1. Delivering SOX Compliance and
Shareholder Value
by David Bolton
Sarbanes-Oxley has created a new era of accountability for corporate officers by demanding greater
transparency in controls, auditing, and reporting of financial information. By implementing best practices
that deliver the transparency that SOX requires, many CEOs and CFOs are also discovering ways to make their
organizations better-equipped to provide increased shareholder value over the long term.
One way executives can enhance compliance and On the buy side, companies often have no idea if a
help to offset its costs while increasing organizational supplier is charging the right fee or is in compliance
efficiency is through effective contract management. with the terms of the agreement. Furthermore, many
A 2005 Aberdeen Group report estimates that year- companies often have multiple contracts in force
over-year growth rates for the contract lifecycle at the same time with the same supplier, making it
management industry will exceed 20 percent through difficult to determine which contract governs orders
2008. SOX compliance is one of the drivers fueling this being negotiated by multiple departments or divisions
growth. within a corporation.
Despite the recent increased emphasis on controls The resulting error-prone process is fraught with high
and reporting, many companies still don’t have a costs, the inability to locate specific agreements, and
contract management system or process in place. exposure to penalties for non-performance or default
According to the Aberdeen Group, nearly half of – all factors that can negatively impact a company’s
companies still store at least a portion of their financial results.
contracts in paper formats. Finding hard copies of
various contract terms amidst the clutter of someone’s A contract management tool, coupled with an
desk can be a tremendous challenge for companies effective management process, can provide
to provide quick, accurate reporting. Monitoring companies and its managers with:
and managing SOX compliance in such a scenario,
let alone trying to maximize organizational and • Improved contract compliance – Companies
process efficiencies, is nearly impossible and clearly are starting to view contract life cycles as
unreliable. commencing before the creation of the contract.
They chart the process cycle from the generation
Many companies, if they track contract compliance at of a requirement and the communication of
all, do it manually with standalone Excel spreadsheets the requirement to sourcing for its fulfillment.
or in-house systems that are prone to inconsistent Consequently, the number of control points and
and unreliable reporting. They may even rely upon departments involved in the cycle’s process flow
customers to police the performance or payment are increasing – and so is the need for more control
obligations in the contract, assuming that customers over operations and process efficiency. By helping
will alert them when they’re being undercharged for companies establish and document best practices
products and services or overpaid on incentives. in enterprise contract management, a contract
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2. management tool enables the alignment of Implementing Internal Controls
internal policies and procedures with compliance One way companies manage risk is by establishing
requirements. This improves internal processes, standard contractual terms, such as limitation of
streamlines the contract creation process, identifies liability, within the organization. Having a contract
and minimizes financial risk through the contract management tool in place enables companies to
life cycle while boosting SOX compliance. control when their standard terms can be changed
and who can change them during contract creation
• Higher contract performance – The ability and negotiation. It manages this process to ensure
to track multiple provisions and obligations is that if a particular clause is being negotiated and
particularly important when managing special- there is a request to modify it, it is delivered to the
purpose contracts that deviate from a company’s proper corporate contact with the delegated authority
standard form or agreement, since these are to make the change. It eliminates the risk of “maverick
often the ones that corporations lose track of. buying” by ensuring that the proper internal controls
By providing the ability to monitor compliance are in place during the contract negotiation process
by compiling and summarizing contractual – and by ensuring that only those delegated with
obligations, a contract management tool can the authority to make contractual commitments on
help companies understand how to continuously behalf of the company are in fact the ones making
improve internal controls and contract them.
performance and to take immediate corrective
action as necessary. This enables managers to stay While a record of contractual obligations is not
on top of contract terms, conditions, deadlines, specifically required by SOX, a contract management
and details of commitments to reduce the high suite can help companies accurately and quickly
costs of erroneous payments. access information that is required. After all, the
contract is the foundation for the financial statistics
• Reduced risks – In addition to implementing of a company, since the financial obligations of a
a contract management tool, it’s essential that company – both when selling and buying – start with
companies establish processes that obligate a contract.
those who manage contracts at risk to alert those
responsible for reflecting risk in the financials. Take, for example, the process of determining the
By allowing corporations to view contractual revenue-recognition rule to apply for a particular
risks and material events – and by providing transaction. First, the terms of delivery, acceptance
immediate access to all relevant documents and and payment described in the contract need to be
communications related to the risk or contract – a determined. The determination today often involves
contract management tool can help companies multiple disciplines interpreting the terms of the
analyze and quantify contractual risk of any type contractual obligations. This makes it imperative that
across their entire enterprise. each discipline involved has access to the terms of
the obligations and that the terms being reported are
• Enhanced contract visibility – More and more accurate, current and reliable.
companies are electing to purchase contract and
supplier management software, and hosting of SOX does reference contracts in the requirement that
their contracts repository, as a service as opposed every annual and quarterly report filed with the SEC
to operating licensed applications within their IT disclose all material off-balance sheet transactions,
environment. Having a centralized, searchable, arrangements, and obligations (including contingent
enterprise-wide repository for contracts obligations) that may have a tangible current or future
eliminates paper-based contracts and ensures effect on the company. These arrangements can
fast and efficient access from any computer. It include certain types of leases, subsidiary guarantees,
enables companies and their auditors to quickly interest-rate swap instruments and foreign exchange
compile relevant information to demonstrate contracts.
SOX compliance and impacts to their financial
reports without having to ask, “Who has the latest To be SOX-compliant in contract-related matters,
version?” public companies must:
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3. • Summarize their contractual obligations in the is that a lack of internal communication often exists
Management’s Discussion and Analysis of Financial today when companies go to buy such a system.
