SOX Compliance with SAP Central Finance
SAP S/4HANA Central Finance is an accelerated deployment option for implementing SAP S/4HANA Finance in a non-disruptive way. Once deployed, SAP Central Finance becomes a central repository of financial data (and a single source of truth, by extension) by interfacing with multiple source ERP systems and replicating their accounting transactions in real-time.
While there are several widely discussed benefits of Central Finance such as data harmonization and transparency, centralized financial reporting, accelerated M&A adoption, potential operating model redesign, faster closing times among others, one often overlooked aspect, despite being a compelling value proposition, is that of improvement realized in SOX compliance.
SOX compliance essentially requires management and the external auditor to report on the adequacy of the company’s internal control over financial reporting. The report must contain an assessment of the effectiveness of the internal control structure and procedures for financial reporting. This includes an assessment of both design and operating effectiveness of the internal controls built in the ERP and other IT systems.
Adhering to SOX compliance is quickly climbing up the list of top priorities for CFOs and is evident in the increasing budget that organizations are allocating to this end. SAP Central Finance can be instrumental in reducing the complexity and cost required to achieve it.
In order to understand how Central Finance helps in SOX compliance, we can group its capabilities under the following broad categories:
- Centralization of transaction data – Through real-time replication of accounting journals and other transactions
- Centralization of master data – Through mapping of most financial master data with source systems
- Centralization of processes – Several finance processes can be centralized with implementation of Central Finance
- Centralization of access control points – as a result of centralization of processes, certain access control points can also be centralized
These capabilities directly result in a more efficient implementation and execution of SOX compliance in several ways.
- Centralization of process reduces the number of people working on the same process and the number of transactions entered. This, in turn, reduces the risk of breach of compliance along at least two levers – breach arising out of human error and breach arising as a result of collusion or willful fraud. The following processes can be centralized in Central Finance and since many of these involve external business partners, they can form a high proportion of overall controls needed. Internal control KPIs related to any of these should show significant improvement after it is fully operationalized
- Credit management
- Supplier payments
- Customer collections
- Dispute management
- Cash management
- Central budgeting
- As an inherent advantage of centralization, access control, master data control as well as process control is better managed with Central Finance. In this context, GRC implementation and its capabilities complement well with an instance of Central Finance system in the landscape.
- S/4HANA core process control though various checks and validations are also easier to implement and manage with a centralized system in place.
- Centralized processes (with or without shared service center) have a higher potential of being streamlined resulting in fewer process deviation. Additionally, because of the centralization of both transactional and master data, the data quality is significantly improved with Central Finance. This immediately leads to several benefits
- Fraud detection algorithms can be modelled more accurately basis the streamlined process and occurrences of outliers is expected to be minimal
- Machine learning-enabled process controls are also easier to implement especially with the richer quality of data now available
- Automation projects to reduce human error are easier to implement and deploy
- SOX analytics is simplified with the presence of a central ledger since it acts as a single source of truth
- Any breach on SOX compliance is easier to investigate and analyze since we get a central view of all the data from disparate systems.
- Once the integration engine has been audited, an extract from the central ledger in CFIN system is sufficient for SOX audit purposes.
It is imperative then that CFOs start evaluating the benefits of central finance with this additional perspective and should certainly be considered when exploring the value case associated with a Central Finance implementation.