Using Technology in Finance - Case Study Example

Technology in Finance Lecturer Introduction Corporate governance within the United s has undergone radical changes in the last few years as regulators embarked on measures to reign in sloppy and sometimes unscrupulous corporate leaders. Past deception, dishonesty, insider trading piracy against the public good, unethical and financial impropriety, has eroded the public confidence in the financial system, hence weakened the pecuniary markets. The many measures undertaken by the various authorities including the Securities and Exchange Commission (SEC), New York Stock Exchange (NYSE) and NASDAQ culminated in the comprehensive Sarbanes-Oxley Act of 2002. Stricter more stringent rules required firms to change their reporting processes, enabling more transparency. The resultant strict rules enacted necessitated firms to adopt modern accounting practices that could only be employed through innovative technology interfaces. The integration of automated or technological applications although costly in terms of resources and time has proven to be an effective control measure for the authorities while simultaneously assisting corporate leaders manage their internal systems. Other benefits of using technology in finance have been the development of enhanced marketing, communication, research and transaction technologies by organizations. Technology has been described as the application of individual, logical or material approach to resolve an impasse that leads to enhanced efficiency. It has been credited with improvement of business operations in firms including: administration, communications (from postal letters to email, mobile phones, telecast etc.), trading (online trading or ecommerce), automated production line technology, and research facilities among others.The need for embracing advanced technology by corporations was highlighted by the tighter regulations enacted by the Securities and Exchange Commission (SEC) in conformity with compliance rules relating to requirements regarding evaluation of internal control over financial reporting and management certification requirements mandatory to amendments under the Securities Exchange Act of 1934 that were adopted on June 5, 2003, pursuant to Section 404 of the Sarbanes-Oxley Act. Companies needed advanced technology to detect undesired movement in inconsistencies, automated reporting, upholding customer assets, violations etc., hence avert bad practices while enhancing the companies efficiency (WS&TStaff, 2005). Corporate governance encompasses the compliance to rules or procedures, traditions, edicts, and statutes touching on how a firm is directed, managed or controlled. This definition has now been expanded to embrace the relationship with the firm’s major stakeholders including the shareholders, workforce, clients, contractors, creditors, authorities, and the community. The main aim of corporate governance and compliance is to enhance accountability of the organisation to its stakeholders. This principle was brought to the fore in 2001 when various formerly respected large firms (Enron, WorldCom) collapsed even after reporting high profits year on year and more recently when giant monoliths like AIG, General Motors were forced to seek Federal government assistance to survive the global recession. The corporate reforms and regulatory requirements initiated by the regulatory authorities and other government agencies forced many corporations to improve their corporate governance practices to conform to new rules. Although many corporations have been apathetic in complying with the stringent measures, studies indicate that compliance leads to better results within the corporate while enhancing their revenue levels. Of technical significance, minor shareholders were enabled access to proxy statements online and allowed to nominate a parallel board of directors hence able to get more involved with the company. According to PricewaterhouseCoopers (2005), ‘Leading-edge research, expert analysis, and the opinions of business executives indicate that when companies apply an integrated approach to governance, risk, and compliance (GRC) activities, they enhance their competitiveness and bottom-line success’ (pg. 3). Companies have however traditionally viewed governance, risk, and compliance (GRC) functions as too arduous, costly, mandatory and a remote part of regulatory requirements much like tax returns, however recent events whereby large firms that have not taken GRC tasks seriously collapsed, have persuaded corporate leaders to adopt this measures wholly even as they were spurred on by public and political pressure. To this end, companies have integrated cutting edge technology or information technology (IT) infrastructure to prioritise compliance and enhance their internal systems. Corporate leaders who now increasingly held accountable for any non-compliance and governance misdemeanour within their firms have now taken a more proactive role in issues of integrity and financial discipline. Companies that integrate governance, risk, and compliance (GRC) practices mainly adopt IT systems that have a service-oriented architecture (SOA) which encompasses: software applications that are compliant with their internal systems and are available on demand; a reusable code to adjust to emerging different services; a neutral platform transport that incorporates a universal interface; and capable of patching gaps among the different applications systems while instituting controls in the enterprise’s non-automated areas. PricewaterhouseCoopers (2005) assert that, “integrating technology across the organization helps companies gain more timely and reliable regulatory compliance, more efficient use of legacy IT systems, and less expensive development and maintenance of software applications” (pg. 6). The impact of the digital technology on economies has been tremendous as consumers embrace new technological inventions not only in social spheres but also for convenience of financial transactions. Firms that ignore or lag behind in improving their digital presence risk being cut off from mainstream trading and having to expend hugely to catch up with their more technologically savvy competitors. Similarly, firms using outdated systems will lose clients who will move to the more efficient digitally compliant companies. Dixon (2009) asserts that, “internal efficiency demands use of new technological tools...aggressive cost-savings through use of new technology increase efficiency inside institutions” (nd). The import of these new rules was exemplified at Disney Inc. where over 40 percent of the minor shareholders voted online against the reappointment of the Entertainment Board chair, Eisner (Hymowwitz, 2004). The transformation to new technology enhances the current financial systems and has made financial systems more proficient even as software developers provide solutions that simplify and improve administrative and support systems that augment vocation duties. This is exemplified by the combination of advanced hardware and software developed by IBM engineers’ ground-breaking solution that is capable of churning information from global financial trading bourses at very high speeds churning out security prices 21 times faster than any other existing financial-trading system in the firm’s supercomputers known as Blue Gene/P (Greene, 2007). The success of integrated technological and financial systems has been confirmed by analysts. An online survey conducted by Accenture Inc., a research firm to establish the impact of the Sarbanes-Oxley Act in July 2005 ascertained this. The study encompassing 304 interviews of 152 IT and 152 financial managers at various US corporations having revenues of more than $1 billion worldwide (41 percent had more than $10 billion) had representations in the financial services (28 percent), health care (11 percent) and in the manufacturing/non-computers sector (11 percent). The results revealed that the Sarbanes-Oxley Act has led to more enhanced collaborations among finance and ICT managers as corporations that embrace new technological systems recorded higher performance and higher revenue levels. Although many corporations estimate that the cost of complying to the Sarbanes-Oxley Act averages seven percent, the study revealed that the real cost ranges from one to three percent (Curtis & Stone, 2006). Apart from this perceived apathy, firms also fail to exploit the inherent advantages in incorporating compliance measures whereby internal monitoring, evaluation of key performance indicators and metrics to determine the strength of the company can be undertaken for internal purposes (Stone, 2006). Majority of the firms have now discarded manual spreadsheet reporting and analysis to encompass to more advanced software forecasting in financial software analysis tools that enhance companies’ compliance in specialised reporting and budgeting applications (OBannon, 2004). Leading companies are now adopting various web based solutions that are self-reliant; transmitting data via a web-enabled graphic arrangement called extensible mark-up language (XML). This harnesses data from other applications, servers, databases, and other digital sources which is then sent online encrypted but is unloaded in a universal autonomous platform easily decipherable. Among this is the flexible business reporting language (XBRL) category that codifies accounting statements data for general use in financial software. XBRL-GL, is