In the cards

Vince Eavis, head of business development, Commercial Cards Europe, Citigroup looks at getting compliant with commercial cards.

In July 2006 the Sarbanes Oxley Act, the American legislation introduced to clean up corporate governance after a spate of high profile scandals, will celebrate its fourth birthday.

Of course, many European companies feel that SOX is not relevant to them – it is a foreign piece of legislation, after all. But SOX does have an impact on this side of the Atlantic. Any foreign company that is registered with a US stock exchange is subject to its conditions, as are international subsidiaries of American firms operating in Europe.

What's more, American companies looking for partners, mergers or acquisitions from overseas will naturally be more attracted to firms whose operations most closely resemble US obligations for accounting, financial disclosure and corporate governance.

While it may appear easy to dismiss travel and entertainment (T&E) expenses as irrelevant as far as SOX is concerned, this would be to misunderstand the far-reaching implications of the Act.

It relates to any area that has a material impact on a company's financial results. And that goes all the way down to individuals' taxi fares or restaurant bills. They may not sound like much but, in fact, T&E expenses are estimated to be a company's second largest controllable spend after salaries.

Unlike salaries, however, T&E is driven by the employees themselves, and is subject to a degree of discretionary judgement. Depending on the sector in which it operates, between ten and 50 percent of a large company's employees typically have an expense entitlement.

That means that an organization with, for example, 10,000 employees could have up to 5,000 slightly different interpretations of the company's T&E policy.

Although this field of expenditure is defined as controllable, the opposite may well be true – and the impact of these costs on the balance sheet can be significant. Companies need processes in place for control and visibility, and hence accountability, if they are to comply with SOX.

A commercial card solution can do just that and help companies meet the demands placed on them by SOX. Indeed many firms who already have such a scheme have found that legislation has merely formalized the best practice they had previously adopted.

So how do cards address these legislative requirements? There are three sections of the Act in particular that commercial cards address.

Section 302 requires that the CEO or CFO prepares quarterly and annual certifications that disclose any fraud involving management or others with a role related to internal controls.

A report published by the US Association of Certified Fraud Examiners in 2002, before SOX came into being, showed that 22 per cent of corporate fraud is committed within the realm of expense reimbursement. Although these are American figures, there is no reason to assume that European companies have a significantly different experience.

It tends not to be the high-value transactions that are prone to deception, rather it is the smaller items like cash, meals, train tickets or taxi fares – and with taxi drivers usually happy to 'round up' fares or hand out blank receipts, it's not hard to see why.

It's also easy to see how fraud like this can be perpetrated in a large organization where hundreds, if not thousands, of employees are submitting paper receipts and personal credit cards statements that represent their own idea of what is an acceptable expense and what is not.

A commercial card solution, on the other hand, effectively takes that decision away from the individual, by automating the processes involved and implementing effective controls.

Rules can be put in place at the central level as to what can legitimately be purchased. Limits on individual spending and cash access can be set, and selected vendors prescribed – all of which helps prevent fraudulent use of corporate funds.

Card programmes can also capture line item information on transactions directly and feed these into financial systems – immediately flagging up inappropriate expenditure. And with a corporate-wide commercial card programme in place, claims for reimbursement for expenditure made with other methods can legitimately be turned down or delayed while thorough checks are carried out.

Section 404 of SOX mandates that firms have reliable internal processes that can ensure the accuracy of financial data.

It can be met by showing that expenses are properly authorized, assets are safeguarded against illicit use and transactions are properly recorded and reported – all of which can be achieved with the information management systems that accompany a good corporate card.

Although sections 302 and 404 are the main areas in which commercial cards help SOX compliance, they can also address section 402. This deals with practices that could be considered improper personal loans to executives: cards can ensure that such personal loans do not take the form of expensive purchases or large cash withdrawals.

However, for commercial cards to be a true compliance tool, they need to have a high acceptance rate.

Cards that cannot be used with a wide range of vendors, or in a variety of locations will inevitably be overlooked in favour of personal plastic – which swiftly negates the benefits of a corporate solution.

A single global provider, with the capacity to issue cards at a regional or local level, will also enhance compliance by having a single repository for data management.

The use of commercial cards can therefore make a significant contribution to compliance with this particular piece of US legislation.

But for the rare company that is, and intends to remain outside corporate America's sphere of influence, it seems likely that similar legislation will eventually be enacted within Europe. As there have been calls from senior EU commissioners for similar legislation over the last few years.

While we wait for that to materialize, moves have been made towards a greater integration of international accounting principles.

Following a rocky journey, the European Union has become the first region to have one common set of standards, with the adoption of the International Accounting Standards Convergence Rules (IASC) in 2005.

This trend can only increase the need for European companies to adopt rigorous management of every area of corporate expenditure, to reduce the cost and effort of meeting changing standards.

Aside from supporting compliance with tough legislation, a commercial card solution promotes a culture of more thorough financial controls and expense management. This brings its own advantages, in terms of increased accountability and visibility over a major area of expenditure.

SOX has focused a spotlight on the need for best practice in areas that these cards have long been fulfilling – and presented an opportunity for all large organizations to radically improve their T&E management, regardless of their location.

This article first appeared in July 2006 ITNOWextra.