BIZ 2000

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Year 2000: A Business Issue

by Alan R Arnold

Senior Manager

Ernst and Young

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Year 2000 Awareness

Like many other business executives, you are probably tired of hearing

about the Year 2000. You may even be a little skeptical about the messages contained

in many of the articles you have read. But I assure you from where I

stand at the front lines of the Year 2000 battle, the message is real

and the consequences could be severe for those who do not prepare now.

The majority of the Year 2000 articles in the press tend to focus on

extreme examples. This, in my opinion, has contributed to many

organizations not taking the issue seriously. The Year 2000 situation is

hard for many of us to relate to, or understand, when the only examples

we hear about have nothing to do with our everyday businesses. Perhaps

you think that your company doesn’t have a major Year 2000 issue. Or,

you may feel that you have mastered a certain level of Year 2000

awareness and are comfortable with your grasp of the Year 2000

situation. My opinion is that many businesses do not really have a

thorough awareness of all the related business issues.

The Year 2000 issue cannot be ignored for two important reasons. The

first is that the time to fix the issue is truly running out. Second,

and even more important, is the potential dire consequences it may cause

at your company. In this article, I will help you get to the next level

of Year 2000 awareness by giving you some real-life examples, followed

by the real-life consequences, and explain how you and your business may

be affected.

A Few Examples

From a technical perspective, the Year 2000 issue is not complex. In

most cases it is a simple matter of dates not processing correctly when

used in arithmetic calculations, data comparisons, and sequencing

(sorts). It is important to note that Year 2000-related failures usually

do not cause programs and systems to stop working. That would be too

easy. Unfortunately, Year 2000 failures usually result in applications

producing unpredictable results, which are discovered only when the

resulting business issues arise. Some of the issues I have seen first

hand include orders that will not process correctly, supply channels

that fail, accounting reports that don’t age correctly, and invoice

systems that don’t bill correctly.

If your organization is in the distribution industry, you need to be

careful of the many date-specific processes. In the distribution

industry, dates control when shipments are sent and received. Many

times, the sequence that goods are shipped is date dependent as well.

Older inventory can be skipped by mistake and newer inventory shipped

first. In several well-documented Year 2000 cases, this situation has

already occurred and has caused millions of dollars of damage.

Financial systems in all industries are beginning to have issues as

well. For example, forecasting systems that forecast into and beyond the

Year 2000 are currently failing. Have you reviewed the strategic budget

for your organization to verify that the numbers your systems are

producing are reasonable? If your forecasting system is not Year 2000

ready, there is a good chance your budgeting calculations may be

producing error today.

Other parts of your financial systems that are susceptible to Year 2000

errors include your accounts receivable, accounts payable, and payroll

applications. If your company has business on the books going into the

Year 2000, or is using Year 2000 dates in calculations, you need to

manually review and verify the results of these systems. Non-Year 2000

ready A/R and A/P systems can miscalculate important interest and aging

routines. Payroll systems have many dates used to do simple and complex

salary-related calculations. Verify that your payroll applications are

Year 2000 ready before your company starts running into issues.

And don’t forget to review your billing applications for Year 2000

readiness. Most invoicing applications are triggered by dates.

Calculations contained within the invoice are date dependent as well.

Failures in your invoicing systems could critically damage your cash

flow.

Whose Issue Is It?

Many Year 2000 issues that are not directly yours or your company’s may

indirectly affect your company in negative ways–sometimes in small

ways, but other times in very large ways. All partners in your supply

chain need to be examined for Year 2000 readiness. How are other

organizations going to affect you if they fail? You need to develop a

plan that addresses your critical business suppliers’ plans for Year

2000 readiness. I would recommend that you develop contingency plans

that address companies that you feel may not make it through their Year

2000 issues. Some organizations are collaborating with their critical

business partners and working together on Year 2000 solutions to ensure

their mutual Year 2000 readiness.

It is important to recognize and prepare for the certainty that other

companies will be examining your company and its Year 2000 readiness

status as well. If your company is a supplier to another company, and

supplies critical components, you may have to prove that your company is

Year 2000 ready. If your company can’t prove its Year 2000 readiness,

chances are good you will be given an ultimatum to get your company Year

2000 ready by a certain date, or risk losing business. This examination

of other businesses is an important part of a Year 2000 readiness

program that minimizes an organization’s Year 2000 risks. Many companies

are taking a proactive position to protect themselves against other

companies’ Year 2000 issues.

