The ongoing corporate governance requirements both in Canada and the United States have generated public debate in relation to the mounting costs that companies are forced to incur during the compliance and CEO/CFO certification process. “Without question, complying with the new requirements will have a cost,” says Enterprise Risk partner Terry Hatherell. “The challenge, however, is for companies to capitalize on and crystallize the many business benefits available beyond pure compliance.”
Companies can turn the “sunk costs” of compliance into real business advantage. But realizing the benefits of compliance requires a comprehensive, top-down approach. “Canadian companies need to understand that addressing the requirements of CEO and CFO certification is a long-term exercise that doesn’t end after year one,” says Hatherell. “Elements of sustainability should be built in and addressed right from the start.”
Based on our experience in assisting more than 800 North American companies address the new corporate governance and CEO/CFO certification requirements, Deloitte has found that compliance need not be a sunk cost. Instead, Canadian companies embracing corporate governance will ultimately be rewarded by the market. In a recent global study conducted by Deloitte, more than half of executives and directors surveyed considered quality of governance among the top three corporate performance areas investors reward most heavily.
Complying with corporate governance requirements and demonstrating good governance doesn’t only affect a company’s stock price or access to capital. Embracing the spirit, and not just the letter of the law, also provides companies with significant opportunities to see a return on their investment and increase efficiency beyond regulatory compliance.
“The consequences of not fully complying with corporate governance requirements extend well beyond the personal liability of the CEO and CFO,” says Enterprise Risk partner Doug Wilkinson. “Historically we see that companies’ market caps have been negatively affected by a restatement of financial results, while on the other side of the equation investors are willing to pay a premium for good governance.”
Deloitte’s work with clients has shown that effective compliance can result in a variety of business benefits:
-
Improved disclosures
The 2005 requirement for CEOs and CFOs to certify their companies’ disclosure controls and procedures have caused companies to better understand, assess and formalize their procedures related to the disclosure of information externally. Many companies have reported that, historically, controls in this area have tended to be less structured and formalized. The new requirements have resulted in companies taking a fresh look at their disclosure controls, resulting in an improved disclosure process and greater assurance for investors regarding the accuracy, completeness and timeliness of external reporting.
-
Standardization of processes and controls
Addressing the new certification rules has resulted in companies bringing more standardization to their processes, policies and controls across subsidiaries, divisions and locations to weed out inefficiencies and streamline their systems. This standardization has not only improved the effectiveness of processes and controls but has yielded significant business benefits through improved efficiencies.
-
Better control over management and information systems
Many companies reported that their compliance initiative identified weaknesses in security where access to critical systems was not as well-controlled as expected. Companies cited the potential negative impacts on reputation that would result from security breaches and recognized the benefits that were realized through improved security.
-
Improved acquisition integration
Many companies reported that their compliance activities uncovered areas where the integration and value generation stemming from acquisitions had not occurred to the extent expected. Numerous areas were identified where processes and systems had not been integrated and expected synergies not fully realized. The compliance process highlighted these issues and assisted in more quickly integrating and standardizing the processes, controls and systems.
-
Reduced risk of loss through fraud
The significant focus on fraud in identifying where fraud could occur and assessing existing anti-fraud programs and controls resulted in improved controls and a reduced risk of loss through fraud within compliant companies. Companies noted both the reduced risk of financial loss and an avoidance of the negative impact on reputation as benefits in this area.
-
Enhanced market confidence and reputation management
The market is quick to judge companies on earnings results, delays in financial reporting and restatements of financial results. Many Canadian companies believe that complying with the requirements of CEO and CFO certification enhances investor confidence in the integrity of financial reporting as a result of the rigour and focus required in complying with the rules.
Wilkinson stresses that if companies want to realize some of these potential benefits, they need to take immediate action. “Companies need to embrace corporate compliance now, given that the new disclosure control requirements are effective already and that the new internal control requirements take hold in 2006 and 2007.” And he points out that companies north of the border have an advantage. “Canada should learn from the Sarbanes-Oxley experience. First-year compliance is a 12-to-18 month journey requiring specialized skill sets,” says Wilkinson.
