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Partial Clearing

Budgeting software isn't the key to corporate finance reform, but it can help CFOs manage expectations in a sinking economy.

If the reach of the Sarbanes-Oxley Act of 2002 can be measured by marketing spin, then Congress has indeed instituted sweeping corporate reform. After the legislation passed, vendors of all kinds of business software, including budgeting and planning tools, were quick to tout their applications as cure-alls for the new compliance headaches it created.

Of course, Sarbanes-Oxley never mentions software and has little, if anything, to do with budgeting and planning. The act doesn’t even include specific rules for market guidance — the one area of disclosure typically based on output from B&P software. And while it may be true that financial software in general can help strengthen controls within business units, such claims ignore the fact that the recent scandals were caused by the misdeeds of executives, not workers in the trenches. “If Enron had the most sophisticated enterprise performance management tools, do you think it would have made different decisions?” asks Lawrence Serven of research and management consulting firm The Buttonwood Group. “Of course not.”

But overeager public relations aside, the message from software vendors isn’t totally off-base. Although the new legislation doesn’t directly address guidance, investor skepticism gives companies plenty of reason to shore up the consistency and accuracy of their forecasts.

Perhaps more important, the vagaries of today’s economy have made the ability to quickly adjust forecasts essential. Indeed, in a survey conducted jointly by CFO Research and Cap Gemini Ernst & Young just after the WorldCom scandal broke, 81 percent of CFOs said that accuracy of revenue and earnings forecasts was their highest priority, and 63 percent complained of inadequate, poorly integrated budgeting and forecasting systems.

The Big Package

The desire for integration provides additional justification for discussing B&P software and Sarbanes-Oxley in the same breath, since the software is often part of broader packages of financial software that can help with reporting and disclosure compliance.

The new law requires management to publicly assess “the effectiveness of the internal control structure and procedures of the issuer for financial reporting” and submit that assessment to auditors — a process that certainly could include evaluations of the controls built into the reporting software. Moreover, CFOs must now disclose material changes to a company’s financial condition “on a rapid and current basis,” produce quarterly and annual reports faster, and, of course, certify the accuracy of the results. According to Aberdeen Group Inc. analyst Alan Yong (in “Baring the Financials: More than Current Financial Systems Can Bear?” InSight, Aberdeen Group, 2002), these and other rules “will necessitate significant investment in financial software.” Yong argues, for example, that determining whether a change is material will require predictive forecasting — assigning probabilities of occurrence to each possible scenario. “In contrast,” he notes, “forecasting techniques currently used in budgeting and planning exercises look at only the most probable scenario.” Implicit in Yong’s assertion that budgeting functionality may need to be broader is the idea that it must be integrated with other financial systems.

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