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FACING SARBOX, BANKS TURN TO IT

With internal controls under increased scrutiny, banks seek to streamline workflows in financial reporting.

Under section 404 of the Sarbanes-Oxley Act, companies will have to include in their annual reports an "internal control report" attesting to the effectiveness of financial reporting procedures. This report will have to be certified by both management and by an outside auditor.

In turn, banks are turning to their IT departments to help with the compliance effort. The time limit isn't that far away: Most companies with an equity market capitalization over $75 million will have to comply by June 15, 2004. Smaller firms and foreign issuers have until April 15, 2005.

Compared to other public companies, banks have somewhat of an advantage in that insured depository institutions already submit much of the same information to the FDIC.

However, the requirements of the FDIC and the SEC do not coincide entirely. In a final rule published June 6, the SEC lists the additional requirements that market-listed banks will have to meet in addition to their current reporting requirements, as follows:

* Banks must identify the framework used to evaluate internal controls over financial reporting.

* Management must assess the effectiveness of the bank's internal control over financial reporting (using the above framework).

* Banks must disclose any material weaknesses that have been identified in internal controls. If any such weaknesses exist, management cannot claim to have effective controls (in the above assessment).

* Banks must state that internal controls have been audited by a public accounting firm. Furthermore, the public accounting firm's "attestation report" must be included in the company's annual report.

Since internal controls are coming under such scrutiny, many companies are taking the opportunity to understand and simplify their internal processes. "People running the company want to be able to say, 'This is how things work,' and be fairly confident that things really work that way," said David Ellenberger, CEO of 170 Systems, based in Cambridge, Mass., whose customers include Citicorp, Greenpoint Financial, and NYC Housing Development Corp.

Sarbanes-Oxley amplifies the benefits achieved by workflow automation. "Once you go and automate a control, then it becomes self-documenting," said Rakesh Shukla, co-founder of 170 Systems. "Then it becomes much easier for an external auditor to attest to and so your auditing fees should go down."

Furthermore, content management will help to support other provisions of Sarbanes-Oxley requiring companies to disclose "material events" affecting the company in a short timeframe. "If you don't have an efficient, automated process in place, there's no way you can disclose that process in two days," said Shukla.

Also, with effective automated internal controls, corporate leadership can better ask the tough questions, such as: "Why did we pay this outside firm $500,000 for services?" said Ellenberger. "What were those services and who approved it?"

Indeed, the money spent on technology to bolster internal controls may end up paying for itself.

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