepancies as soon as they occur. This isn't going to stop improper accounting, but it will help the honest companies to regain the trust of their shareholders.