Cadency™ - “Restoring the Rhythm of Finance to Balance Sheet Reconciliations through Certification”

21st August 2013

The Record to Report (R2R) process is the bedrock of financial reporting, financial risk management, strategic reporting and decision making.  Nestling within the thousands of tasks and activities comprising the R2R process is the reconciliation process.  It is an unglamorous, highly labour intensive and risk laden component of the financial close, yet the completeness and accuracy of reconciliations can have a profound effect on the quality and speed of the entire R2R process. 

In this white paper we explain how “Certification,” a key element of the Cadency™ financial governance solution, addresses reconciliation issues in the context of a unified environment designed to deliver process visibility, control and adaptability to the entire R2R process.

 

 

 

CONTENTS


INTRODUCTION

 

TRADITIONAL APPROACHES HAVE NOT SOLVED THE DIFFICULTIES

 

   Spreadsheets

   Specialist reconciliation software

 

HOW CERTIFICATION OVERCOMES THE HISTORIC LIMITATIONS

 

   A risk-based approach

   Automation

   Knowledge management 

   Collaboration

   Quality assurance

 

HOW CERTIFICATION CONTRIBUTES TO SOLVING THE CHALLENGE OF FINANCIAL GOVERNANCE

 

   Process visibility

   Better management of risk and compliance

   Quality assurance

 

SUMMARY

 


INTRODUCTION

The Record to Report (R2R) process is the bedrock of financial reporting, financial risk management, strategic reporting and decision making.  Weaving its way through the entire organization, the R2R process enables the collection and delivery of trusted information and is relied upon by internal and external stakeholders to give a true and fair position of the business.  It is the de facto foundation of ‘financial governance’.

Nestling within the thousands of tasks and activities comprising the R2R process is the reconciliation process.  It is an unglamorous, highly labour intensive and risk laden component of the financial close, yet the completeness and accuracy of reconciliations can have a profound effect on the quality and speed of the entire R2R process.  On average, it takes a company 21 man-days to reconcile and update the chart of accounts, and the average figure is much higher for companies with international offices (26.8 man-days), compared to those with just national offices (13.5 man-days)1.  

88 percent of companies have experienced delays in their financial close, financial reporting and filings in the last 12 months and account reconciliation is implicated in 29 percent of the instances of delay1.  Among the companies that have experienced delays, 62 percent say that the Board’s trust in the finance department has been reduced as a result.  So it is not surprising that reconciliations management solutions are a “top 3” priority in the finance function, well ahead of other trends such as cloud computing, mobile technology and social networking2.

But at the same time, the cost of closing the books has been increasing substantially.  Around a third of companies say that the cost of the R2R cycle has risen over the last 3 years with an average increase of around 17 percent. 

Yet paradoxically, this picture of rising delays and costs comes against the backcloth of steadily increasing investment in the financial close, reporting and filing. So what is going wrong?

It is clear that existing approaches to financial governance based on loosely coupled suites of ERP/CPM applications, spreadsheets and collections of niche applications sourced from multiple vendors are not delivering the ‘goods’.  

In this white paper we explain how “Certification,” a key element of the Cadency™ financial governance solution, addresses reconciliation issues in the context of a unified environment designed to deliver process visibility, control and adaptability to the entire R2R process.

 “Dissonance and discord” 

Reconciliations fall into two main categories, namely, high transaction volume reconciliations such as local bank reconciliations, and secondly, the more specialised and intricate reconciliation of balance sheet movements.

 Generally speaking, high volume reconciliations are a pre-requisite for an effective period close in reporting entities, and are not the subject of this white paper.  By contrast, general ledger reconciliations have applicability to both group accounts and reporting entities, and have a direct bearing on the speed and accuracy of the R2R process.

 

THE CHALLENGES OF BALANCE SHEET RECONCILIATIONS

With Charts of Accounts running to several thousand individual lines, many companies find it challenging to ensure that material errors do not slip through the net either because accounts are not reconciled promptly, or, because nobody has been assigned the responsibility of performing the reconciliation. 

Ask an auditor where one is likely to find problems during the course of an internal or external audit, and the answer is likely to be "un-reconciled accounts". It is quite common for unresolved balances to be carried from year to year in even the most well run companies, with only sparse explanations being recorded to explain away the differences.

