Business change threatens financial integrity

Research finds M&A activity the primary cause of financial “fault lines”

Change due to mergers and acquisitions activity is undermining the integrity of firms’ financial systems, according to new independent research commissioned by ACL Services.

Of the 300 companies from north America, the UK and Germany surveyed, 52% had either merged, been acquired or undergone a departmental merger in the past 12 months. While 85% of businesses experienced some level of change in their financial analysis applications over the past 12 months, almost half of respondents (47%) believed their financial systems were undermined by operational change within the business.

One in three businesses stated they were exposed to regular finance department errors and two-thirds are seeking to improve the effectiveness of financial transaction analysis. Some 40% of respondents agreed they struggle to find a balance between optimal internal controls versus over-controlled systems that can’t keep pace with business.

“It appears that enterprise financial systems and processes are buckling under the pressure of constant change,” says Harald Will, president and CEO of ACL Services. “Even seemingly simple changes to business structures, such as the merger of a department or a move to a shared services centre, can involve massive financial consolidation and upheaval. Constant change equals greater risk and businesses need to have much tighter systems and monitoring in place to manage both.”

Businesses are already feeling the potential financial pitfalls brought about by change. About 13% of companies admitted to experiencing financial loss due to poor risk management, 12% had been asked to improve their processes by regulators and 5% had already been fined for deficient compliance controls. Perhaps as a response to this, one in three businesses stated their approach to assessing risk had changed in the past 12 months.

Continuous monitoring could be one way to mitigate these risks but, although 59% of respondents agreed that continuous monitoring of financial transactions across their organisation is an effective way to mitigate risk and improve accuracy, only 17% of businesses have continuous controls monitoring technology in place.

“Small gaps and weaknesses create ‘fault lines’ that potentially destabilise an organization’s financial systems. And while businesses agree that continuous auditing is an effective strategy to mitigate these risks and bridge systems, they are still using ad hoc analysis in most cases. As they try to cope with the impact of change, they must invest in early warning systems to continuously monitor the fault lines for fraud, mistakes and inefficiencies that can cost millions in losses, as well as damage a company’s reputation and value,” says Will.

The ACL survey was undertaken by Loudhouse Research, an independent B2B research consultancy, in July 2007.