SAM your industry needs you
Posted: 6 September 2007
Strategic Asset Management, fixed, IT and facilities has become a critical management requirement for all energy and utilities companies, as financial, regulatory and legislative compliance requirements continue to gain momentum at senior management and board levels.
It is not a matter of if, but rather when a supplier is subjected to an external audit or industry investigation and, if non-compliance is established, feels the full legal weight of industry policing or, in the case of IT, a software vendor.
The ramifications are that there will be significant costs associated with non-compliance, as well as fines and damages that may be additionally applied and under licensing costs associated with non IT compliance.
And it’s not limited to international or listed utilities companies with official financial reporting requirements, Australian companies are equally at risk.
Based on our audit experiences, we believe the majority of companies would be unable to provide an accurate, immediate report on the status, location, value and risk status of their assets if required. With assets sitting on the balance sheet, it is vital that these numbers are correct as we head into a more audited environment.
Traditionally, we know that energy and utilities companies have tracked assets using a combination of spreadsheets developed from multiple asset databases. The utilisation of such mechanisms to capture asset data has been driven by various issues.
These include the lack of available and dedicated asset management tools that provide a single, accessible asset repository and a lack of understanding of the benefits effective asset management can deliver to other areas of the business.
Added to this critical operational need for asset management, changes to the way in which all organisations are now required to prepare their financial accounts, catalysed by the failure of some major global organisations such as Enron and Worldcom, means that proper, thorough and compliant asset management is now a mandatory requirement.
The new statuatory and regulatory reporting requirements include:
- Corporate Governance Standards
- International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS)
- Sarbanes Oxley (Sarbox)
- Occupational Health and Safety standards
- Environmental Protection Authority (EPA) standards
The financial reporting standards have resulted in a focus on the quality of the data supporting financial reporting, especially in relation to a company’s fixed assets since they are a substantial component of the balance sheet.
Further external audits undertaken by accounting firms rely on accurate information. Significant problems arise when the asset register entries do not match actual assets in relation to the value or number of assets. Therefore it becomes difficult for auditors to reconcile the information, which has potential negative impacts for manufacturing businesses should auditors recommend a write-off.
Environmental and Occupational Health regulations are also key requirements that organisations, such as water, waste water and refinement industries, have to comply with. The risks associated with these are clear.
For example, if manufacturing or processing equipment is not adequately maintained to a standard or not maintained at all, or if sub-standard parts have been used and fails causing injury to a company’s employee or employees, there is a public liability risk. This is where asset management is critical in demonstrating that equipment is being maintained and managed correctly and that proper process is being followed.
Similarly, organisations whose equipment fails causing potentially polluting discharges will undoubtedly be pursued by environmental protection agencies. Investigations would surely focus on proper maintenance and asset management procedures.
The absence of proper and robust asset management tools and practices has contributed to the labour intensity of gathering and managing asset management data from various sources and a lack of full visibility and control.
This lack of visibility and centralised access to assets has meant that utilities and manufacturers can be constrained in their ability to manage, plan and report on the critical assets on which they and their supply chain depend for service delivery.
Poor visibility and accessibility also means assets cannot be quickly located if there is no system to manage and track assets. Therefore it has been difficult for asset management professionals to manage the service delivery aspects assets provide, and to make decisions about asset utilisation and capacity whether current or future.
There is a wave within the industry of forward-thinking companies which are keen to start future-proofing their business and proactively explore Strategic Asset Management as a benefit rather than an operational obligation.
There are tools and services to help senior executives rationalise line of business assets, ascertain return on investment, allocate maintenance or replacement funding based on the risk profile of critical assets, and predict failure points to provide managers with the means to maintain service delivery.
The sooner energy and utilities, companies, and manufacturers adopt the Strategic Asset Management philosophy, the more Australia will be able to compete and transact internationally safe in the knowledge that the i’s are dotted and t’s are crossed to whichever standards are required.
David Hodges is Managing Director at Smartpath, an innovative asset management software and services company.