IT DIRECTOR GREG DOVER wants to get the Village of Bolingbrook, Ill., ready. In the aftermath of several corporate financial scandals, private sector companies are scrambling to meet stricter accounting rules required by the Sarbanes-Oxley (SOX) Act. Recently, the federal government has imposed similar guidelines on federal agencies, and Dover figures local and state governments are next.
Dover’s already installed a new enterprise resource planning (ERP) system with accounting software that can address the type of recordkeeping that is required by Sarbanes-Oxley. Dover also purchased a new e-mail server and has plans to add storage capacity, so he can archive all e-mail correspondence by his town’s employees—another requirement of the law. If and when his community needs to comply with any SOX-like regulations, Dover plans to be technologically prepared.
“Most city governments are reactive in nature,” he says. “When the gas line bursts or there’s a pothole, that’s when you do something. I am a big proponent of being proactive, pushing the envelope and having the systems in place to fulfill whatever new policies and requests come around.”
Some state and local governments have already begun examining their accounting practices and are even considering adopting SOX’s internal control requirements as best practices for their organizations, says Nancy Valley, partner and national public sector practice leader for KPMG LLP, an audit, tax and advisory services firm in New York.
For many jurisdictions, the driving force behind their review of accounting practices is the discovery that they don’t have uniform policies in place among their many agencies or departments. Some are exploring SOX-like accounting rules because they want to adopt the highest possible standards. Other jurisdictions are doing it because they realize that the federal government may impose stricter internal control standards on local and state governments, Valley says.
In addition, bond rating agencies—which provide information for municipal bond holders to gauge the financial health of jurisdictions—have begun asking local and state government entities about the strength of their internal controls, she says. Looming large is the federal government’s decision to require federal agencies to assess their internal controls and correct any problems they may find. While not as tough and far-reaching as SOX, the new regulation will require federal agency managers to vouch for their internal controls. Local and state governments could be next.
“Once the federal government decides to adopt, it has a trickle-down effect,” Valley explains. “We’ve talked to a lot of [local and state] governments that are evaluating their controls, taking out the old things and brushing them off, and asking themselves, ‘If we have to comply, what procedures do we need to change?’ ”
For some jurisdictions, their review of accounting practices is part of a broader plan to upgrade their ERP systems in order to automate accounting tasks and help finance personnel perform their jobs faster and more efficiently. The jurisdictions need to know what their requirements and internal processes are before investing in new technology.
The IT staff plays a crucial role in this effort, collaborating closely with the finance department and government leaders. Finance personnel must first determine their needs, then the IT staff must provide them with the best possible technology and make it work, says Matthew Lampe, chief technology officer (CTO) of Portland, Ore.
“It’s really a team effort,” Lampe says. “They [finance] decide the core business processes. Then we [IT] help make the right choices in terms of project life cycle and the underlying technology.”
Officials in Portland and the state of Illinois are giving their antiquated accounting software and accounting practices a much-needed makeover.
In both governments, accounting is decentralized. Each individual department or agency has its own accounting practices and runs its own financial software. Illinois, for example, uses more than 100 different accounting systems. IT leaders in both jurisdictions say it’s difficult to give decision-makers real-time snapshots of their current financial situations.
“There really isn’t one source of truth,” Lampe says. “Simple questions from the City Council sometimes take an incredible manual effort to get the answer.”
Both of the jurisdictions are working to create common accounting guidelines. Then officials hope to automate more of the processes with new ERP systems. While Illinois is still investigating all of its options, Portland is already in the implementation stage.
In fact, Portland recently created a new controller position to develop consistent citywide accounting policies and procedures. Six months into her job, Controller Marty Scott says the city has already developed some basic accounting guidelines and will spend the remainder of 2005 developing the rest.
Currently, the city is busy researching its ERP software options, and it could choose a vendor later this year. CTO Lampe hopes to have the new software in place by July 2007.
Portland officials expect to build an accounting system with an eye toward future SOX-type requirements. Scott is evaluating the private sector’s response to SOX and is considering what parts would be appropriate to incorporate.
“My expectation is we’re going to see stronger requirements,” she says. “The reality is, whatever happens in private industry usually circles back and hits government. It just takes longer.”