the specific general ledger interface used to transmit data internationally without altering a firm’s chart of accounts. Conventional perception has always held that the primary concern or corporate objective of companies is the maximization of long-term return (profits) of its shareholders, however contemporary outlook has revised this narcissistic voracity as firms adapt a more holistic attitude towards their environment hence encompassing social, environmental and economic objectives as part of their corporate goals (UNCTAD, 2006). Many small firms now use technology to generate new business. Incorporating accounting, management, and other office application software, small firms are able to incorporate advanced online technology to effectively market them globally while minimising their expenditure requirement. Using free online social networking, blogs, podcasts like Facebook, Twitter and podcast or relatively cheap forums like dot.mobi technology, which makes Web sites easier to view and navigate on mobile phones, firms are able to reach many clients at minimal costs. To connect the blog to an established Website is called ‘syndicated technologies’ hence generating more traffic for the site owner and blogger (Patel, 2009). The G20 London Summit (a grouping of the world’s leading industrialised countries) meeting in April 2009 and in recognition of the current virtually borderless global trading regime has advocated a more concerted and coordinated international regulation of corporations. The G20 Working Group on Enhancing Sound Regulation and Strengthening Transparency suggested that in partnership with the rather ineffective IMF’s Financial Sector Assessment Program (FSAP): “create an effective mechanism for key financial authorities in each country to periodically come together around an international table to jointly assess the systemic risks across the global financial system and to coordinate policy responses” (Hislop & Gruetter, pg. 3). In Europe member countries of the European Union (EU) established a body called the European Systemic Risk Council (ESRC), with logistical support of the European Central Bank (ECB) in Frankfurt, mandated to overseeing macro-prudential regulation within the EU (de-Larosiere Report, pg.44). The current global recession largely blamed on reckless and rogue financial practices has therefore united international regulators who have acknowledged the need for better coordination worldwide to reign in and enforce ‘policies and governance structures required to reform the global banking system’. Consequently, the G20 meeting has consented to the Basel-based Financial Stability Forum (FSF) to be expanded and incorporate all G20 countries, Spain, and the European Commission, henceforth renamed the Financial Stability Board (FSB) (Hislop & Gruetter, 2009). To enhance international collaborative monitoring among diverse authorities and corporations, advanced technology is employed ranging from closed social networks and discussion forums (Chat-rooms) to voice, video, and data-sharing technologies. The most recent invention is Tele-presence, a high-definition-video, sensitive-audio system which evokes a virtual presence of long-distance communication by harmonizing the physical experience with face-to-face meetings. Technology is playing a critical role as firms improve the rules and policies governing their internal and external compliance requirements as new legal regulations, particularly the Sarbanes-Oxley Act (SOX) and the Health Insurance and Portability Act (HIPAA), oblige corporations to revaluate their compliance practices. A PricewaterhouseCoopers survey in 2004 indicated that only 15 percent of corporations had an automated reporting system hence tended to view new regulations with lots of trepidation. Although firms tended to view compliance in terms of the rules spawned by the regulators like the SOX, HIPAA, and NYSE requirements, analysts advocated for a more inclusive enterprise technological solutions that will not only enhance compliance but also support internal corporate systems. (Taylor, 2004); (Secor, 2004) The impact of technology has also been profound on securities trading as more individuals and firms embrace virtual trading bypassing the hitherto mandatory brokerage firms and dealers. The advanced architectural platforms that enable tracking international securities online at individual’s convenience has enhanced financial stocks trading but require close scrutiny to avoid the unsavoury effects of uncontrolled indulgence and money laundering. According to Dixon (2009) the future of the national trading bourses is uncertain as a single international electronic online trading platform is capable of handling 60 percent of all global trade. Online