Sarbanes-Oxley: Does Compliance Require Earned Value Management on Projects?
By Quentin W. Fleming and Joel M. Koppelman
There are numerous ways corporate executives can put a "positive spin" on their financial reports. Some methods are legal, others are blatantly illegal. The illegal ways are now being addressed by a number of groups, including the U.S. Congress, Securities and Exchange Commission (SEC), Department of Justice, state attorney generals, and others. With the president's signature on the Sarbanes-Oxley Act of 2002, the spotlight is now on every CFO and CEO to give an accurate portrayal of their true financial condition:
...The Commission shall, by rule, require, for each company filing periodic reports under section 13(a) or 15(d) of the Securities Exchange Act of 1934...that the principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, certify in each annual or quarterly report filed or submitted under either section of such act that
- The signing officer has reviewed the report;
- Based on the officer’s knowledge, the report does not contain any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;
- Based on such officer’s knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report;
- The signing officers
- are responsible for establishing and maintaining internal controls;
- have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared....(1)
There is a legal way, however, for corporate executives to effectively cook their books and put a positive spin on performance. Perhaps it should not be legal, for at best, this practice is highly questionable. This approach ignores the early performance indicators on major new projects (capital, software, etc.), which often span several fiscal years. One should not wait until the actual funds have been expended to predict an overrun of costs'by then, it could be too late.
Some obvious examples of major capital investment projects that would impact the firm's bottom line would be: the construction of a new corporate headquarters, an IT transition project, a commitment for a new corporate enterprise resource planning (ERP) system, construction of a new factory, or the decommissioning of a nuclear reactor. These are just a few examples of multi-year projects that, if performed poorly, could have a major material effect on the profitability of any organization,and of course, the resulting bonuses of their managing executives.
The prevailing attitude of many firms would seem to be that whenever they make a commitment to fund a major new project that spans multiple fiscal years, there is no obligation to ascertain and report both the current status and final expected costs. A recent best-selling book on the Enron affair typifies this type of corporate attitude:
...the truth is that there is no entirely satisfactory way to account for complex deals that extend over several years.(2)
Respectfully, the authors disagree with this assertion. There is a method "proven and accurate"to measure the current status and exactify final required costs on major capital projects that span multiple fiscal years. That technique is called earned value management (EVM). It is a concept that originated more than 100 years ago by industrial engineer, as they measured cost results in U.S. factories. The U.S. Department of Defense (DOD) has successfully employed this technique for the past 40 years on its major systems acquisitions.
[Read the full text of the impact on project management of the US Government Sarbanes-Oxley Act]
Editor's Note:
In 2002 the US Congress passed the Sarbanes-Oxley Act as a response to the breakdown in corporate checks and balances that cost investors hundreds of millions of dollars in losses
Measures to assure the independence of the corporate audit were central to this legislation. But most importantly there are strong new corporate governance rules on who can sit on boards and audit committees. Sarbanes-Oxley is designed to reinforce duties that directors, executives, auditors have to the investing pubilc. The ends sought are reliablity in accounting and clear accountability to shareholders and trusted markets.The rule discussed by the Fleming-Koppelman article is the the clear responsibilities for internal controls and accuracy of financial reports.
About the Authors: Fleming and Koppelman are the co-authors of Earned Value Project Management published by the Project Management Institute, 2nd edition, 2000. |
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Joel M. Koppelman is the co-founder and CEO of Primavera Systems, Inc. |
Reprinted with permission from the National Contract Management Association. NCMA is a leading association for contract management professionals.