The run-up to the adoption of International Financial Reporting Standards (IFRS) in the United States will give financial executives an opportunity to improve the effectiveness and efficiency of their organization because, as part of the transition, many will need to make some fundamental choices about the IT systems they use to support their operations. These include the ERP/accounting systems and the software they use to perform their statutory consolidations. The question is – will they take advantage of the opportunity? Probably not – if history is any guide.
The introduction of IFRS will not necessarily require companies to buy new software, but some companies will find replacing some software, consolidating their vendor base (larger companies typically have ERP software from multiple vendors) and adding some financial data management capabilities (such as master data management) will be cost effective moves. Since even without the change in accounting standard these might be a good idea within the next 3-4 years, and because the phase-in for US companies will begin within this period I think corporations ought to have a long-term IT capital spending plan that factors in the requirements for IFRS. For most companies, this is likely to be a departure from the year-to-year approach they now use. CFOs and other financial executives are loath to replace their accounting systems because it is akin to having a root canal procedure: potentially painful and always expensive. With the shift to IFRS, companies will benefit from sorting out how changes in their accounting environment can best be handled by their IT systems. The point is – it’s a lot easier to envision a better (if not optimal) finance IT infrastructure for IFRS and then gradually implement it over the next several years than to make a series of ad hoc decisions that may only accidently turn out to be the right choice.
Yet, it’s hard to be optimistic that many (let along most) finance departments will take this path. A majority of companies dragged their heels in confronting the demands of Y2K and the Sarbanes-Oxley Act. Yet despite these still-fresh memories, current polls of US-based corporations indicate only a relative handful have started their migration to IFRS and only a few more plans to start in the near future. For US public companies with 1,000 or more employees, further delay in starting to plan both the accounting and IT ramifications of the shift to IFRS would be an expensive mistake.
Complicating all of the IT decisions is the reality that different companies will have very different needs depending on their existing infrastructure and – crucially – how their accounting processes will change in the switch from US-GAAP.
Finance executives that are looking at the accounting treatment implications of the switch may not be asking the necessary, parallel questions as to how best to support these changes with their IT systems. The shift from a rules-based standard (US-GAAP) will put a premium on having high-level financial controls in order to cut down on the amount of external and internal auditing that will happen when a principles-based system (IFRS) collides with manual processes. For example, only about half of the companies we benchmarked had automated at least some their order-to-cash or requisition-to-pay processes. However, this sort of automation makes it far easier to ensure that accounting treatments consistently follow acceptable principles, especially in the “downstream” accounting processes that take place during the close and the close-to-report phases of the accounting cycle.
Finance executives ought to manage the shift to IFRS as a multi-year project. There are things that need to be done this year, the next, the following year and so on. The exact timing of these events will be fluid, of course, but the shift will happen. Planning this project will save time and money. Planning the IT requirements that support the shift can also save considerable time and money. The reactive approach to these sorts of events, which has been typical of finance departments over the past decade, will constitute mismanagement.
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Robert D. Kugel - SVP Research