As U.S.-based public companies enter year two of compliance with Section 404 of the Sarbanes-Oxley Act, there is a continued outcry that the costs of complying are way out of line. My conversations with affected corporations, compliance service providers, and auditors indicate that in their first year of meeting Section 404 requirements, most organizations spent between $1 million and $3 million on consulting services per billion dollars of company revenue.

Despite these substantial figures, however, many businesses failed to invest in comprehensive software systems that could ease their future compliance burden. The market has seen the emergence of a slew of applications that can assist in financial process management and compliance assertions by providing a more effective and collaborative environment than the popular PC-based products that consulting firms offer. These applications are becoming increasingly popular. But many companies still perform management reporting through their enterprise resource planning (ERP) general ledger solution, and organizations that found areas of material weakness in year one addressed them primarily through manual processes and Excel-based work-arounds.

Key among the areas in which firms can benefit from technology investments spurred by Sarbanes-Oxley Section 404 is financial consolidations. Over the past three years, the focus of most organizations' business performance management (BPM) implementations has been more on internal reporting, planning, and metrics management than on external reporting. Although improving internal visibility should be at the center of any Sarbanes-Oxley initiative, a company must also pay close attention to external financial reporting and consolidations. I have seen many firms spend heavily on planning and management reporting improvements while maintaining a predominantly Excel environment for financial consolidations.

To make matters worse, many multinational firms have multiple ERP solutions, often from different solution providers. These firms are challenged to consolidate management and financial results while ensuring consistency in financial management content across the enterprise. This problem is further complicated when financial staff members rely on offline processing in Excel and Microsoft Access to accumulate data from multiple source systems and rationalize it.

Ideally, firms should source all of their financial management reporting from a consistent repository, such as a data warehouse or datamart, and seek to automate many of these allocations within the reporting tool. However, over the past year, work-arounds in the area of financial consolidations have created greater dependence on Excel. Relying on Excel will ultimately prove more costly and less effective than would the implementation of an auditable, centralized solution for financial consolidations. Such a system can automate financial consolidations and thereby reduce the amount of time needed to produce external financial statements such as 10-Ks and 10-Qs. Leading organizations are implementing this type of software, then augmenting consolidation processes with both internally facing and externally facing portals. The portals can streamline financial statement preparation and can provide information on required corporate disclosures, including director holdings/information/affiliations and changes in financial condition, as required under Sarbanes-Oxley Section 409.

Consolidations Through BPM

Fortunately, the trend toward better methods for simultaneously sustaining Sarbanes-Oxley compliance and achieving a cost advantage through improvements in processes related to corporate governance is leading companies to improve their financial consolidations practices. Moreover, because they are working to consolidate enterprise accounting information for both internal management reporting and external reporting, more and more firms are beginning to view financial consolidations as a critical component of their BPM system and processes.

Organizations face many challenges during the financial consolidations process that represent major opportunities for error. They should consider a BPM application that can ensure that their approaches to the following concerns comply with Sarbanes-Oxley:

Import of data from a variety of ERP solutions. Larger enterprises typically do not operate on a single instance of an ERP solution. Especially as a result of mergers and acquisitions, they tend to run several ERP applications from multiple vendors, often operating on different charts of accounts. Organizations must consolidate financial results from multiple ERP solutions down to an appropriate level of detail in order to ensure the visibility into accounting processes that is necessary to support financial audit/validation processes and external reporting.

A consolidations software solution can improve the consistency of the financials by creating a standard, auditable approach to data import. It can also process information according to the appropriate financial management procedures. In the absence of such a solution, firms struggle with error-prone manual and Excel-based processes, which may lack auditability and checks and balances. Plus, such processes present the opportunity for fraud. Sometimes adjustments can occur without the appropriate documentation and approvals, adjustments that may be material enough to change the financial picture of the firm. A formal approach to consolidations can address audit requirements and add rigor to the company's financial controls.

Journal entries. Many firms would prefer a journal-entry-based approach to consolidating entries -- including joint venture equity booking and eliminations -- that meet GAAP requirements. This type of approach ensures that balanced accounting entries are available to keep accounting records in order. Many times these entries will cross general ledgers since they cross different entities. When a company encompasses multiple ERP systems supporting multiple entities and business units, a financial consolidations solution may be the best approach to ensure that these entries are processed according to enterprise accounting standards that are auditable and would meet auditor scrutiny.

Intercompany transactions. In many larger firms that have a high degree of business unit integration, intercompany transactions require a major accounting effort. Consolidations software can help ensure that these entries meet enterprise standards and are auditable.

Foreign exchange. A standard corporate approach to foreign exchange is critical for any global firm. During general ledger consolidations, a financial consolidations application can provide the necessary controls to ensure a consistent response to foreign exchange processes. For example, the rules and procedures -- as well as standard conversion rates for various currencies employed in a global organization -- can be controlled.

Approvals and controls. Critical to any Sarbanes-Oxley-compliant consolidations process is the ability to ensure that duties are distributed appropriately among enterprise personnel -- and that they are well-controlled. Organizations should provide a formal workflow process to handle alerts and material variances to ensure that there is a heightened visibility of that issue within the firm. A financial consolidations solution can provide this consistency through an effective deployment of workflow and role-based business process management. This is extremely critical to Sarbanes-Oxley Section 302 because it provides internal confidence that the processes involved in creating financial reports are controlled and that the information is accurate.

The consolidations schedule. A BPM consolidations solution can monitor and manage the critical dates in the closing process and report on the company's progress toward deadlines.

Consistency of reporting. Ideally, firms should seek a single solution for consolidations, management reporting, and planning to ensure that all use a single, standard base of financial information for both internally and externally positioned reporting. This approach could prove extremely cost-effective by eliminating the need to either manage multiple disparate applications or to attempt to integrate products that are difficult to merge.

Doing so also helps ensure that the company is looking at a single version of the financial truth. A complete, consolidated financial picture is critical for any enterprise, and it's nearly impossible to achieve with an Excel-based process. Financial consolidations software can ensure that the enterprise is aligned around a single view of consolidated financials.

Support for dynamic consolidations. Many firms have found that waiting for a monthly consolidation is not enough to ensure prudent financial management. They want to see the consolidations picture as it develops and to set up compliance and reporting dashboards so that executives are aware of the corporate financial situation as it unfolds. Support for dynamic consolidations is critical for any automated BPM software solution.

An important side benefit of using a BPM application for consolidations is that it can link back to source data to provide drill-down support for the auditing process. Clearly, Excel can't do this. Organizations should provide visibility into transactions (or appropriate summarized details) that cause unexpected results, linking analysis to transactions and providing a more rapid response than would be possible if users were forced to drill back into the various transactional systems. While it may not be appropriate to have the BPM consolidations solution sit on a large-scale enterprise data warehouse, many companies want to be able to drill through Web links back to source ERP and transactional applications.

As companies bring together the financial reporting and process management assertions required by Section 404, they can also benefit from connecting their BPM consolidations application to a governance tool. Such a connection helps them understand the status of the financial management assertions in the policies and procedures used to create those numbers.

Firms must ensure that their financial business processes can meet Sarbanes-Oxley compliance requirements. They must focus on the critical dimensions to be achieved -- transparency/visibility, controls, retention, communication, and risk and fraud prevention -- and evaluate their current and potential future business applications against these capabilities. Consolidations through BPM software can be important in ensuring compliance. Although BPM can be implemented without a focus on financial consolidations, companies can realize major benefits from placing financial consolidations considerations at the center of their approach to BPM.

John Van Decker is Senior Vice President and Principal Research Fellow for Robert Frances Group, a leading business IT research and consulting firm.