The Impact of IAS and Sarbanes Oxley on UK Organisations

Transcription

1

2 The Impact of IAS and Sarbanes Oxley on UK Organisations

3 Michelle Maden ERP and Supply Chain Solutions Leader Oracle Corporation Michael Coyle Senior Manager PricewaterhouseCoopers

4 Agenda UK Governance International Accounting Standards Sarbanes-Oxley Act

5

6 Corporate Governance and Compliance Recent financial scandals have placed the entire performance of all companies under greater scrutiny than has been known for long time In short too many many companies have suffered too many surprises Confidence in management s ability to manage is at an all time low RESULT: More Regulation!

7 Strong Responses are evolving to drive Governance Corporate Governance Business Systems The Board Executive Impact Accounting Boards placing new demands More Disclosure Common Rules Transparency Faster Reporting Code of Governance driven by regulatory committees Board Composition Role of Non-Exec Directors Compensation Ethics Personal Responsibility on CEO/CFO Accuracy Controls

8 Recent Legal and Regulatory Response: UK July 2003 The Revised Combined Code on Corporate Governance was issued (following recommendations contained in the Higgs Report and the Smith Report on audit committees published in January 2003) July 2003 FSA will now exercise powers to arrest suspects July 2003 DTI companies will have a choice of IFRS or UK GAAP.

9 The Combined Code on Corporate Governance July 2003

10 Increased focus on Independence tests for NEDs Transparency of procedures for appointments Performance evaluation Role of the Audit Committee Time availability of NEDS Review of whistleblowing arrangements

11 Disclosure Requirements Independence tests for NEDs Transparency of procedures for appointments Performance evaluation Role of the Audit Committee Time availability of NEDS Review of whistleblowing arrangements

12 What does Good Governance really mean? Based on calculations on share price performance between May 1998 and May 2003, the 15 companies who achieved above average marks on the governance study generated significantly superior returns compared to the below average companies. On average, the above average companies achieved a share price return of over 36% over 5 years, while the below average companies achieved just over 23%. Source: Governance Metrics International

13 Annual Total Returns vs Governance Ratings 1-, 3-, 5- and 10-Year Avg. Annual Total Returns vs. Top- and Bottom-10% Companies by Overall Rating Avg. Total Return 15% 10% 5% 1-Yr. 1-Yr. 3-Yr. 5-Yr. 10-Yr. 0% 3-Yr. 5-Yr. 10-Yr. -5% -10% -15% Bottom 10% Companies Top 10% Companies

14 Annual Returns vs Director Independence 1-, 3-, 5-Year Avg. Annual Total Returns vs. Director Independence Avg. Total Return 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 5-Yr. 1-Yr. 1-Yr. 5-Yr. 1-Yr. 5-Yr. 3-Yr. 3-Yr. 3-Yr. Not Disclosed % Independent % Independent

15 International Accounting Standards Attracting investment through transparency

16 What is IAS About? A full new set of financial standards Major differences with local standards Will become the a legal requirement for all EU listed companies (and subsidiaries) to produce consolidated accounts to IAS by 2005 (2003 in Greece) More global: also affecting APAC (Australia), Africa and US are moving towards it

17 What about local standards? IAS can be used at present for Austria, Belgium, Finland, Germany IAS must be used in 2003: Greece IAS can be used should existing legislation be enacted in full: France Legislation to allow IAS is under development: Luxembourg, Netherlands IAS are expected to be introduced as national standards in the period to 2005: Denmark, Ireland, Sweden

18 However IAS cannot be used and there are no plans for it to replace national standards: Italy, Portugal, Spain

19 What about the UK? On 17 July 2003, the DTI announced that all UK companies are to be permitted to use IAS from 2005.

20 What are the deadlines? 1 Jan Jan Dec 2005 pening IFRS alance sheet for SEC registrants Any other entity quiring three years f income statements Not published Opening IFRS balance sheet (date of transition) for Most companies Recognise and measure all items using IFRS Not published June Interim IFRS reporting First IFRS annual reportin date Select policies Use standards in force at this date First IFRS financial statements

21 What s the impact? Telefonica results 2.11 billion euro profit under Spanish rules 7.18 billion euro loss under US GAAP France Telecom 2001 results 5.2 billion euros operating income under French rules 8.0 billion euro operating loss under US GAAP

22 More Examples Property and construction company profit up 8% Financial Services Company profit down by 35% Safety and Security service co profit down to zero, net assets tripled Software provider Co profits doubled, net assets up 22% Utility Co profit down by 9%, net debts up 55%

