Brian Hall, the finance practice leader at the Hackett Group, a strategic advisory firm and Answerthink company, shared the results of a recent report from the firm about compliance costs. The report is based on the firm's 2007 Finance Book of Numbers, a culmination of a year's worth of research that highlights key takeaways for chief financial officers. Hackett expected compliance costs to start to drop for all companies, now that Sarbanes-Oxley marks five years. "We were expecting that overall burden of the project, as it were, the compliance costs, to come down, and what we're finding at leading companies, it certain did, but for [others], it didn't." Hall spoke with Consulting about the research and life in a post S-O world. Consulting: You were surprised by the continued expense related to Sarbanes-Oxley. What did you expect to find instead?
Hall: We expected the gap to be somewhere in the 20 percent range, not in the 50 percent range. This is a problem because when we take into account the levers of what should drive an audit fee, one of the things that we still were not able to explain was what Firm A pays for their audit and what Firm B pays for their audit technically should be the same if we isolate for complexity. We're not finding that to be the case, and so what appears to be the case is as much as anything, your ability to negotiate with your auditor or what you paid last year are far better determinants of your audit fee than what we would think of as the drivers of the audit fee.
We said, "OK, this is a compelling question." We're putting out there a market available performance study* for any organization to go through and put in their characteristics to see what their insights or what things they might be able to use to have a fact-based discussion with their audit team.
Consulting: What would you advise a company who is struggling with Sarbanes-Oxley costs?
Hall: I think there are three very, very significant things that we see. Sarbanes-Oxley is a great canary in the coal mine, that if my compliance cost is out of line or high, more likely than not, I'm a poor performer everywhere, and this is simply an indicator. And I'll give you an example. Let's take two global giants. Global Giant A performs all of their accounting work in three shared services locations around the world. Global Giant B does all of their accounting work in 180 locations around the world. Global Giant B is going to pay a tremendous penalty for that fragmentation versus Global Giant A because they've only got to review and audit the work at three locations, versus assuring, which is the whole premise of Sarbanes, that the accuracy of the financial statements are in place at 180 locations. So there are three tenets that we continue to see that drive improvement into the finance organization. The first is standardize. The second thing is simplify, and the third component that we see is automation. If we look at automated control in Sarbanes, you only have to test it one time. What we find is the leading companies in this space have a fraction of the manual controls that [others] do. There's no secret sauce here.
Consulting: How do you think the CFO perspective would change had there never been Sarbanes-Oxley?
Hall: That's a great question, and we can probably have a two-day discussion on—"Did Sarbanes actually improve the compliance nature of the world?" But I think at the end of the day, if you think about the Herculean effort that organizations went through to accomplish Sarbanes, everyone was under a time constraint. So what I think we saw is that organizations that maybe did it in a sloppier fashion, that vast majority [still] achieved compliance. What we're saying today is that they've introduced these processes in peer companies—or median companies—that didn't exist before, so there's this ongoing tax, as it were, from Sarbanes. In the world-class organizations, it was more likely than not already part of the process.
Consulting: How do you define a world-class organization?
Hall: We use something called a Hackett Value Grid, and we use a series of effectiveness measures, approximately 14 measures of effectiveness for an organization, 15 measures of efficiency, one of which is cost, and we take whole finance organizations in this case and we look at the organizations that achieve the upper quartile in both. Hackett's the only firm to my knowledge that really brings an empirical [value to it].
Consulting: How many organizations are defined as world class?
Hall: Typically 10 percent of any population is in that bandwith.
Consulting: Did Sarbanes-Oxley change how you categorize companies?
Hall: Actually, no. Compliance has always been a part of our taxonomy. If you disclose a material weakness, that has added to really the derailers of effectiveness, and that's a new thing that came about with Sarbanes that wouldn't have been part of the methodology before. So it used to be that if you had to restate earnings, that's a disqualifier for world class, as it rightly should be, because you've had a huge failure in your process environment. Now it's also if you have material weakness as well.
*Hackett's study is available here.
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