Many executives look at the recent U.S. and Canadian security commission compliance rulings (Sarbanes-Oxley in the U.S. and Bill198 in Canada) as a necessary evil pill that defocuses executives and their teams from driving their respective businesses forward. But is it? How can a company leverage the digestion of this evil compliance pill into something more palatable? Maybe even do the unthinkable and turn the exercise into one that creates customer, shareholder and employee value!

As background, the Sarbanes-Oxley/Bill 198 rules apply to all public companies trading on U.S. and Canadian exchanges. For those trading on U.S. exchanges (Nasdaq, NYSE), Sarbanes-Oxley rules will apply and for those trading on Canadian exchanges (TSX, Canadian venture), Bill 198 rules shall apply. Note that a company generating business in the U.S. but trading only on the TSX would be subject to Bill 198 rules only. The content of both acts focus on documenting and testing internal and disclosure controls for each business process in the company. All areas of the business are “tested” from the accounting transactions to computer systems to overall corporate governance. While the content of Bill 198 is consistent with the direction of Sarbanes-Oxley rules, the language in Bill 198 is relatively softer. However, we expect that further amendments to Bill 198 over the near term will bring it more in line with Sarbanes-Oxley rules.

Get some leverage

Given the magnitude and importance of this exercise and the potential conflict with other business priorities of North American businesses, how can companies leverage this compliance task?  Consider the following…

After a company has completed the compliance exercise, their internal controls including corporate governance will have been strengthened, thereby reducing business risk. This is a good thing! Also, remember the hype (and grumbling) around ISO certifications? Suddenly we started to see ISO banners appearing on buildings. They have become sales and marketing tools for customers, shareholders and employees. Could this be the next big thing for the first wave of Sarbanes-Oxley/Bill 198 compliant companies?

Consider the expense side of your business and what will happen as you streamline processes and enhance the underlying infrastructure. The documentation and enhancement of disclosure and internal controls will help a business identify opportunities for resource realignment, outsourcing/ insourcing, centralizing/decentralizing and process re-engineering. Improved and more reliable reporting of financials will provide enhanced management insight into the operations of the business and more efficient quarterly and annual financial audit processes.

Furthermore, consider how a solid infrastructure underlying your business processes will aid your future growth/expansion plans. Also, a merger or acquisition and the corresponding integration of two companies will be more likely to succeed with the compliance exercise completed.

Priority for IPOs

Any private companies contemplating an initial public offering (IPO) should consider the compliance project as soon as possible. Our discussions with companies moving down the IPO path suggest that CFOs and other executives are not fully aware of how Sarbanes-Oxley/Bill 198 rules will apply to their companies once the IPO process is complete. In particular, the company will be subject to the same rules as any other public company with no additional grace period. On the positive side, however, even before the commencement of the IPO process, a company can benefit by employing compliance exercise tools to improve their internal controls, become more efficient, increase customer satisfaction, etc. Existing and potential investors, customers and employees will see the finished product as a well-managed business, thereby increasing the intrinsic value of the firm. Sarbanes-Oxley/Bill 198 compliance rules are, quite simply, all about doing business in a better way.

Another consideration is to link the timing of the compliance effort with ongoing or upcoming initiatives to maximize the potential benefits and minimize costly re-work. If, for example, a company has decided to purchase a new financial system, significant effort would be required to understand and map existing processes and system requirements. The design and implementation of this work should be done in conjunction with Sarbanes-Oxley/Bill 198 compliance work. This will maximize the cost effectiveness of the combined initiatives and eliminate potential re-work.

As SEC Chairman William Donaldson remarked at the National Press Club in July 2003, “If companies view the new laws as opportunities – opportunities to improve internal controls, improve the performance of the board and improve their public reporting – they will ultimately be better run, more transparent, and therefore more attractive to investors.”
 

Massood Oroomchi and Alec Moore are partners in FinEx Consulting Group Inc. The company provides leadership and support to private and public firms in Sarbanes-Oxley/Bill 198 compliance implementation. They also provide guidance to companies in the areas of Mergers and Acquisitions and Business Planning. For further information, please contact (519) 880-0285 or HAmoore@sympatico.ca.  Alternatively, you may contact Eric Sundin at (519) 749-9319 x1300.  Email: eric.sundin@dataperceptions.com