Automating the Financial Close

23rd July 2010

Financial processes across the globe are in a constant state of flux. New accounting standards and regulatory requirements at a local and international level mean that the corporate reporting landscape is continuously changing. In fact the pace of change is accelerating, with Global 2,000 companies facing more challenges in the first decade of the 21st century than in the whole of the previous two decades. But how does a company increase the dependability of reporting and satisfy the demand for faster information and auditability against the backcloth of increasing reporting complexity? The answer, says Gary Simon, FSN’s managing editor, lies in increased process automation. 

INTRODUCTION

 THE CHALLENGES OF THE FINANCIAL CLOSE

 The limitation of ERP

The limitations of consolidation systems

Scale, time zones

Complexity of requirements

Complex organisational hierarchies

Heterogeneous companies

Variable group policies and culture

Inappropriate tools

 COMPLEMENTING SAP –

WHAT SORT OF ARCHITECTURE WOULD WORK?

 WHAT ARE THE ORGANISATIONAL IMPLICATIONS?

 HOW RUNBOOK AUTOMATES SAP PROCESSES.

 SUMMARY

 

INTRODUCTION

 

Financial processes across the globe are in a constant state of flux. New accounting standards and regulatory requirements at a local and international level mean that the corporate reporting landscape is continuously changing. In fact the pace of change is accelerating, with Global 2,000 companies facing more challenges in the first decade of the 21st century than in the whole of the previous two decades. 

In recent times the reporting burden has reached fever pitch as public companies grapple with increasingly novel disclosures, for example, around the environment, social and community impacts. Not only has reporting broadened in this way but it has also become more technical as regulators and standard setters seek to impose complex international accounting standards which are still not completely harmonised and settled. To add ‘insult to injury’, companies are required to report their results more frequently and in ever tighter timescales. 

But not everything has gone to plan.  The Enron collapse in 2003/4 followed by the demise of Lehman Brothers during the financial crisis of 2009 has focussed attention more fully on compliance and control. As a result companies now face the ‘perfect storm’ of increasing complexity in reporting, broader disclosure requirements, accelerated timescales for producing statutory accounts, digital filing (XBRL) and increased scrutiny of their standards of governance, risk and control. 

These individual threads coalesce around the financial close process which has become the focal point for debate. How does a company increase the dependability of reporting and satisfy the demand for faster information and auditability against the backcloth of increasing reporting complexity? 

The answer lies in increased process automation.  After years in which automation has been applied to transaction processes, epitomised by the shared services model of the nineties, the same disciplines are now entering the financial reporting arena (and other management processes). 

Fig 1. The actual consolidation is essentially a ‘mathematical trick’ and only accounts for a small part of the ‘record to report’ process.

Runbook graphic 1a.jpg

But automation needs to be applied to the entire ‘record to report’ process, i.e. from closing the books in subsidiaries through financial consolidation, reporting and analysis if the results are to be truly reliable and trustworthy.  Experience shows that the outdated approach of selectively applying greater automation to parts of the process, say consolidation, merely shifts the bottlenecks to other parts of the process rather than creating enduring improvements.

In this white paper we explore how a comprehensive approach to process automation can be used to drive down the cost of external audit, governance, risk and compliance and improve productivity whilst increasing process visibility and confidence in the quality and robustness of regulatory reporting.

 THE CHALLENGES OF THE FINANCIAL CLOSE

AND OTHER CORE PROCESSES

 Automation may seem a laudable objective but it not that easy to achieve in a multinational financial reporting environment comprised of a range of fragmented operational and reporting systems. So what are the challenges that need to be overcome if the close process is to become more automated?

 The limitation of ERP:

 Although a common transaction platform simplifies the process of data capture it does not necessarily follow that an ERP system is the most effective platform for maximising the efficiency of the financial close process. There is often a trade-off between systems optimised for transaction processing and those designed principally for reporting. In practice, the consolidation capability, performance and functionality available from ERP vendors have not generally proved to be the equal of ‘best of breed’ financial close solutions.

 Neither are ERP systems always what they seem! Rather than a single uniform deployment, ERP implementations are often comprised of multiple versions, making change a more arduous, time consuming and costly task. Trivial changes can be surprisingly difficult to implement and fractured technologies can introduce unexpected delay and mean that consultants and IT specialists are frequently required to effect even the simplest modifications to processes. Any proposed automation has to overcome a high degree of fragmentation.  

The limitations of consolidation systems

Historically consolidation systems have received all of the attention when it comes to fast close initiatives or projects. It has been mistakenly thought that improving the performance of the consolidation system will inevitably accelerate the process.  But in reality, the consolidation is a ‘mathematical trick’ – a computation - accounting for just a day or two in a process that can take anything up to 4 weeks to complete.  Consolidation performance is important but its influence on the ‘record to report’ process is very limited. Enduring change needs to focus on all of the intricate tasks leading up to the consolidation as well as the analytical and reporting tasks beyond the point of consolidation.

