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.