Other government entities have started looking at SOX as well. The California Public Employees Retirement System, for example, is among the many state employee retirement funds considering the implementation of some SOX regulations, KPMG’s Valley says.
To get SOX passed into law, many state employee retirement funds pressed Congress for more stringent financial and business rules governing the companies they invest in. Because these government entities pushed for the law, they feel a need to hold themselves to the same standards, she explains.
Other jurisdictions, such as New York State, want to adhere to the highest possible standards. New York Gov. George Pataki has proposed strengthening the accountability of the state’s public authorities, such as the transit and port authorities, which operate more like businesses, Valley says. Pataki is pushing for a standard financial reporting structure, independent audit committees and additional oversight of authorities’ boards of directors to ensure their independence.
Valley says reviewing accounting practices could result in cost savings and greater employee productivity. In the private sector, companies that evaluated their internal controls found that up to 80 percent of the controls are operated manually, which offers an opportunity for the IT staff to automate them.
In the late 1990s, many companies, in their haste to make themselves Year 2000- compliant, turned off some automated controls in their ERP systems, she notes. IT staffers may find it beneficial to check their ERP systems to make sure all automated controls are turned on. On average, a set of financial statements has about 10,000 controls in place.
“It could save a lot of costs in operations and improve the control itself because it’s better to automate,” Valley says.
One simple example of a manual control that could become automated is when a department tries to make a purchase. ERP software flags it and stops the transaction until the finance director approves the acquisition, explains Kirk Openchowski, the former finance director in Bolingbrook who now handles the same duties in Romeoville, Ill.
About two years ago, Dover and Openchowski bought new ERP software for Bolingbrook, partly to automate accounting functions and partly to help the town conform to a new Governmental Accounting Standards Board rule that required communities to track and report all their assets—from city buildings to roads. The two are confident the software can quickly support future regulations.
In fact, Dover says that many of the technologies he has implemented will help with potential SOX-type requirements, such as greater demands for document and records management. Because of the public records act, he is already planning to archive some types of e-mail. Bolingbrook also owns a document management system that allows staffers to scan and store public documents for quick retrieval.
“I’ve endeavored to make sure that anything we do and any purchases we make go into helping us be accountable,” says Dover, who works with Finance Director Antonette McCaster.
Reviewing accounting procedures and installing new technology is a long and arduous process, but it’s well worth it, adds Openchowski. “As a result of the corporate scandals, I think stricter regulations will help bolster the public’s confidence that the government is well-run, everything is accounted for and the proper financial controls are in place,” he says.
WHAT IT IS: The Sarbanes-Oxley Act features strict accounting regulations designed to prevent fraudulent accounting practices. Section 404 of the law requires public companies to have in place policies and controls on their financial information. Compliance could cost companies millions of dollars.
IMPORTANCE: Federal agencies must now conform to a SOX-type regulation. Specifically, the Office of Management and Budget recently revised Circular No. A-123, which requires federal agencies to assess their controls and correct problems. State and local governments could be next. A number of local and state governments are even considering adopting some SOX provisions on their own. Two SOX provisions that local and state governments could choose to incorporate are: Section 404 on internal controls, and oversight of board members and audit members to ensure that they are qualified and independent.
BENEFITS: Better accounting procedures, more-effective government and increased public confidence.
HERE ARE SOME GUIDELINES for adopting new accounting systems and procedures:
• Planning: IT managers and finance personnel should examine the existing financial controls and technology, and determine how much effort and money it would cost to adopt pieces of SOX. Then evaluate the pros and cons. That way, if elected officials bring up the idea of SOX-type policies, you can readily explain whether it makes sense to adopt elements of SOX.
—Greg Dover, IT director, Village of Bolingbrook, Ill.
• Training: When revised policies and new technology have been implemented, start by training your staff and giving government leaders a general overview. Then offer detailed training to employees who must execute your plan.
—Marty Scott, controller, Portland, Ore.
• Technology: Remember that IT plays a critical but supporting role in this process. Find out the finance and accounting requirements and provide technology to meet those needs.
—Matthew Lampe, CTO, Portland, Ore.