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I recently spoke with Oversight Systems, an operational intelligence analytics company that uses predictive analytics and optimization to help companies save money, reduce the risk of loss and fraud, and reinforce corporate governance and compliance efforts. Ventana Research views operational intelligence as an emerging technology with the potential for a high return on investment. By continuously monitoring activities in a company’s IT systems, Oversight’s Web-based software continuously, consistently and objectively monitors all business processes to identifies opportunities to save money, cut fraud, minimize risk and provide real-time controls to support governance.

Today, corporations generate large amounts of operational data that should be monitored as part of routine management oversight. These data sets provide foundational intelligence that can be used to automatically spot deviations that require management attention. The variations may be specific values that diverge from the mean, such as an overpayment for a purchased item or excessive discounting by sales people. Variations also may stem from item repetitions, such as duplicate invoices. The data streams may reveal anomalous patterns or events that can signal emerging issues with customers or may alert the company to ongoing fraud, such as in unusual returns or changes to customer master lists. Our recent research on governance, risk and compliance (GRC) found that the majority of companies have immature governance systems in place.

The challenge confronting organizations (and anyone trying to develop packaged applications for this preventive capability) is knowing what to look for and how best to find it. There’s a heavy dose of forensic accounting and IT systems domain expertise involved. While much of the data may be in transaction systems, such as ERP or supply chain management, the oversight process may also require monitoring of email or instant messaging to detect issues or confirm patterns in transactions or systems data. As important as detecting anomalies or suspicious patterns, the system has to be able to filter its assessments to achieve the right balance between avoiding false positives, dealing with too many trivial issues and missing real incidents.

Oversight Systems’ products take on various aspects of operational intelligence in this area. For example, to ensure that a company minimizes its outlays, Assured Best Price (part of its Spend Insights software) automatically compares the value of a purchase order (PO) against the optimal amount, taking into account prices paid for those same items elsewhere and at other times within the company, making allowances for quantities and other factors. A PO that significantly exceeds the optimal amount will be flagged for review before it is issued to a vendor. The system also can be used to alert purchasing to duplicate billing or unusual orders. It can provide internal auditors, controllers and CFOs with evidence of payment fraud.

Similarly, Oversight’s Revenue Insights can detect pricing trends that indicate discounting that exceeds guidelines, preventing unnecessary margin erosion. It also detects unusual revenue patterns that may be channel-stuffing, and return and warranty events that suggest fraud. The company’s Purchasing Card risk system can analyze patterns and specific items bought in order to recognize and stop suspicious purchases, excessive or fraudulent spending or shady merchants; this is especially useful for government entities. It can spot attempts to exceed authorization limits using split purchases. In all, these capabilities can save money, limit the incidence and impact of fraud and make governance and the audit function more efficient.

Oversight is a co-innovation partner for SAP’s HANA in-memory computing platform. Running Oversight’s Continuous Transaction Analysis on HANA enables companies to perform more of these functions in real time with very large data sets. It can, for example, provide individuals using predictive analytic models with more sophisticated guidance on how best to react to an emerging trend that requires their attention or to mitigate the impact of an event sooner.

Automated continuous monitoring is a smart way to avoid unnecessary costs and mitigate the risk or limit the impact of fraud, financial or operational. It is an efficient governance tool as well, providing a cost-effective control mechanism for lowering internal and external audit costs.

Big data is not necessarily a topic that interests finance department types, yet it is the ability to analyze very large data sets that makes continuous monitoring feasible. In my opinion, most companies with 1,000 or more employees and all companies with 5,000 or more employees should have continuous monitoring capabilities. I recommend that companies looking into deploying such systems put Oversight Systems on their list of vendors for evaluation.

Regards,

Robert Kugel – SVP Research

I have commented before on the movement to adopt International Financial Reporting Standards (IFRS) by the United States to replace US-GAAP (Generally Accepted Accounting Principles). Most recently I discussed the drive to harmonize the significant differences between US-GAAP and IFRS on revenue recognition and lease accounting. To those who are interested in but not intimately involved with the subject, I suspect the current situation is a bit confusing, since there are multiple groups involved in the discussions on how best to proceed, each with its own agenda. The full adoption issue remains in flux, but let me weigh in the matter.

I have long supported IFRS, largely because over the past three decades I have watched US-GAAP become increasingly unwieldy as the Financial Accounting Standards Board (FASB), the group that administers US-GAAP, has made it much more of a rules-based, rather than principles-based, accounting standard. Although the rules are well-intentioned, in several areas (such as revenue recognition) they have become increasingly complex and, to my mind, do not necessarily promote transparency. In an effort to be conservative, companies can understate their economic performance, which allows some investors (usually professionals) to gain an advantage because they can see through the distortions produced by the accounting rules. And it’s not that difficult for companies to slip up and require a restatement, as the recent example with JDA Software made clear.

Lately, though, I’ve been having second thoughts. Some of the arguments for the United States adopting IFRS are so overstated that I want to reject them on rational grounds. This offsets a suspicion that advocates for retaining US-GAAP are mainly attempting to retain their administrative power. In the end, though, I think that the SEC got it exactly right in advocating following a path of condorsement, which will converge US-GAAP and IFRS without formally adopting it for the near term while endorsing the ultimate adoption of IFRS at some time farther out. I agree that adopting IFRS is a worthy objective, but what’s the hurry?

The main argument for the U.S. adopting IFRS immediately is that in global financial markets it’s essential for all countries to use the same standard to ensure comparability of financial statements. This sounds reasonable, especially to those who aren’t accountants. Yet the reality is that today the overall differences between practices in the U.S. and IFRS are not especially great. For example, when global software company SAP shifted to IFRS from US-GAAP, only relatively small differences between the two approaches emerged in the years when it was reporting results in parallel. (SAP minimized differences by electing to largely follow US-GAAP revenue recognition methods.) In some industries (those affected by the differences in revenue recognition and the treatment of leases, for example) there can be meaningful differences. However, if the United States retains US-GAAP but the two systems converge on key differences, I expect that in most cases the gaps between what would be reported using either standard would be slight. Moreover, once the major areas of difference between US-GAAP and IFRS have converged, the argument that the two systems will not offer comparable results becomes specious. Indeed, IFRS is based far more on principles than US-GAAP is, and that approach creates the potential for a similar lack of strict comparability between two companies that use IFRS, even in the same industry.

I have another concern with the U.S. adopting IFRS: The eXtensible Business Reporting Language (XBRL) taxonomy in IFRS is less rich than the one developed for US-GAAP. As things stand, I believe adoption of IFRS by the U.S. would leave investors worse off in this respect. While the International Accounting Standards Board (IASB) talks a good game, I fear it will be many years before the IFRS taxonomy will become as rich in its descriptive capabilities as the US-GAAP version. The IASB views taxonomy-building as being tightly linked to standard-setting, and therefore requiring careful vetting and review. In my judgment, this is at odds with the nature of XBRL taxonomies, which are designed to be loosely coupled and dynamic. Inevitably, a more limited IASB taxonomy would lead to a considerable increase in the use of extensions and a corresponding reduction in financial statement comparability when using XBRL. This would diminish the value of XBRL in communicating financial results.

There is long-term value in the United States adopting IFRS, mainly because it will shift the accounting standard back to a principles-based approach from today’s rules-based regime. But I don’t see a great deal of value in rushing this migration if the main rationale is to achieve greater comparability, and even less if it means diminishing the value of the nascent use of XBRL for financial statement analysis and reporting.

Regards,

Robert Kugel – SVP Research

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