Sarbanes-Oxley Act's impact on annual reports and strategic planning processes

Annual Reports vs. Strategic Plans

It is a new era of transparency and compliance in accounting practices within public and private companies, and this is completely changing the role of annual reports and strategic plans. The Sarbanes-Oxley Act (SOX) of 2002 redefined and re-ordered the financial systems and processes of American-based companies (Jain, Kim, Rezaee, 2008). As a result, there is a high priority placed on risk mitigation and the development of strategic plans that underscore agility over highly structured approaches to capitalizing on market opportunities. In conjunction with these dynamics there is a high reliance on business intelligence, Enterprise Performance Management (EPM) and the use of dashboards and scorecards (Othman, 2008). The integration of annual reports, which by their nature define accounting results, is tighter than ever with strategic plans. The need for compliance, risk mitigation due to heightened economic uncertainty, and the continual pressure from shareholders and boards of directors to deliver successively greater results force companies to show greater integration between annual reports and annual reports than has ever been the case in the past. The purpose of this paper is to evaluate the differences between the systems and processes put into place to support annual reports and those needed to sustain and ensure the accomplishment of strategic plans. The greatest variation is in the processes used for creating annual reports vs. initially creating then executing strategic plans. The reliance on cross-functional teams is significant in executing strategic plans while systems coordination is critical for creating accurate and timely annual reports (Li, 2008).

Reconciling Planning and Reporting Processes

What is most significant is the variation between annual reports and strategic plans are the processes used and timeframes defined. At a fundamental level, the creation of an annual report requires a completely different perspective of time relative to the development, planning, execution and managing of strategic plans over longer time horizons. Be definition annual reports are often defined in three-month time frames, representing the financial quarters companies operate in. The accumulation of results for financial reports also puts a very high level of urgency on disclosing financial and strategic events within the given financial reporting period (Banghoj, Plenborg, 2008). Compounding this time pressure is the requirement on publicly-held companies to report any and all financially significant events per Section 404 of the SOX Act of 2002 (Jain, Kim, Rezaee, 2008). The demands and requirements for publicly-held companies to report on financial events and in the precise manner as defined by the SOX Act of 2002 are redefining processes and making them even more short-term and urgent in nature. As a result of the needs for disclosures and compliance, entirely new processes are now in place in every publicly-held company to meet the many requirements for disclosure and reporting. These processes include in many companies include redefining Enterprise Resource Planning (ERP), Accounts Payable, Accounts Receivable, order management, invoicing and financial systems. Taken together the redefining of the underlying systems necessary for creating financial statements that align with the more rigorous compliance and disclosure requirements are forcing many companies to invest heavily in Business Process Management (BPM) and are as a result re-engineering their entire back-office systems. The costs of redefining these systems are so significant for smaller, public-held companies that many consider going private or delisting their securities to alleviate the burden of having to comply with Sarbanes-Oxley requirements. What emerges from an analysis of the processes that are put into place to ensure a company can produce annual reports on a consistent basis that are in compliance to Sarbanes-Oxley are entirely new measures of performance as well (Othman, 2008).

As the underlying processes are modified within many companies to produce annual reports that provide greater levels of compliance and disclosure, it systems must also be significantly changed to better support these new requirements. Increasingly, it systems is the first point of tight overlap between the processes required for producing accurate, complaint annual reports and also defining feasible annual reports as well (Liew, 2008). Starting from the redefining of systems for better alignment of compliance and disclosure, the majority of organizations are also looking to streamline these processes to make them more efficient and focused. An example of this is the overlap of the processes within a distributed order management system. For accounting and financial reporting the processes must be synchronized with the broader Accounts Payable and Accounts Receivable, Logistics, Supply Chain Management (SCM), and Pricing databases. Given the need for high levels of transparency and compliance that annual reports need to adhere to, all of these systems must be tightly integrated with one another if an organization is to survive an audit for example. Comparably speaking, strategic plans also require this same level of systems and data integration to ensure that accomplishable and realistic strategic plans can also be created. In this respect, it systems are the area in companies where the overlap between annual reports and strategic planning is the greatest. it's important to realize that the integration at the back-office level of companies is essential for annual reports and strategic plans to in fact be synchronized with one another. These systems must be the unifying source of information and data analyze that drives each of these major initiatives within companies. Accuracy, auditability, and timeliness of data are essential for both annual reports and strategic plans that can be measured and continually monitored until accomplished.

IT systems are often seen as the dial tone of entire enterprises, where processes in place already are merely automated. The truth is that only after processes are streamlined and made more efficient can both annual reports and strategic plans be accurately and reliably created and maintained. What makes the development of it systems to support both annual reports and strategic plans is the significant cultural change required by organizations to support new processes as well (Mohan, Xu, Ramesh, 2008). When processes and it systems change within any organization, cultures also change significantly. The essence of how it systems vary by their support of annual reports vs. strategic plans begins at the process-level followed by change management strategies necessary to make each initiative successful (Mohan, Xu, Ramesh, 2008). How annual reports vary from strategic plans in this regard is in the severity and urgency that the former's requirements bring onto companies quickly. Publicly-held companies face this with a very high level of urgency associated with the process-to-it systems transformation, while privately held companies have greater flexibility depending on their boards of directors and owners. The urgency in strategic planning however is not as acute or concentrated, and instead first focus on the accuracy and validity of the data. Second, strategic planning requires these systems are designed with underlying supporting processes to support the creation of dashboards and scorecards, enabling the tracking of strategic plans' progress (Othman, 2008).

In reconciling the processes and it systems used to support annual reports and strategic plans, the underlying foundational differences between each of these initiatives are apparent. The auditability, accuracy, veracity and validity of systems and processes are critical in creating annual reports, while the long-term process modifications necessary to make strategic planning processes successful.

Conclusion

The variations in time horizons for creating annual reports vs. strategic plans are much more systemic and process-based than many realize. Depending on the industry for example there can be significant variations in the perception of time within an accounting department relative to R&D and strategic planning departments as well. What exacerbates the time variations is the level of change required with each strategic planning iteration or cycle, as greater levels of collaboration and coordination are needed the faster the R&D and strategic planning cycles are. In addition, the perception of financial statements being short-term and strategic planning being long-term is only partially correct. For financial statements to be accurate and in compliance to the SOX Act of 2002 there are massive process and it system changes required, with many companies taking over 12 to 18 months to get these systems in place. When one considers the systemic, underlying dependencies of creating accurate and auditable financial statements relative to the strategic planning process, it becomes clear there is much more coordination and synchronization than initially is seen just from the publish date of these documents.