23 Impact of IAS IAS Imperative New standardised accounting rules need to be adopted New reports need to be made public Books may need to be managed simultaneously under multiple accounting standards Impact on Businesses Changes in policies, processes and system setups to comply Reported results would possibly change due to new accounting treatments leading to change in shareholder perspectives of the business Greater transparency into internal operations including all subsidiaries Will drive management direction to converge with external reporting albeit with competitive implications Labour intensive and error-prone consolidation nightmares Compliance to multiple rule-sets would impact both executive decision making and business systems

24 hat do Customers need to do now? Establish a plan of Action: Identify and understand differences IAS vs Local Revise policies and procedures Examine and critique your processes for IAS compliance Train Staff Take advice from their auditors Align internal and external reporting Assess adequacy of systems/change or re-configure Control and monitor risks

25 Reporting Impact: IAS Migrate and Unify Corporate Reporting and More New Valuation Approaches Consistency of Data from All Locations World Wide Inventory Financial Instruments Fixed Assets Employee Benefits Subsidiary Reporting Segment Reporting

26 Major Changes and Consideration Segment Reporting For each Segment, report: Primary Revenue (External / Inter Seg.) Operating Result Assets & Liabilities at BS value Assets & Liabilities at Cost Depreciation & Amortization Secondary System needs to be capable of analysing not just Income and Expense but Balance Sheet items Substantial analysis will be required if not dealt with in the underlying systems Flexibility required in rolling up balances in a variety of ways Non Cash Expenses Equity & JV Investments Inter segment Pricing Basis

27 Major Changes and Consideration Fixed Assets Valuation methods after initial purchase: Standard: cost less accumulated depreciation and impairment Allowed: revaluation method at fair value. Must be applied to all assets of a same class. Result must be applied to prior opposite reserves first, then to P&L. Could result in different asset lives in local and IAS book: Depreciable life Depreciable basis Revaluation Capitalization System will need to allow for the different treatment Reconciliation required of movements from the beginning of the period including impairment adjustments Difficult to achieve through spreadsheets or consolidation systems

28 Major Changes and Consideration Inventory FIFO or weighted average allowed by IAS Accounting treatment of reversal of write-downs in a later period is credited to income by reducing that period s cost of goods sold. Must be reported at year end Potentially the need to deal with 2 types of costing IAS Local Tax and GAAP Very difficult to handle by spreadsheet or consolidation system alone

29 How Business Systems Simplify IAS Challenges? Visibility Access to accurate, relevant and real-time information across the organization Control Centralise and secure policies, processes, and procedures Efficiency Consolidate and reconcile data quickly

30 Want to find out more? Please contact your Oracle representative or contact me directly:

31 Sarbanes-Oxley Act A Response to the Deterioration in Public Confidence

32 Sarbanes Oxley Act Focus: Quality & Reliability of Financial Information Who Needs to Comply? All Companies Issuing Securities in the United States What are the Driving Tenets? Corporate Responsibility for Quality of Statements Auditor Independence from Corporate Management Public Company Accounting Oversight Board Independence of Audit Firms Enhanced Fiscal Disclosure Objectivity and Independence of Securities Analysts SEC Resource, Enforcement and Penalty Enhancement Senate Report , Public Company Accounting Reform an

33 Sarbanes Oxley Act Impact on IT & Management Section 103: Your auditor must (and therefore, you should) maintain all audit-related records, including electronic ones, for seven years. Section 201: Firms that audit your company s books can no longer provide you with IT-related services. Section 301: You must provide systems or procedures that let whistleblowers communicate confidentially with company s audit committee. Section 302: Your CEO and CFO must sign statements verifying the completeness and accuracy of financials reports. Section 404: CEO s, CFO s and outside auditors must attest to the effectiveness of internal controls for financial reporting Section 409: Companies must report material changes in their financial conditions on a rapid and current basis. The act calls it real-time disclosure but doesn t define what that means. Computerworld, April 14, 2003

34 And.the big one Sec 906 Corporate Responsibly for Financial Reports - Failure of corporate officers to certify financial reports Whoever wilfully certifies any statement..knowing that the periodic report accompanying the statement does not comport with all the requirements shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.

