COMPLYING WITH REPORTING RULES WHILE MAXIMIZING REVENUE WILL BE NO EASY TASK

Fifteen years and three networks have taught me and my cable finance and accounting colleagues something that everyone is about to learn: We need to replace the historical “doing more with less” motto for our finance and accounting departments if we are to rise above the obstacles that plague us today. Over the last several years, the cable industry has seen more than its share of accounting scandals, which combined with the meltdown of Enron and other widely publicized shortcomings to prompt passage of Sarbanes-Oxley, the Public Company Accounting Reform and Investor Protection Act of 2002. Sarbanes-Oxley, which takes effect this fall, has increased the momentum to overhaul how programmers and cable operators manage financial reporting. For example, Section 404 of the Sarbanes-Oxley Act requires management to issue an annual internal control report that includes (1) a statement of management’s responsibility for establishing and maintaining adequate internal financial controls and (2) management’s assessment of the effectiveness of these internal controls. Compliance with Sarbanes-Oxley will require companies to devote the resources necessary to identify and address areas of management concern. Another factor that has increased pressure on the networks’ back-office functions is a plateau in annual license fee growth. Nearly 30 cable networks reach 60 million or more cable subscribers and an additional dozen networks reach over 45 million subscribers. Not only are these networks experiencing smaller gains from new distribution, they are also responding to pressures to keep cable rates down by minimizing increases in their license fees. Reduced margins and cash flow are net effects of these two factors and are driving interest in another method for revenue growth: maximizing revenue from existing sources. The most profound challenge for most networks, as it relates to improving internal controls and maximizing subscriber revenue, is effectively managing the data required by their affiliate sales and finance functions. For example, Medea, a database developed by Argo Systems, provides networks with a central data repository required to effectively support the affiliate data requirements of all organizational functions. However, a database alone will not improve overall functionality. Processes, procedures, effective internal controls and qualified staff must be integrated into the organization and into the management of the affiliate database. Many programmers effectively use highly specialized outside services. Our company provides audit reports that programmers can use to identify and recover unidentified receivables and to insure contract compliance with their cable affiliate. Cable operator consolidation continues, with 90% of the cable revenue for programmers now attributable to the top ten MSOs, magnifying exponentially even the smallest of contractual discrepancies. While the audit process is integral to identifying revenue-related issues, real-time success in managing revenue and cash flow will come when cable networks place greater emphasis on internal financial controls and devote additional resources to managing their revenue recognition, contract compliance, billing and collections functions. Compliance with Sarbanes-Oxley and the pressure to maximize operating results are prompting many programmers and cable operators to reevaluate their organizational structure and internal controls in search of new “best practices.” Until recently, rarely did the accounting or definition of subscribers, the launch of digital services or the complexity of contract language affect the resources needed to manage a network’s affiliate finance group. One of the most important issues in achieving best practices in performance and internal controls is the conflict between organizational politics and operational functionality. An example of this is when a programming network’s affiliate sales and finance and accounting departments create and maintain independent data management systems. Best practices must transcend department boundaries. Cable Audit Associates is facilitating the process of identifying these new best practices for our clients, which we believe will improve the financial accountability of our industry as well as the performance of participating companies. Later this month, CAA is hosting a conference at which these new organizational and procedural models will be the focal point of our agenda. This forum will enable new networks to benefit from the history of more established ones. These mature networks, which are in the process of reinventing their affiliates sales and accounting management structures, will equally benefit from the ideas and recommendations provided by their peers. Stay tuned for the results of this important undertaking. They will be evident in stronger balance sheets and well-substantiated financial projections and results. Bruce N. Lazarus is CEO of Cable Audit Associates.