A Year 2000-ready company has a competitive advantage over a company

that is not Year 2000 ready. Many companies will insist that every

business partner in their supply chain must be Year 2000 ready. Several

industries (ie, banking and automotive) are organizing industry-wide

initiatives to set Year 2000 standards to help ensure that their

industries do not suffer catastrophic failures. It is in your best

interest to not only solve your Year 2000 issue early, but also to be

able to prove to others that you have done so.

Bottom Line – Where Does the Buck Stop?

Executives of all organizations must recognize their potential liability

in regards to the Year 2000 issue. Directors and officers owe their

corporation a fiduciary duty of care that requires that they exercise

reasonable diligence in the performance of their obligation on behalf of

the corporation. The failure to uphold this duty could result in

imposition of personal liability for harm to the corporation. It is

extremely important to realize that there is no protection from

liability in being ignorant of the existence of a Year 2000 issue. The

only “safe harbor” available to directors and officers is a demonstrable

effort to determine the relevant facts and to implement appropriate

responses.

Your opinions to fix the Year 2000 software issue are simple: upgrade,

replace, fix, or retire. There are many different financial implications

with each of these options. You should check with your accountant or

financial advisor in this area. The financial implications can be

serious and should be thoroughly understood before any final decisions

are made.

Your auditors will begin, if they haven’t already, inquiring about your

company’s Year 2000 issues. They will ask questions to understand your

Year 2000 management plans to resolve the issues. They will assess the

reasonableness of management’s plans and progress made in executing the

plan. Finally, the auditors will appropriately communicate to

management, the audit committee, and/or board of directors of your

company.

Under SEC Release 6385, a Management Discussion/Report must be included

with management’s filings and audited financial statements. The purpose

is to allow investors to look at the quality of earnings reported in the

audited financials (i.e. to disclose the company’s ability to continue

to perform at that level in the face of such potential issues as the

Year 2000 situation). Under SEC Release 6385, management is required to

make known trends, demands, commitments, and events likely to come to

fruition that can have a material impact on the company’s earnings and

its future. Footnotes, reserves, and other accounting treatments may be

possible depending on your company’s specifics, so please contact your

auditor for more information in this area.

Year 2000-related litigation has also started! The first lawsuit was

filed in Warren, Michigan, where a retailer claimed they lost extensive

sales revenue because a vendor’s system could not accept credit cards

with an expiration date of “00”. This is only the beginning of what the

legal industry sees as a trillion-dollar opportunity.

Don’t Ignore Year 2000

You don’t want to ignore the Year 2000 issue. It won’t disappear by

itself and it must be addressed. The good news is that you still have

time to fix your Year 2000 issues if you start today. The sooner your

company addresses the Year 2000 issue, the more options will be

available. The bad news is, many companies have chosen to ignore the

Year 2000 issue today, and as time runs out, so do their options. The

deadline for Year 2000 readiness cannot be moved!

Don’t let extreme Year 2000 examples scare your company into not doing

anything about Year 2000 issues. The Year 2000 issue is not an industry

scam created to sell more hardware, software, and services. Because the

technology industry is delivering the Year 2000 message (because they

understand the seriousness of the issue), non-technical professionals

have been extremely suspicious of the messenger. You must look beyond

that, however. There are real Year 2000 issues happening today and many

more will occur as we approach the new millennium.

Year 2000 awareness has continued to earn notoriety outside of

Information Technology circles and has entered into the mainstream

press. For this reason, public awareness of the issue and its potential

for financial and legal ruin continue to grow daily. Even shareholders

and the financial community have stepped in to question companies’ Year

2000 readiness. In turn, this means that you must move quickly to

understand the impact of the Year 2000 situation for your company and

minimize its risk. You must identify mission-critical systems and

processes to ensure that steps are being taken to ensure Year

2000-readiness with century dating standards.

Furthermore, Year 2000 readiness cannot be assumed; it must be verified

across all internal and external systems that share date-dependent

information for your company. Take action today to protect your business

against the obvious, and not so obvious, Year 2000 business issues that

face your company.

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