Funding the Cause

Wal-Mart's deadline for its top suppliers to be RFID ready by January 2005 has certainly garnered a lot of attention. However, June 15, 2000 -- the date that all publicly held U.S. companies must begin to comply with the Sarbanes-Oxley Act -- might very well be of greater concern to the vast majority of consumer goods firms. A recent industry poll showed that CG firms have a long way to go in making sure their Trade Promotion Management processes were compliant, with only 21 percent claiming to currently be in compliance. This month, CGT sat down with Mark Osborn, Chief Solutions Officer for Gelco Information Netwok, to discuss details of Sarbane-Oxley, what it means for CG firms and, most importantly, what they need to do about it.

Under Sarbanes-Oxley, why is there such a large focus on trade funds management? In 2003, CG companies spent $110 billion on trade promotion with trade funds averaging 17 percent of revenue and 54 percent of total marketing spend. Before FASB changed accounting rules in 2002, all trade funds were treated as expenses making it easier for managers responsible for trade funds budgets to allocate and manage promotional dollars. Now, FASB accounting rules require that certain activities be accounted for as reduction in revenue and others as expenses. Instead of simply managing an expense budget, trade marketing managers and sales executives are now managing dynamic revenue and expense forecasts throughout the year, which requires tighter processes to ensure accurate and timely accounting. With Sarbanes-Oxley compliance requirements, CG companies will have to certify the adequacy of their internal financial controls and attest to the accuracy of their financial reporting to the SEC. With that much money being spent, you can bet the SEC will be interested in whether or not publicly held CG companies have the right systems and processes in place to enable tight financial controls and ensure accurate accounting for trade promotion spending.

Is this more of a retail challenge, CG challenge or both? Sarbanes-Oxley compliance is a challenge for both retail and CG companies. However, it probably represents a bigger opportunity for CG companies because the tighter controls mandated by Sarbanes-Oxley will help provide better visibility and control over CG companies trade funds spending and, hopefully, better returns as a result. Manufacturers will have backup documentation and the backing of a legal requirement to document and maintain clear and detailed records of their TPM transactions with retailers, making it more likely that they will can influence the TPM process with the retailer. At the same time, Sarbanes-Oxley will make it increasingly difficult for retailers to take unauthorized deductions or to take deductions without providing clear supporting documentation for the deduction. A generally accepted industry practice that has benefited retailers and challenged manufacturers for years may be substantially addressed or even eliminated over time because of the new requirements.

Will sarbanes-oxley bring cg firms closer to true collaboration with retailers? Over time CG companies' compliance policies will influence collaboration between retailers and manufacturers but, right now, every publicly held CG company is focusing on its own compliance efforts. As compliance efforts evolve into everyday business processes, both retailers and manufacturers will operationalize formal financial controls over trade promotions. Once those controls become standard operating procedure, retailers' and manufacturers' accounting requirements will drive business process opportunities to enable both to manage and track various TPM activities collaboratively.

What makes Sarbanes-Oxley legislation unique to the cg industry? It's a question of oversight and accountability. Existing legislation and accounting rules like Robinson-Patman and 2002 FASB accounting rules changes mandate accounting practices for CG companies and trade funds, but fall short of establishing requirements to ensure proper oversight of those activities or for holding senior executives and corporate directors personally responsible for accounting rules violations or fraud. Sarbanes-Oxley defines specific corporate responsibility and financial disclosure guidelines that, among other things, require both the CEO and CFO to certify personally the effectiveness of their company's internal control processes along with the accuracy of the company's quarterly and annual reports filed with the SEC. With $110 billion spent on trade funds in 2003, senior executives are sure to be asking for better visibility to trade funds management processes and direct oversight over TPM-related financial controls.

Sarbanes-Oxley applies to public companies. Is there value for privately held firms to reach compliance? Absolutely. Compliance with Sarbanes-Oxley's control standards may require changes to internal business practices, including those for tracking and accounting for trade expenditures, but, in the long run, the changes make good business sense. A privately held CG company's ability to demonstrate that it complies with Sarbanes-Oxley will be a huge benefit if the company hopes to go public through a future initial public offering, be acquired someday by a publicly held company, or even if the company needs to apply for a loan or a line of credit, or negotiate financing.

Many companies still use spreadsheets to manage their trade funds. is this still a viable option? No. Spreadsheets fail the test for adequate and verifiable financial controls. Spreadsheets don't scale well, you can't audit transactions or maintain consistent historical records, aggregating data across reps, regions, customers, products or other categories from multiple spreadsheets isn't easy, and there is no systematic way to enforce process or financial controls throughout the organization. Without controls to ensure that users are following a standard process or are subject to the same systematic and rules-driven approval processes, CG companies cannot certify the effectiveness of their internal financial controls. And, aggregating data from multiple spreadsheets up to the corporate level for reporting is never timely and is always error-prone making it impossible to attest to the accuracy of quarterly and annual financial reports - a clear violation of Sarbanes-Oxley's compliance requirements. The only way to establish adequate and verifiable controls over the trade funds management process is to adopt an automated trade funds management solution, review the control options available with the solution, and then establish and systematically enforce those controls as a matter of corporate policy.

Does implementing a TPM solution like Gelco guarantee compliance with Sarbanes-Oxley requirements? Implementing an automated TPM solution like Gelco is the first step, and it certainly puts CG companies on the path to compliance. But Sarbanes-Oxley compliance requires CG companies to establish clear TPM financial control policies, and then enforce those policies through the TPM solution. What's more important are the corporate policies that dictate how the solution will be used to enforce those controls. Also, any TPM solution is subject to audit and review as part of a CG company's Sarbanes-Oxley compliance efforts. CG companies with the appropriate financial and process controls in place can leverage their TPM solution as evidence of that control. Instead of defining and managing controls on their own, companies leveraging automated trade management solutions from an outsource provider like Gelco will be ahead of the compliance curve, benefiting from the process and financial controls already built into the solution.