The SEC recently fined company MetLife for Internal Control Failures. For those of you not tuned into finance news, that might not seem particularly fun. And it isn’t. But paying fines to the SEC? That’s even less fun. Here’s the deal with Internal Control Failures and how these companies messed up. If you already know about Internal Controls and the repercussions of their failures you can jump down to the “Recent News” section.

What are Internal Controls Over Financial Reporting (ICFR)?

Well, let’s start by defining Internal Controls. Every company has them, a set of procedures that ensure compliance with their policies. While there are several types, the Internal Control Failures we’re talking about in this post are specific to a company’s financial reporting.

In 2002, Congress passed the Sarbanes-Oxley Act (SOX) in an effort to decrease corporate fraud. Remember the Enron scandal? This was essentially a response to that. It set up guidelines companies had to meet, guidelines that made it harder to commit corporate fraud. The SOX also put the SEC in charge of outlining how public companies had to comply with these new rules.

So what are Internal Control Failures?

Internal control failures are what happens with the internal controls a company has are flawed, so flawed “that a material misstatement in a company’s financial statements will not be prevented or corrected.” Examples of a material misstatement include inadequately prepared employees preparing financial statements, not correcting account balance errors, and personnel holding positions that conflict with compliance.

When someone notices that a flaw is possible in a company’s ICFR, it must be reported immediately. If they don’t, the company can face fines from the SEC. However, there is some wiggle room in the law.

Likelihood and Impact

Your company wants to do the right thing. But they also don’t want to suffer undo consequences. So they double checks their work, internally or by bringing in an auditor. The goal is to establish two things: how likely the flaw is to cause a financial misstatement and how much that would impact the business.

Recent News

The SEC cracked down on MetLife because, for over 25 years, the company sent no more effort than two mailing over five and a half years apart to determine is customers were still alive. This allowed the company access to money that might have otherwise been used to cover claims. While MetLife paid 10 million, they are far from the only violators.

In the past three years, four companies were made example of by the SEC. Specifically, the government agency called into question the adequacy of companies Internal Controls. The companies in question did share that there were material weaknesses, but as in some cases they happened year after year, they weren’t doing enough about it. The SEC made it clear that penalties would be enforced until proper their ICFR’s were fixed.

What should your company be doing about this?

The SEC had set a precedent of tacking on the ICFR violations when a company was found at fault of other financial misconduct. These recently announced violations make it clear that ineffective ICFR’s are enough of a reason for the SEC to impose fines and pursue legal action. Granted, these companies took as many as seven years to fix their issues. But that’s no guarantee for respite if a company has only been offering material misstatements and doing nothing about them for fewer years.

Another way to ensure your company avoids internal control failures? Making use of use of products and platforms that provide a clear process and record. Take mileage reimbursement. There can be a lot of disparate, moving parts in a reimbursement process that isn’t built around a platform. Our platform ensures there’s a process to follow and a record for fair and equitable reimbursement. Whether these are being scrutinized by an auditor or the government, these pieces are something every company wants to be protected by.

Interested in more Finance related content? You can find it here.

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Looking back on the discussion points from these events, the recurring themes were speed and efficiency. The mantra at the FinancialForce conference was “Speed is the new currency.” These discussions got me thinking about how an agile framework can be applied across an entire enterprise. When the Finance team is operating with an agile mindset, it operates more efficiently and finance leaders make well-informed decisions more easily.

What it means to be agile

Agile is a software development methodology, which focuses on continuous evolution and rapid iteration and feedback loops to drive innovation. The idea of being agile is related to how a business operates in terms of speed and agility.

Here at Motus, we’ve implemented agile frameworks across our technology teams to adapt more quickly and move faster. Agile frameworks allow for prioritizing tasks, dealing with unforeseen roadblocks and being able to adapt to meet deadlines for complex projects. As a result, our technology teams provide continuous improvements to our platform through short sprints, which enables us to deliver increased value to our clients.

Applying Agile to the Back Office

Agile frameworks are not only useful for development teams. These methods can be applied across the business, including the Finance team’s approach to reporting and analytics. From my perspective, being agile is a combination of interconnecting these different tools that enable teams to move much faster with the ability to close, report and then layer on additional analytics to produce predictive insights to the finance leader.

At Motus, we’re taking steps to be more agile by interconnecting our data across the business and analyzing the aggregated data to iterate more quickly and speed up the decision-making process. We’re able to get feedback more quickly and either move forward or adapt based on the findings. This is a challenge many finance teams are presented with when trying to uncover ways to be more agile. In fact, an IBM Study of CFOs and senior Finance professionals found that “there are large gaps in most Finance organizations between the importance placed on delivering insight and their ability to deliver it.” The IBM research further states that “inconsistent tools/applications and fragmented information” are the reasons for these information gaps.

Connecting the Data

The first step towards rapid analytics is to examine how your data systems are set up across your business to ensure you can aggregate information across the enterprise. A key advantage of using cloud-based tools and leveraging APIs (Application Programming Interfaces) is that you can decouple suites of software and get the point solutions that work best for your team.

For example, at Motus, our agility comes from how we’ve architected our data systems with various cloud solutions, taking advantage of APIs and ETL tools to pull data from our operating platform, CRM, financial management and accounting system (FinancialForce) into our cloud-based forecasting and budgeting system (Host Analytics) to calculate KPIs and model different scenarios. Our last step is to aggregate all of this data into a system like Domo, that presents it back in a holistic view to myself and the executive leadership. We’re still in the early innings of this transformation but it has definitely shifted our focus from historical reporting to providing valuable analytics.

As businesses strive to be more agile to compete in the market, they’re looking to layer on other third-party business intelligence sources as a competitive advantage. At Host Analytics World, they pointed out their integration with Prevedere as part of this initiative, where their solution takes macro financial trends and applies them against corporate data to reveal correlations. For example, comparing marketing to sales performance and adapting the strategy based on those insights. Systems like Prevedere offer the capabilities to reach beyond your own data and provide predictive insights to finance leaders, enabling them to make more accurate forecasts and business decisions.

This is an exciting time for Finance. The digital transformation that has taken place across the enterprise has arrived in the back office. By leveraging SaaS solutions designed specifically for Finance teams, CFOs can position their businesses to move quickly.

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