trading including ecommerce, internet-banking and foreign exchange (Forex) trading is now the norm as technological innovations effectively gains prominence. Corporations are now readily integrating and embarking on additional internet marketing, banking, communication in a virtual global marketplace as online auction firms like EBay and Amazon.com handle many transactions. Technology has therefore not only transformed financial regulations but also in other transactions that have rendered the new technological innovations indispensable to users. The challenges now for the regulators is keeping a tight grip on the seamless transactions handled by modern technology even as the new phenomenon, data enabled mobile phones transactions that range from money transfers to online and messaging (sms) trading gains prominence (Dixon, 2009). Conclusion Finance and technology have virtually become interwoven as modern monetary transactions incorporate modern machination and structures. Likewise, the accounting functions and regulations have integrated the latest tools to keep up with the new technological innovations. The sophisticated systems evolved have assisted both the corporate leaders and regulatory authorities to keep track of various transactions more effortlessly than the earlier decadent techniques that were open to abuse by unscrupulous finance managers and traders. Modern monitoring systems have additionally enabled easier compliance and governance of corporations, and stock exchanges at various trading bourses. Modern technological innovations has therefore transformed the way companies trade as they employ online trading, marketing and research hence reducing expenditures unlike the previous methods. Financial trading like automated teller machines, ecommerce, internet banking, and mobile phone exchanges have simplified transactions and enabled smaller firms to enter hitherto barricaded markets. The emerging issues among the IT and financial managers is how to keep a tight control on the various transactions while the regulatory authorities maintain constant vigil. References Angus Hislop & Peter Gruetter. (2009). Using Technology to Accelerate G20 Plans for Strengthening Financial Supervision and Regulation. San Jose, CA: Cisco Internet Business Solutions Group (IBSG). Dickson, E. (2008). IT Policy Compliance Group Issues 2008 Report on Best Practices. Retrieved October 22, 2009, from IT Policy Compliance Group: http://www.itpolicycompliance.com/it-policy-compliance-group-issues-it-policy-compliance-group-issues-2008.html Dixon, P. (2009). The Impact of New Technology on Corporate Banking. Retrieved October 22, 2009, from Globalchange.com: http://www.globalchange.com/technobank.htm Greene, K. (2007). Speeding Up Financial Analysis. Retrieved October 22, 2009, from Technologyreview.com: http://www.technologyreview.com/tag.aspx?id=160&aid=22463 Hymowitz, C. (2004), Business leaders face grassroots demand for a lot less Hubris, The Wall Street Journal, p. B-l, (Eastern Edition), March 9. Melillo, L. (2008). Use ROI Analysis to Prioritize Technology Purchases. Retrieved October 22, 2009, from Microsoft.com: http://office.microsoft.com/search/redir.aspx?AssetID=01205515103333&CTT=5&origin=HA011999671033 OBannon, I. M. (2004). Financial Statement Analysis: Forecasting & Budgeting Tools Add To Practice Value. Retrieved October 22, 2009, from Cygnus Business Media: http://www.CPA.com/article/article.jsp?id=&sitesection=32.htm Patel, S. (2009). How Small Businesses Are Using Technology to Get Ahead. Retrieved October 22, 2009, from FOXNews.com: http://www.foxsmallbusinesscenter.com/finance/index.html PRICEWATERHOUSECOOPERS. (2005). Global Best Practices: Governance, Risk, and Compliance Series. PRICEWATERHOUSECOOPERS Global Best Practices Team. Secor, G. (2004). The Gilbane Report: Compliance: Make "DRM" A Part of the Solution. Retrieved October 22, 2009, from Gilbane.com: http://gilbane.com/Compliance_Make_DRM_A_Part_of_the_Solution.html Stone, G. A. (2006). Understanding the Cost of Sarbanes-Oxley Compliance. Retrieved October 222, 2009, from Accenture.com: http://www.accenture.com/NR/rdonlyres/A2AFC385-29C4-43C6-87C8- C4B81FA234D4/0/Sarbanes.pdf Taylor, R. (2004). Enterprise Content Management (ECM). Retrieved October 22, 2009, from ECM.com: http://www.ecmreport.com/ UNCTAD. (2006). Guidance on Good Practices in Corporate Governance Disclosure. UNCTAD/ITE/TEB/2006/3 (pp. 1-52). New York and Geneva: United Nations Conference on Trade and Development (UNCTAD). WS&TStaff. (2005). SEC Extends Compliance Dates for Non-Accelerated Filers and Foreign Private Issuers. Retrieved October 22, 2009, from Wallstreetandtech.com: http://www.wallstreetandtech.com/;jsessionid=MWKQYVLQCDRNQE1GHPCKH4ATMY32JVN Read More