Scale, time zones

The delays inherent in the complexity of the close process are magnified by operations in different time zones. Tasks waiting in someone’s email ‘Inbox’ whilst they are away or sleeping cannot contribute to an efficient close, whereas a system that is automatically updated on-line overnight can automatically trigger a business rule or event monitoring system that launches the next sequence of processing steps. Any attempt at automation has to provide deep integration with MS Office email, calendar and tasks if it is to be effective.

Complexity of requirements

Although International Financial Reporting Standards (IFRS) have been widely adopted in Europe and elsewhere (more than 110 jurisdictions) they have increased the complexity of reporting for multinational organisations during the transition. Most enterprises face the challenge of multi-GAAP reporting (IFRS, Local GAAP and IFRS for SMEs) increasing the level of inherent risk and checking required.

 Task management and controls testing needs to be flexible to manage this level of complexity.

 Complex organisational hierarchies

 Intricate matrix management structures increase the complexity of process workflows such as the routing of submissions and approvals. Furthermore, reporting and control has to mirror the multidimensional organisation in order to give complete visibility of reporting and ensure that controls are applied comprehensively. Automation needs to be accompanied by reporting flexibility so that the status of complex tasks can be viewed in any business dimension. 

Heterogeneous companies

The complexity and scale of the close process is quite different for a heterogeneous group, say, an industrial conglomerate which spans several different industries and a homogeneous enterprise that focuses almost exclusively on one business sector.

 A homogeneous business, which is strongly vertically aligned, can more readily take advantage of standardised processes and a common ERP system. By contrast, the close process in a heterogeneous business has to cater for highly individual and idiosyncratic tasks.

Task management has to be highly adaptable to cater for intricate management structures especially in heterogeneous businesses if automation is to be successful.

 Variable group policies and culture

The larger the group the more likely it is that group accounting policies will vary from region to region or company to company.  Local compliance regimes may also conflict with group policy. Differences arising may manifest themselves in the need for different close tasks and controls which have to be built into the overall close effort.

Different cultures, languages and currencies can also take their toll on the efficiency of the close process. Variable quality of training and staff around the world can seriously impede the efficiency with which the close process is managed – often making higher levels of automation an attractive option for improving control and reducing the risk of error.

Inappropriate tools

Despite significant advances in specialised tools many businesses remain heavily reliant on manual processes or spreadsheets for key parts of the financial close process. Fractured, spreadsheet-bound systems create institutional delay and make it difficult to introduce effective controls and process improvements. Any solution should seek to eliminate spreadsheets at an early stage. Ideally, any solution needs to combine the flexibility of the spreadsheet but without compromising a ‘bullet-proof’ approach to control.

COMPLEMENTING SAP - WHAT SORT OF ARCHITECTURE WOULD WORK?

SAP is one of the foremost providers of ERP systems in the world and its applications are widely used by large corporates. In common with other vendors, its ERP system serves the needs of transaction systems very well but arguably offers less specialised functionality in the critical area of group reporting and the close process than Best of Breed solutions. So if a Best of Breed solution was to enhance and complement the capability of SAP ERP what characteristics would it have?

The starting point is that Best of Breed solutions, almost by definition, offer specialisation and expertise beyond the normal experience of generalised solutions.  In the case of close management this translates into deep functionality for close tasks and controls, the ability to embed them (integrate) natively into the underlying applications and the overriding capability to introduce higher levels of automation leveraging the SAP platform.

But how does a Best of Breed solution work and why should it work better in SAP environment than a native SAP application? Curiously it is sometimes easier to superimpose a Best of Breed solution on an ERP system rather than introduce additional models from the vendor. The simplicity of some Best of Breed solutions means that they can sit astride existing architectures, taking or placing information as required but without being drawn into the complexities of the underlying technical architecture. The Best of Breed solution has to ‘understand’ and mirror the SAP foundation but does not need to be intimately linked with it in every respect.

In essence the solution has to leverage SAP processes, data models and procedures, invoking them as needed but without being so tightly bound that drastic changes are needed to the underlying code.

This ‘understanding’ means that, for example, workflows within the Best of Breed solution can kickoff processes in SAP, such as the production of a report and similarly processes in SAP can initiate workflow tasks in the Best of Breed solution.

WHAT ARE THE ORGANISATIONAL IMPLICATIONS?

For many organisations the group reporting process is a mechanical and unthinking process in which data is conveyed in electronic packages from reporting units to group finance at the centre.

