Financial Reporting Issues

Two headlines sum up the coming regulatory deluge that Wall Street and Main Street alike can expect from our Federal Government.

The first, from the Washington Post, states, “New SEC Chair Off and Running With Enforcement Measures.” The second, by contracting specialist Eric Sobota in the Federal Compass, notes, “Effective Investigations Key to Compliance with New FAR [Federal Acquisition Regulation] Ethics, Compliance and Mandatory Disclosure Requirements.”

Katrina and Iraq War government contracting fraud, coupled with myriad maladies on Wall Street, have jumpstarted the regulation machine. With the new Obama Administration and a Democratic Congress, expect it to accelerate to warp speed.

To avoid being run over by it, get on top of it. Get ahead and stay ahead of this new regulatory business environment by reviewing every aspect of your company’s accounting, tracking, and reporting structures—in departments ranging from accounting services to CRM.

If you don’t do it now, here’s a taste of what you may be subjected to later:

• From the Washington Post SEC story, quoting incoming SEC chairman Mary Schapiro: “The new chairman also said she would speed up the process of launching formal investigations into potential acts of corporate crime… ‘Those who break the law and take advantage of investors need to know that they will face an unrelenting law enforcement agency in the SEC.’”

• From contracting specialist Sobota: “Contractors must now deal with increased oversight and requirements that many are not well-prepared to face…The new rules carry a heavy penalty for noncompliance…”

Think you’re immune if you don’t contract with the Federal Government or have much interaction with SEC-related realms? Think again. Quoting the Post story, “Schapiro also said the Financial Accounting Standards Board, the independent panel that sets accounting rules for U.S. companies, is exploring changes to rules that require firms to mark the value of assets on their balance sheets to whatever the market is paying.” Don’t expect FASB accounting services reforms to stop there.

Sobota notes, “…the Federal Government is becoming increasingly impatient with the perceived lack of effort exhibited by contractors towards meeting their procurement integrity obligations. We advise contractors to take a fresh look at their practices to ensure they are prepared to meet this new heightened level of scrutiny.” You may not contract with the Federal Government, but expect scrutiny nonetheless.

In the accounting software realm, start your review by checking the following:

1. How does your accounting system software provider track regulatory updates?

2. How fast can accounting system software be updated to comply with new regulations and requirements?

3. How will you be notified of accounting system software updates? Will you need to be proactive and check the accounting software purveyor’s website or other information repository? Or will your accounting software provider notify you in a timely manner?

4. How will needed accounting software updates be available? Will the accounting system software user have to go to the website to request or download new accounting solutions updates, or will the purveyor push these updates out to their subscribers? If it’s the latter, how—a link to a website download area, sending of a CD, other processes?

5. Besides actual accounting software updates, how proactive will your purveyor be in keeping you “in the know” about regulations and requirements affecting the accounting services world? Again, will these be pushed out to you, or will you need to go get them on an accounting software website?

These are issues you must become knowledgeable about, to make sure your accounting services can handle the coming deluge. For those inclined toward procrastination, just remember that if you stick your head in the sand now, it’s going to be that much harder to get out later—once the deluge has turned it into quicksand.

So, I have been writing about the importance of accounting software that can ensure compliance with accepted practices and regulations. Then, along comes Bernard Madoff, who’s allegedly able to circumvent compliance controls and implement a $50 billion Ponzi scheme.

It certainly validates the question of how effective any accounting software can be in ensuring accurate and above-board practices. Of course, it also adds fuel to the regulation fire that inevitably will heighten levels of control and reporting—and consequently the need for secure and sophisticated accounting solutions.

A Dec. 23 article in the Wall Street Journal frames the debate: “Questions about compliance practices at Bernard L. Madoff Investment Securities LLC are troubling many securities industry observers, as losses related to an alleged $50-billion Ponzi scheme associated with the firm’s investment advisor arm continue to impact a widening international circle of investors. ‘How could you have this massive scandal going on in a firm that’s adopted adequate procedures? That’s what compliance is all about,’ says James A. Fanto, a professor at Brooklyn Law School in New York and author of Broker-Dealer Law and Regulation.”

So, what are some lessons to be learned from all of this in the world of accounting solutions?

One, hire honest people. No accounting software, no matter how robust or well-configured, can function flawlessly if the people operating it—or their bosses—have crooked intentions. Just because you have excellent accounting system software doesn’t mean you’re totally protected. People still matter—a lot.

Two, the importance of adequate accounting software cannot be overstated. Notes the Wall Street Journal article, “…investigators issued a subpoena to David Friehling, a New City, N.Y., accountant who audited the Madoff firm’s financial statements, and are seeking documents related to the Madoff firm going back to Jan.1, 2000. Friehling has until Dec. 29 to fulfill the request.” Do you think for a moment that this accountant wants to be caught with his figurative “accounting software pants” down? Obviously, sophisticated, up-to-date accounting system software would aid his cause.

Three, when accounting practices and reports are challenged, how many people want to spend inordinate amounts of time trying to comply? The right accounting software can be a huge time-saver in many types of situations. In some cases, it can be a potential “livelihood-saver” as well.

You may have heard increasing discussion of international versus US accounting standards. Given proliferation of international trade, now coupled with an international financial crisis, it’s only logical that domestic and international accounting standards would invite side-by-side comparison.

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are holding round-table discussions to address “financial reporting issues highlighted by the global financial crisis…” (source: IASB Nov. 3 press release).

The release elaborates, “The round tables are intended to help the board identify any accounting issues that may require the urgent and immediate attention of the boards to improve financial reporting and help enhance investor confidence in financial markets.”

Even if you own a US company with no direct international ties, these discussions ultimately may impact your accounting software’s reporting requirements and standards.

I know. Many of you are asking, “I have plenty of time before this affects me, so why concern myself with it?”

Here’s why. There’s a perfect regulatory storm brewing in the accounting services sector. First, there’s the domestic quagmire created by the current financial crisis. Second, the ongoing comparison and contrasting of US and international accounting services standards will produce changes regardless of the present economy. Third, a new Administration and Congress will want to appear gung-ho about undoing harm created, in part, by the sub-prime mortgage mess.

And, you don’t think your accounting system software will be scrutinized? As the pendulum swings quickly toward more government oversight and regulation, no one is immune. By way of analogy, think airline security. No matter who you are or what you do, you can’t carry that unsealed bottle of water aboard.

Given these circumstances, make sure your accounting software is heavyweight enough to address any or all of these accounting services issues. And do it now, not when new regulations are being implemented—and you’re already behind the proverbial eight ball.

So, how do you know if your accounting system software—present or prospective—
is safe and sound? Start by asking the manufacturer for specifics of present and planned accounting software features to address today’s regulations and tomorrow’s changing accounting services landscape. Look for more than reassurance—look for substantive answers that demonstrate knowledge of, and ability to deal with, what’s coming regulation-wise.

And, if that lower-priced accounting software doesn’t quite seem to measure up, move up to more robust and scalable accounting solutions that can take care of your needs now and as you move forward.