Accounting Shakeup: Time to Count on IT?

By Larry Barrett  |  Posted 2002-07-02

With $6 trillion of shareholder wealth wiped out since March 2000, and Xerox, WorldCom and Enron all in the middle of billion-dollar accounting scandals, public reporting on spending of all types is getting deeper scrutiny.

This will put more pressure on tracking all transactions within a company, to report to outsiders, and could include disclosing information technology expenditures, for which there is little public accounting.

"CIOs can't ignore the impact that Enron and Arthur Andersen will have on the way they will manage and operate their IT systems," says Diane Tunick Morello, vice president and research director at business research and consulting firm Gartner Inc. "Now there's even more pressure put on CIOs to increase access to data and uncover information hidden deep in their systems."

To date, the burden of cleaning up reporting practices of publicly traded companies has fallen to the Securities and Exchange Commission, and, to a lesser degree, to the self-policing New York Stock Exchange and Nasdaq market. The NYSE, for example, has considered requiring that the CEO of a listed company would certify every year that his company's information is accurate and complete.

To meet that kind of standard, a CEO would have to lean even more on the information systems in his company. That could mean delivering a more detailed account of that company's information technology spending as well. Traditionally, companies fold such spending into their general expenses category or, in rare and expensive cases, break them out as separate one-time charges. There is no requirement that companies break out their information system expenditures, although the SEC is looking hard at just about every aspect of financial reporting.

"We generally don't comment about movements afoot," says SEC spokesman John Heine. "All sorts of things are going on within the building. This is just one of the issues we're looking into."

The stakes are enormous. Information technology spending worldwide is expected to surge to more than $2 trillion in 2003, according to Strategic Planning Services/Spectrum Economics, an economic consulting firm in Palo Alto, Calif. By 2005, it will reach $2.6 trillion—a huge sum not required at present to be reported in much detail.?">

Time to Spend?

And despite the dramatic slowdown in technology spending in the past year, 50% of all capital spending by U.S. companies was information system-related, according to Bill McNee, managing partner at the business strategy consultant firm Saugatuck Technology.

"Companies are still holding IT spending tight," McNee says. "But we're approaching the end of the ability to postpone."

When that dam does finally break and technology spending rises, there will be more scrutiny on where and how the money was spent. A Saugatuck survey indicates U.S. CIOs have under-spent their budgets by between 10% and 20% this year. In April, a Morgan Stanley survey showed that while 80% of U.S. companies planned to begin new application initiatives, only 23% of those projects were started in the first quarter.

With the economy still ailing, pressure is also on to avoid the "soft costs" that tend to creep into any major installation—such as lost sales or wasted labor from unpredicted downtime.

"Generally, companies don't want to publicize these IT costs because it makes them look bad," says Cameron Steele, an analyst at the RBC Dain Rauscher brokerage. "There's not much to gain by talking about it. The damage has already been done."

Accounting for IT Spending

How to know when to say "when" to adding more servers:

  1. Think it through. Determine what the final information is that you want to track and then work backwards from that
  2. Identify "soft costs.'' Find the cracks where unexpected expenses will materialize and determine which department will be responsible for those costs
  3. Communicate, communicate. Make sure all employees know what data needs to be gathered and reported
  4. Do due diligence. Review how your current systems account for costs
  5. Review contracts. Examine agreements with suppliers and consultants to make sure all costs are reported fully and regularly