In common with many other business processes, the typical group finance organisation relies on a hotchpotch of informal communication methods, such as email, fax and conference calls to prop up the reporting process when requirements change or things start to go wrong. Unreconciled items, misclassifications, posting errors and queries over inter-company balances and internal controls are often resolved by lengthy telephone calls and email exchanges.

Unfortunately, commonplace productivity tools such as Microsoft Outlook usually sit outside of the formal reporting process, placing the finance function at a disadvantage. In effect the finance organisation occupies two distinct and unconnected worlds, operating parallel processes. On the one hand financial information (structured data) is communicated through the group reporting application, but the informal communications (unstructured data), which is just as insightful and important, is outside of scope. Structured and unstructured data which should be naturally combined are compelled to follow different processing paths

Worse still the finance organisation is effectively confined to operational silos where each reporting unit in the same organisation is cut off from the other and the key processes in which they are stakeholders. The ‘disconnect’ between the finance organisation and the process makes it impracticable to share best practice and to respond efficiently to change. This in turn has implications for the effectiveness of the close process since change, whether externally imposed or internally induced is a constant feature of the group reporting cycle.

Collaborative technologies, such as web based finance portals, workflow and integrated email and performance reporting are essential for responding to change and increasing the visibility of the close process. Recognising, the importance of human interaction is crucially important.  Unlike factory processes which are often linear and predictable, or even transaction processes which can be routed across business functions with a fair degree of certainty, information processes can have a variety of outcomes.  So process automation has to accommodate human decision making, management review and appraisal as well as collaborative working and control.

Workflow technology offers the dual benefits of communicating information bi-directionally within the same environment, as well as promoting an efficient and standardised process. It is one of the key transformational technologies capable of accelerating the close process and making it more dependable. User-oriented technologies such as these, place control in the hands of the finance department allowing finance professionals to respond to change without the need to draw on specialised IT resources. Furthermore, as the boundaries between controls reporting and financial reporting become more blurred it is feasible to widen the systems to a broader user base including, for example, internal and external auditors who can gain access to the applications to conduct tests and satisfy themselves that application controls are being applied as expected.

With increased visibility of the process comes the opportunity to tailor views of tasks and controls to individuals or user groups depending on their business role. This roles-based approach promotes organisational effectiveness and improves the ‘user experience’.

HOW RUNBOOK AUTOMATES SAP PROCESSES.

The challenges companies face when striving to automate their close process is familiar territory to Runbook a software and solutions provider specialising exclusively in integrating close solutions in a SAP environment. Runbook’s deep domain expertise with SAP applications and processes means that it is uniquely positioned to offer technically robust yet practical solutions that both enhance and complement SAP environments.

Using its intimate knowledge of SAP’s architecture Runbook knows exactly how to leverage existing capability within SAP to produce technically elegant solutions that maximise organisational productivity and enhance the controls environment. The Runbook architecture can be superimposed on the underlying SAP system without causing material business disruption. This translates into implementation timescales that are typically very short.  But how is this achieved?

Existing task lists and controls documentation are often the starting point for a Runbook implementation.  Tasks documented in spreadsheets (as is normally the case) can be uploaded into the Runbook environment to give a starting point for process flows. Tasks and controls are mapped onto underlying SAP processes and sub-processes providing a deeply integrated solution in which the workflow maintained in Runbook can automatically fire-off the next step in the chain. Where relevant this could be a SAP process or sub-process.  The reverse is also true, i.e. a SAP process can be programmed to invoke a workflow task in Runbook, such as the review of a control. 

Manual controls are by definition susceptible to error since they rely on human intervention to ensure that they work at a particular instant in time. By contrast automatic controls and tasks can be guaranteed to work every time – provided of course they have been correctly established. By replacing manual controls and process steps with automated controls Runbook not only increases productivity (by eliminating non-value-added tasks) but it reduces error rates, liberating companies to focus resources on areas requiring more judgement.

Runbook’s scope and reach is comprehensive since it can marshal activities and controls right across the SAP environment, i.e. all application areas.  It can also incorporate and integrate with non-SAP processes where necessary.  The flexibility to define any process means Runbook can cater for unusual or idiosyncratic processes that almost every company possesses but finds difficult to automate.

Fig 2. The Runbook solution embraces the entire ‘Record to Report’ process, enabling all of the intricate process tasks and activities to be automated.

Runbook graphic 3.JPG

Source of Graphic PwC

But Runbook raises the bar when it comes to automation through innovative technology that it calls “Report Verification”. In most scenarios, operational, production and audit reports form an important component of the control environment.  Reports are used to verify information and to scan for unusual conditions.  But it is time-consuming to review every report and easy to miss crucial information.  Furthermore, in the majority of cases controls will be found to be working satisfactorily so why spend time checking? 