35 What is an Internal Control? Providing Reasonable Assurance of: Effectiveness and Efficiency of Operations Reliability of Financial Reporting Compliance with Laws and Regulations or else Visibility, Control,, & Efficiency

36 How are Your Internal Controls? Do you have the necessary checks and balances in your processes? Are your processes transparent? Are your processes well documented? Where are your exposures? How much will it cost for your external auditors to attest to your controls? Visibility, Control,, & Efficiency

37 To Document, Test, & Certify Internal Controls Internal and External Auditors will Need: Workflow Management Tools Document Management Tools System Configuration Tools Survey Tools Procedure Documentation Tools Process Control Limits Sampling & Statistical Tools Project Management Tools Visibility, Control,, & Efficiency

38 New Product Navigating the Way: nternal Controls Manager Oracle Internal Controls Manager is a Oracle Internal Controls Manager is a comprehensive tool for executives, controllers, internal audit departments, and public accounting firms to use to document and test internal controls and monitor ongoing compliance.

39 To Document, Test, & Certify Internal Controls Oracle is Introducing: Oracle Internal Controls Manager Workflow Management Tools Document Management Tools System Configuration Tools Survey Tools Procedure Documentation Tools Process Control Limits Sampling & Statistical Tools Project Management Tools Workflow Files isetup isurvey Tutor Performance Mgmt Audit Manager Repts. Project Collaboration

40 Oracle Internal Controls Manager Solution Expose Internal Audits to Sarbanes Oxley Certifiers Host & integrate Risk and Issues Library (COSO) Compare Internal Policies to External Guidelines Turn Internal Policies into System Processes Compare Actual Practices to Internal Policies Associate processes, risks, controls, locations Highlight Application Control Points Validate Financial Values from the consolidated level to the transactional level at every subsidiary Visibility, Control,, & Efficiency

41 racle Internal Controls Manager usiness Flow Internal Controls Manager siness Flow Document Business Processes Identify and analyze all the business processes that are specific to that particular entity Establish Enterprise Structure Establish an organization structure that allows segregation of duties and alerts management of possible infringements Document Findings Document all testing procedures and the results of the test tablish ogram fice ecific audit projects can undertaken, either as cheduled activity or as result of an trigger event Conduct Assessments Conduct a survey of management on their opinion of the adequacy of internal controls Scope Audit Projects Identify the nature of the audit project, the scope of testing and resources required Test Internal Controls Test whether internal controls are operating as designed Provide Assurance Report Based o results of au projects, issue assur report Establish Risk & Controls Library Create a library of all the recurring risks that can be associated to each business process within the entity Enterprise Roles CFO Internal Auditor CEO Controller Legal Counsel Independent Consultant Recommend Changes Propose new interna controls or modify co in place to mitigate r Tutor, Financials, Internal Controls Manager

42 Managing the Risk and Control Library

43 Risk Library: Deconstructing Processes

44 Risk Library: Process + Risk + Control +

45 Risk Library: Controls & their properties

46 Conducting Assessments

47 Risk Assessment Questionnaire

48 eb Based Surveys

49 Assessment and Evaluation

50 Testing Controls

51 Testing Controls

52 Assurance Reporting

53 Assurance Reporting

54 Assurance Reporting

55 Assurance Reporting

56 Oracle Internal Controls Manager Benefits More Efficient Internal Control Testing Exposing the native controls of the applications in an auditor s context Higher Certainty in Your Risk Assessment Providing verification mechanisms as part of the applications themselves Lower External Audit Verification Costs Allowing external audit independent verification of the same controls Visibility, Control,, & Efficiency

57 What Analysts and Partners Are Saying "Businesses are scrambling to define the new requirements for compliance and governance, and there is a need -- now more than ever -- for companies to look to technology to assist in their compliance efforts." Lee Geishecker, research vice president, Gartner, Inc. "When combined with third party assistance relating to systems processes and controls, Oracle Internal Controls Manager provides companies a framework for Sarbanes- Oxley compliance, and helps monitor audit and control activities on an ongoing basis." Jim Barrett, partner, PricewaterhouseCoopers Security & Privacy Practice.

58 What Our Customers Are Saying Oracle's approach to business systems involving consolidation of data and shared service centers assists us in meeting our corporate governance goals -- Phil Chronican, Chief Financial Officer, Westpac Banking Corporation In a highly regulated sector such as reinsurance, a robust corporate regime with effective financial system controls was a clear priority. The goal was to increase our control of finances and to speed our processes Oracle is playing an important role in that process. -- Liz Catchpole, Chief Financial Officer, SwissRe Life and Health Business Group With Oracle in place, our management now has a much better view of the company. We only need to enter information once and can then easily monitor and keep track of everything we do. -- Roberto Albert, Treasurer, Duferco

59