The role of business systems in achieving good corporate governance

A vital component of any move towards better governance is an integrated IT infrastructure that supports an organization's internal requirements for greater transparency and control, as well as compliance with market and industry regulations, explains Ayman Abouseif, Senior Director - Marketing, Middle East, Africa, Eastern, Central Europe, Oracle Corporation.

Following last year's slew of high-profile accounting scandals, corporate governance has become a topic of intense public interest, and rightly so. Almost half of all senior executives now designate corporate governance among their top three business priorities, according to the Economist Intelligence Unit.

Many commentators accurately identified honest and timely financial disclosure as part of achieving good corporate governance, but in fact this is just the tip of the iceberg. Good governance is not simply a matter of complying with industry regulations and financial reporting frameworks. It has just as much to do with what happens from day to day inside the company. The principles of good governance dictate that a company must be fair, honest and open with all of its stakeholders, and that includes employees as well as external parties.

In other words, a company's internal business objectives need to be compatible with the demands of the external regulatory environment. The primary goal of today's senior executives, therefore, should be to create an organisation that is transparent and compliant both inside and out. Furthermore, everyone in the organisation needs to be aware of both sets of requirements, and management needs to keep a very close track of how the company is performing against each one, so that no unwanted 'surprises' occur. These considerations are pervasive across the organization, affecting the supply side, the internal financial and administrative functions, and the customer facing side of the business As the backbone of modern business, IT systems have an extremely important role to play in the creation and maintenance of the well-governed company.

Companies using multiple operating currencies and with offices, divisions or subsidiaries abroad are well aware of the pressures associated with trying to comply with multiple regulatory bodies, each with different requirements. Even with the introduction of the International Accounting Standard (IAS), the first single framework for financial reporting across the European Union, companies listed on both sides of the Atlantic will still have to report in IAS and U.S. GAAP, and in many cases one or more national GAAPs as well.

Furthermore, many companies are regulated by industry bodies , each with its own rules and regulations. As a result, certain industries are at higher risk of committing damaging compliance breaches, particularly in highly regulated sectors like financial services and pharmaceuticals. The recent Basel II Accord, for example, requires a massive effort on the part of European financial institutions to comply with its new requirements for risk management, while the recent 'N2' regulations require all UK financial advisers to adhere to a strict new code of conduct or face possible legal proceedings. With so many regulators demanding compliance, providing a full and accurate report to each one can be very time-consuming and difficult.

IT systems can aid the quest for accurate and trouble-free compliance in two important ways. They can help companies disclose information quicker and minimise the potential for reporting errors, thus reducing the potential for nasty surprises at reporting time. They can also play an important role in ensuring that a company's activity remains compliant with internal and external policies. The first can be achieved by streamlining and centralising information systems. The second can be facilitated by the use of employee management and online learning systems to disseminate crucial compliance information and rapidly train and re-train the workforce on corporate ethics and compliance requirements.

Although most large organisations have solid systems in place for financial accounting and personnel management, these have usually been implemented on an ad-hoc basis as the company has grown, and tend to be scattered around the company and disconnected from each other. The introduction of the euro provided an opportunity to re-centralise financial systems, and many companies who did so have realised many other benefits besides.

The French retail chain Kiabi, for example, connected all of its operations in France, Spain, Belgium and Italy to a single web-based accounting package. As well as providing euro compliance, the new centralised system allowed the company to consolidate all financial data in real time. Previously, each entity had used its own local currency accounting system, and updates could only be carried out at night. Operating accounts could take up to a week to produce, with accountants from different sites often having to meet in person to consolidate the data. Now, information can now be added at the last minute, and it is instantly available for review on the company's intranet, resulting in further time gains and greater internal transparency.

The forthcoming introduction of IAS represents a second opportunity to centralise accounting systems and reap the time and cost benefits, in addition to ensuring easier reporting to regulatory bodies. A centralised system also makes it easier to set policies and automate procedures that might otherwise be open to the risk of improper accounting and human error.
Since the Enron debacle, shareholders and stock exchanges have also started to demand more frequent financial disclosure. With the U.S. Sarbanes-Oxley Act setting the tone with its promise to punish wayward executives with a fine, a de-listing or even a jail sentence, the pressure is on to cut reporting times, increase transparency and improve accuracy. For most companies, however, it remains a hugely difficult and time-consuming process to provide consolidated reports even on a yearly basis, let alone the US-style quarterly reporting. However, recent advances in business intelligence software can help businesses review all their financial data in real-time, and delve into information either at the macro-corporate level or granularly to a specific country or even a specific office. This greatly reduces the amount of time spent gathering financial data, and allows far more time for considered analysis and in-depth presentation of the results.

However, all the information systems centralisation in the world will not make companies compliant if the actual day-to-day work being done by employees does not adhere to internal and external regulations. Corporate Governance is therefore not just the province of the finance department; it is everyone's responsibility. Ethical policies and procedures need to be communicated to all staff, and the legislative and regulatory environment needs to be regularly explained. Any changes must be communicated quickly and accurately. Not only this, but management must ensure that staff are regularly trained and tested on compliance issues, and the results of that training carefully recorded and monitored in case of any future compliance breaches.

In an economic downturn, many companies are understandably reluctant to lay out large amounts of money for ongoing company-wide training that is not directly linked to profitability. Small wonder, then, that the move towards better corporate governance is fuelling the uptake of online training, which can be rolled out to employees quickly, simultaneously and at very little cost. Oracle, for example, trained 42,000 employees on its corporate ethical policies via Web seminars using its own e-learning software. Indeed by 2004, research firm Gartner Group estimates more than two-thirds of Global 1000 enterprises will include e-learning as part of a formal Business to Employee (B2E) initiative.

Of course no IT system can prevent a determined management from falsifying books and records but the centralisation of financial and online training systems may help to overcome some of the governance challenges that companies are currently facing. It is certain, at least, that opportunities for abusing the system can be minimised if reporting is simpler, transparent and more accurate. I bear in mind the title of a book on management at General Electric, one of the most admired companies in the world: 'Control your destiny or someone else will.'