Condition and Results of Operations (MD&A) Since the CFO of a company, along with the CEO, is
section of Securities and Exchange Commission held responsible for establishing and maintaining a
reports; company’s internal controls according to Section 302
of SOX, it’s imperative that the CFO become involved
• Report and track all volume purchase contracts in the selection and implementation of a contract
for goods, service or manufacturing capacity; management system – something that rarely occurs
in companies today. This is important because simply
• Disclose all vendor-managed inventory, which purchasing contract management software doesn’t
may be considered assets; provide a company with everything it needs to
maintain accurate, reliable, and timely information.
• Disclose all outsourced operations; and All the technology in the world cannot eliminate the
human element from the process, or the need for
• Ensure that all outsourcing service providers employees to input updated information on a regular
have adequate internal controls and safeguards. basis.
In practice, the only effective way to maintain and To be certain that a contract management suite
track SOX-related trading relationships and ensure provides a company with accurate contractual
compliances is through the use of a dedicated and information, the CFO should designate it by
mandated contract management suite that automates corporate mandate as the standard, required
the entire contract life cycle. While most ERP and repository of information regarding contractual
CRM suites have contract management modules, they obligations for the company across all of its
generally track only a limited amount of information. organizations.
They lack the required analytic functionality,
reporting capabilities, and the ability to manage risk It Takes a Champion – and Management Attention
and assess compliance. The need for these expanded Establishing such a mandate isn’t enough. To ensure
capabilities is particularly necessary for companies that contractual information remains current,
that outsource services that are considered part of the reliable and reportable, an individual within the
company’s internal controls over financial reporting corporation should be delegated as the caretaker, or
and for those entering into volume purchase “champion,” of the contract management suite. A
agreements. project team should also be assembled to manage the
implementation of the application, the development
According to SOX, these off-balance sheet of the contract creation and negotiation process, and
transactions need to be provided on a “rapid and the assignment of administration responsibilities.
current” basis. In addition, the SEC has accelerated The team, generally including representatives from
the filing date requirements for annual reports on the legal, business and finance departments, should
Form 10-K and quarterly reports on Form 10-Q in be tasked with placing the corporate controls in the
addition to demanding more rigid 8-K reporting process flow and for assigning responsibilities to
requirements in the case of a material event, forcing the appropriate individuals. Without a champion
companies to access contract information and who is held accountable for ensuring that the
performance risks much quicker than in the past. A contract information is being interpreted correctly
contract management tool can greatly aid companies and processed regularly by all divisions within the
in their efforts to effectively implement internal company or the development of a process, the data
processes for the maintenance and disclosure of the can quickly become stale and unreliable.
off-balance sheet transactions, material events, and
mitigate risks associated with them. Appointing such a champion and project
team adds another level of accountability to
The Corporate Mandate the process – a must for CEOs and CFOs who
While the advantages of implementing a central are themselves held accountable for their
contract management solution are clear, the reality companies’ internal controls by SOX.
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4. SOX and Better Process Efficiency
When it comes to increasing corporate process About David Bolton
efficiency and control over operations, a contract
management tool is just one part of the process. David Bolton is Counsel and
Companies can increase their efficiency by managing Executive Leadership Team
fewer suppliers and by reducing the number member for Procuri, Inc. He
of applications existing across the corporation. joined Procuri in March 2005
Standardizing on a contract management tool across following Procuri’s purchase
the organization can help in this respect, since the of Contract Management
2005 Aberdeen Group research shows that half of Solutions, Inc. (CMSI). Mr.
companies either lack formal procedures for creating Bolton was Vice President,
and managing contracts or use approaches that vary General Counsel and corporate
across the organization. officer at CMSI.
The choice to standardize on the use of tools Mr. Bolton has over 20 years of experience in high-
companywide, from contract management to supplier tech industry corporate development, contract
management to strategic sourcing to spend analysis, management, intellectual property matters, and
is another way for companies to both measurably business operations.
improve their business performance and ensure
better recordkeeping and controls over operations Mr. Bolton also served as General Counsel and
across all aspects of the enterprise. Choosing a single Secretary of Real 3D, Inc., a fabless semiconductor
supplier to provide these separate tools is a way that and high performance 3D graphics technology
companies can increase their efficiency even further. and intellectual property company. whose primary
shareholders were Lockheed Martin, Intel and SGI.
A contract management tool, although just one He co-drove resetting the company IP strategy,
application within a company’s overall set of reporting resulting in achieving maximum IP portfolio value by
tools, can, if maintained, produce accurate, reliable implementing long-term technology development
and timely information on the status of a company’s and licensing arrangements with key strategic
contractual obligations. The implementation of a partners.
contract management solution is one significant
means by which CEOs and CFOs can demonstrate Mr. Bolton earned his Bachelor of Arts degree in
that they’ve established and maintained adequate political science and sociology from Eastern Michigan
internal controls. University, and received his law degree from Detroit
College of Law. He is a member of the Florida Bar.
Making these changes is a process that requires
considerable time and effort at first. But in the end, About Procuri
the dividends that result are well worth the effort Procuri leads the Enterprise Supplier Management
required, leaving companies better prepared to industry with a nearly perfect record of customer
meet SOX requirements and achieve “sustainable retention of more than 300 customers of all sizes,
compliance.” In the process, by reducing cycle industries, geographies and spend categories.
times and increasing process efficiency, contract Customers include Eastman Kodak, ITT Industries,
management software can save companies time and KLM Royal Dutch Airlines, The McGraw-Hill
money – and increase shareholder value. Companies, Newell Rubbermaid, Sun Microsystems
and Toyota Motor Sales. Procuri’s OnDemand
solutions for spend analysis, supplier management,
strategic sourcing, contract management and
compliance are comprehensive, cost effective and
instantly available.
For more information, call 1-877-360-1600 or visit
www.procuri.com.
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