Financial processes haven’t kept pace with rise in risk, survey of executives reveals

Ethical MarketsReforming Global Finance

For immediate release: Tuesday, January 20th 2009

Dangers from incomplete, inaccurate or uncontrolled data may rise as downturn deepens, says Economist Intelligence Unit report

Although CFOs have been struggling to automate and streamline financial processes for over a decade, the global downturn is adding a new dimension to these efforts: the need to embed rules and controls within processes in order to control risk. So suggests a survey of 485 senior executives across nine industries summarised in a research study from the Economist Intelligence Unit titled Managing risk through financial processes: Embedding governance, risk and compliance. The study, which examines how companies can use governance, risk and compliance (GRC) policies to adapt to emerging risks, was sponsored by SAP.

Process automation has historically been seen as a way to control costs. Executives are now starting to see it as a way to improve the quality of decisions as well, according to the survey. Seventy-three percent of respondents reported that when risk evaluations were included in their processes, the quality of decision-making improved.

“Lenders and rating agencies are scrutinising companies as never before, restatements are on the rise, and the economic downturn is expected to increase the motivation for individuals to commit fraud,” said Dan Armstrong, the editor of the study. “Any actions that integrate financial reporting, compliance and risk monitoring into daily operations are going to help to mitigate those risks.”

“In the current environment, it’s more important than ever for executives take a combined approach to financial management and GRC,” said Sanjay Poonen, general manager and senior vice president, Performance Optimization Applications, SAP Business Objects. “To improve performance, business decisions should go hand-in-hand with a deep understanding of any risks that might inhibit success. Using this kind of risk-aware approach will give businesses the holistic insight they need necessary to execute on their business strategy.”

Other key findings of the study include:

• When asked about problems with financial processes, executives still focus on costs. Too manual, too complex and too inconsistent – those are the top three problems cited by respondents asked about their current financial processes.
• However, risk- and compliance-related concerns are also prominent. Three in ten respondents said financial processes suffer from a lack of transparency and accountability. Others cited such non-cost-related issues as an excess of restrictive controls and difficulty in documenting audit trails.
• Many executives say that GRC initiatives reduce the number of poor decisions. Fifty-six percent said that prioritising controls by the level of risk resulted in fewer poor decisions. For increased automation of internal controls, the figure was 49%; for realigning of segregation of duties, 41% reported fewer bad decisions.
• GRC investments have a significant impact on control errors. Most respondents reported that investments in automation, efforts to reduce redundances, realigning of segregation of duties and prioritising controls based on risk assessments all led to a reduction in control errors.
• Audit costs were the most resistant to improvement. Only one-quarter to one-third of respondents indicated that various GRC investments resulted in lower audit costs. A smaller but significant proportion indicated that these investments resulted in higher audit costs.
No amount of process automation eliminates the need for judgment. Senior executives still need to articulate policy; managers still need to set the parameters that will drive risk management and compliance. However, automated processes tend to be easier than manual processes to modify, which helps organisations to adapt quickly to changes in business conditions, regulations or corporate policy—many of which carry risks that are not immediately obvious. Companies can be more proactive in addressing potential risks and more quickly mitigate existing risks, leading to less volatility and greater sustainability in financial results.

Managing risk through financial processes:
Embedding governance, risk and compliance
is available free of charge at: www.eiu.com/sponsor/sap/GRC/

Press enquiries
Joanne McKenna, press liaison, +44 (0)20 7576 8188; [email protected]
Dan Armstrong, Senior Editor, Americas, Industry and Management Research, +1 212-698-9710, [email protected]

About the survey
In a September 2008, on behalf of SAP, the Economist Intelligence Unit conducted a global survey of 446 senior executives from nine industries on financial processes and attempts to improve them. Survey respondents came from the finance, risk, general management, strategy/business development and information technology functions. They answered the survey from locations around the world, with one-third from Western Europe, 20% from North America, 27% from Asia-Pacific and the rest from Eastern Europe, the Middle East, Latin America and Africa. Seventy percent of the companies had annual revenue over US$500m, and 28% had revenue over US$10bn. Over one-third were at the board or C-level, and another 15% were at the SVP level. The industries covered were chemicals, consumer goods, energy, financial services, the public sector, life sciences, IT and retailing.

About the Economist Intelligence Unit
The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of more than 650 analysts and contributors, we continuously assess and forecast political, economic and business conditions in more than 200 countries. As the world’s leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.

About SAP
SAP is the world’s leading provider of business software, offering applications and services that enable companies of all sizes and in more than 25 industries to become best-run businesses. With approximately 76,000 customers (includes customers from the acquisition of Business Objects) in over 120 countries, the company is listed on several exchanges, including the Frankfurt stock exchange and NYSE, under the symbol “SAP.” For more information, visit www.sap.com