Where IT accounting raises compliance issues.

• Author: Gordon, Scott
• Position: It governance

Governance of information technology (IT) has emerged as a key CFO issue in the past several years, for a variety of reasons, including information security, financial reporting and portfolio management. Sarbanes-Oxley mandates have significantly raised the stakes, both from a corporate and personal perspective, for any shortcomings in IT governance of financial data.

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The good news is that most companies have responded positively and thoroughly to the IT controls issues raised by Sarbanes-Oxley. The bad news is that there are other IT Sarbanes-Oxley problems lurking out there that are not on the radar screens of many CFOs.

When it comes to Sections 302 and 404, most CFOs have focused their attention on ensuring that effective controls are in place over the operations of IT systems that support financial reporting. However, a separate matter that can also result in significant errors in financial reporting concerns arrangements entered into by the company to acquire IT services and systems. Specifically, the issue is whether transactions to acquire IT services and systems have been correctly recorded from a financial statement perspective.

This is no small matter, not just because of the potential size of these transactions, but also because the complexity of the arrangements often fogs the financial essence of what is taking place. Moreover, many finance departments are not involved in the negotiations of these arrangements, since purchases of IT goods and services have traditionally been the domain of IT and procurement. There can be more to an IT transaction than initially meets the eye and, in the age of Sarbanes-Oxley, that can make it prudent for the CFO to obtain a deeper understanding.

Examples of such transactions are:

* a company's treatment of the hardware and other assets it uses in an outsourcing arrangement with a third party;

* a company's treatment of a professional services contract with a software development or maintenance firm; and

* a company's treatment of a third-party entity that is providing outsourcing services, such as business process outsourcing of HR or customer service.

Getting to the Substance

There are several challenges a CFO faces in ensuring that IT transactions have been properly accounted for in accordance with generally accepted accounting principles (GAAP). First, these arrangements are technically complex, and it is not always obvious how different sections of a technology...