Runbook recognises that reports provide fertile territory for increased automation. By setting business rules around reported outcomes, Runbook can invoke controls monitoring, workflow and remediation of problems in exactly the same way as any other SAP process. For example, general ledger balances outside of a permissible range (perhaps with the wrong sign) on a trial balance report, or an unresolved intercompany difference, can be escalated through the workflow for review.  The extent of the deviation can be used to drive the level of response, for example, a small variance being referred to a finance analyst but a large deviation being escalated higher up the chain of command.

In common with accepted workflow practices, issues can be escalated for review, documents, files and comments attached, deadlines and new tasks created, approvals, rejections and re-submissions recorded and workflows continued as necessary.  Meantime all activities are captured in an audit log so that for every aspect of the workflow there is a complete audit trail of the issue and how it was resolved, by whom and when. Most importantly ‘auto sign-off’ of a control conforming to expected vales means that time is not expended on unproductive activities.

The Runbook application provides complete visibility of the process and the status of tasks, issues and controls within it. This can be viewed in tabular fashion or via an intuitive dashboard – looking at the controls environment in different dimensions, for example, by business entity, control type, control objective or section of the financial statements.

The comprehensive audit trail serves two valuable purposes.  As a completely ‘digitised’ repository of all tasks, issues and controls it provides a valuable resource for controllers, internal and external auditors to follow up queries or check the integrity of the process. Secondly, it serves as a store of useful benchmark information about controls failures and issues allowing an organisation to review its practices and implement process improvements across the business.

SUMMARY

The financial close is a dynamic process, constantly susceptible to changing regulation, advances in digital reporting and greater scrutiny. The challenge is how to accelerate the process yet make it more dependable and accurate. Automation holds the key because it replaces inefficient manual processes and controls with robust processes that increase efficiency, reduce audit effort and compliance whilst allowing management to focus on performance.

But there are several barriers to overcome if automation is to be successful. Multinational organizations are complex institutions, often with diverse operations spread around the globe. The scale of such businesses adds to the complexity and historically the tools at their disposal, namely; ERP systems and spreadsheets, have not provided the solution to faster and more dependable reporting.

 Fig. 3.0. A summary table of process barriers and accelerators

 

SUMMARY

Barriers

Accelerators

The limitations of ERP systems.

Best of Breed solutions that can be superimposed on existing SAP architectures.

Unrealistic expectations of consolidation systems.

Focusing on all of the tasks pre- and post consolidation.

Complexity of requirements.

A flexible solution capable of looking across the entire application.

Complex organizational hierarchies.

The ability to look at tasks, activities and issues in different dimensions.

Heterogeneous companies.

The capability to absorb different close processes in different business units.

Variable group policy and culture.

Tight integration with collaborative tools that help unify and provide visibility of the process across the organisation.

Inappropriate tools, e.g. spreadsheets.

The displacement of spreadsheets that encourage institutional delay and error.

Experience shows that Best of Breed Solutions offering specialised close functionality and which ‘understand’ the underlying structures of ERP systems can be superimposed very rapidly on fragmented architectures to bring about rapid improvements in the control environment and reporting.

Runbook, a Best of Breed vendor specialising in SAP environments and with profound understanding of the close process has developed innovative solutions for automating and controlling financial close. Rapidly building on existing architectures, Runbook helps companies develop comprehensive workflows governing the tasks and controls necessary to accelerate the close.   With its deep links to underlying SAP structures Runbook is able to automatically invoke SAP processes and sub-processes where necessary and report on their success. By replacing and automating manual controls and spreadsheets right across the SAP environment with streamlined workflows Runbook is able to eliminate unproductive ‘non-value added’ tasks and reduce reliance on the IT department.

But Runbook’s solution is especially innovative around report verification. Unique technology allows management to automatically test the reasonableness of key operational, audit and financial reports quickly bringing notable exceptions to management’s attention for remediation.   This enhanced capability to focus on exceptional conditions cuts swathes of unproductive time out of the process and liberates management to concentrate on value adding analysis. 

Furthermore, the ability to capture all activities and provide a detailed audit trail of issues arising during the close process and exactly how they were resolved (and by whom) is of great assistance to internal and external auditors who can leverage the system to improve their own productivity and levels of confidence in the system.

Experience shows that introducing such systems provides a framework for constant process improvement and reducing the cost of compliance as well as a step-change improvement in process automation, dependability and control.

 

 

 

 

About FSN

FSN Publishing Limited is an independent research, news and publishing organisation catering for the needs of the finance function. The report is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University, a Chartered Accountant and a Fellow of the British Computer Society with more than 23 years experience of implementing management and financial reporting systems. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector. His bestselling book, “Fast Close to the MAX” was published in 2008.

Gary.simon@fsn.co,.uk

www.fsn.co.uk

Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. FSN Publishing Limited and the author do not accept responsibility for any kind of loss resulting from the use of information contained in this document.

 

 

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