The Process Improvement Payoff

Capabilities developed from Sarbanes-Oxley compliance activities can be applied to processes as narrow as A/P or as wide as governance best practices.

Last year, American Electric Power discovered just how closely connected compliance work and process improvements can be. As the compliance team at the giant Columbus, Ohio-based power generator and distributor worked to fulfill the requirements of Sections 302 and 404 of the Sarbanes-Oxley Act, the finance department noticed an opportunity. The organization's growing focus on internal controls and financial processes afforded the chance to prune the number of duplicate and erroneous payments that typically occurred during the A/P process.

The finance function shopped for an A/P monitoring tool and settled on an application from Oversight Systems that automatically detects irregular payments to suppliers. The software was installed as the company's first-year Section 404 work neared a close at the end of 2004. By the middle of this year, the tool had already helped American Electric Power reduce its A/P costs by 75 percent.

Transforming Transactional Processes

Ask American Electric Power and other accelerated filers flush with similar success whether Sarbanes-Oxley compliance provides opportunities to deliver process improvements, and they'll answer yes. This question is becoming pivotal as public companies start to strengthen their ongoing Sarbanes-Oxley capabilities and apply them to other financial and operational areas in the process.

Mark Schmeling, CFO advisory services practice leader for Archstone Consulting LLC in Chicago, says that the tactical aspects of Sarbanes-Oxley compliance consumed much of the finance function's attention during Year One. "Most process-improvement-oriented efforts were deferred until the organization was able to complete the initial SOX compliance," he explains. "Now that the first year is behind most public companies, the finance leadership is beginning to focus on driving improvement within the finance organization."

Peter Morgan, vice president of marketing with OpenPages, a compliance management software provider based in Waltham, Mass., adds to that assessment. He says that as public companies begin to standardize their compliance processes and achieve greater visibility into those procedures, they can start to "enable improvements in the documentation/disclosure process itself [and] its related accounting processes and in the reduction of errors, omissions and fraud in such key areas as hiring, procurement and reconciliations."

Processes within the order-to-cash and procure-to-pay cycles as well as payroll are particularly ripe for post-Sarbanes-Oxley improvement. "What is required is to define and document business process controls, rules and roles and to then continuously monitor and be proactively alerted about exceptions to those controls and business rules," explains Neil Selvin, executive vice president with Approva Corp., a controls intelligence software provider in Reston, Va.

American Electric Power's successful adoption of a monitoring tool to transition one of finance's prime candidates for process improvement is a case in point. "We monitor our A/P process on much more of a real-time basis [than before]," says Mike Sullivan, director of accounting services. "The tool identifies transactions that don't look right and then corrects or cancels [them]. Previously, our internal controls around payables were not as timely or rigorous. Plus, we're identifying a larger population of transactions that are exceptions. By addressing them on a daily basis, we can prevent most of the losses we previously incurred."

Sullivan expects to apply the tool to his company's accounts receivable process in the near future.