Leaving general ledger accounts un-reconciled for a lengthy period of time is generally a bad idea - peoples' memories fade over time and tracing errant transactions that make up reconciliation differences can be onerous and unrewarding. The danger is that un-reconciled items simply get carried forward from one review period to another, with the detail becoming more difficult to resolve with the passage of time.  This lack of oversight and balance integrity can lead to significant exposure.  Yet few companies have a documented policy and programme of review, leaving them exposed to risk of error and nasty surprises at the year end.

The issue is even more critical for those organisations caught by Sarbanes-Oxley (SOX) legislation or in heavily regulated industries, such as financial services. Nowadays, non-compliance can lead to hefty fines and reputational damage.

So what are the key challenges with reconciliation?

Scale - for many organisations the sheer scale of the task is off-putting and there is no clear strategy for deciding which accounts should be reviewed.  As a result, experience shows that many companies review a mere one in fifty active balance sheet accounts.

Administrative burden - Identifying the accounts for review and setting up a rolling programme of reconciliation in a matrix-based organisation is time consuming.

Lack of automation (workflow and status reporting) - Keeping an eye on reconciliation progress usually relies on manually intensive processes. For example, an individual can only reconcile a handful of accounts an hour.  The result is that many organisations simply neglect important reconciliations hoping that other management controls will compensate.

Lack of prioritisation – Most companies employ a blanket approach in which all accounts in the balance sheet are placed on an equal footing and are reviewed on a periodic basis, leading to misdirected effort and lack of productivity.

Idiosyncrasy - Balance sheet reconciliations are almost by definition idiosyncratic. Bank account reconciliations are the exception because they lend themselves to a routine approach, but the position for other general ledger accounts is less obvious. The manner in which more unusual accounts are reconciled can be highly specific, and often rely on the knowledge of key individuals within the organisation. The methods used often go undocumented, making it very difficult to move staff from the reconciliation of one account to another. For many, it is a question of trying to 'make do' based on previous period's working papers.

The above challenges relating to the reconciliation process are certainly significant, but it is important that companies not lose sight of the fact that reconciliation is not an end in itself.  For many organizations, the reconciliation process is tackled in a vacuum, i.e. outside of the R2R process itself, of which it is simply a part.  It is this myopic view that lends itself to the principal failure to date, which is that very few businesses have visibility into the status and condition of the reconciliation process and therefore cannot foresee its effect on the progress of the reporting process overall. 

When a global consumer packaged goods organisation wanted to reduce its overall cost of finance, record-to-report process efficiency was a key area of focus.  Any deployed solution had to interface directly with the company’s 4 instances of SAP, and support more than 2,500 users posting over 31,000 journal entries during the close process. The company implemented a solution that managed its R2R cycle, allowing it to achieve a single global Close process that automates and manages most of the reconciliation effort. By doing so, the organisation ensures 100% of Account Reconciliations are processed consistently, while reducing risk to the business.


TRADITIONAL APPROACHES HAVE NOT SOLVED THE DIFFICULTIES

Benefits remain elusive – everything is working to a different beat

Spreadsheets

The ease with which spreadsheets can be configured to meet the specific characteristics of each balance sheet reconciliation have made them a popular tool in the finance function. But they suffer from significant limitations.  Designed first and foremost as a personal productivity tool, spreadsheets are of limited value in a process which depends on collaboration and shared knowledge.  In this environment, a spreadsheet is a blunt instrument with serious shortcomings, for example;

  • Individually designed spreadsheets, which are manually maintained and rolled forward each period may contain input errors or formula errors which undermine the integrity of the reconciliation.
  • Poor documentation standards may make it difficult for someone other than the original spreadsheet author to work on a reconciliation – severely impeding productivity and the ability to move personnel between reconciliations to meet changing patterns in staffing and workload.
  • Spreadsheets stored on personal hard drives or even shared network drives may be difficult to find and retrieve.  Their contents are likely to be duplicated in weighty ring binders of hard copy spreadsheets and supporting documentation, making maintenance of reconciliations between one period and the next tedious and time consuming.
  • No visibility at the centre of the status of reconciliations, for instance when the reconciliation was started, what problems have arisen, which accounts are affected.

In most instances, a spreadsheet-bound process needs to be supported with manual methods of communication, emails, ad-hoc telephone calls and meetings to keep tabs on progress.  As a result, it is easy to overlook reconciliations, lose documentation, leave critical accounts un-reconciled, or fail to ‘trap’ accounts adjusted again, after they have been reconciled, reviewed and approved.

When the world’s largest designer and manufacturer of essential technologies, including microprocessors and chipsets implemented a solution to eliminate the burden of manual spreadsheets from their Record-to-Report process, it eliminated redundant data input work, and leveraged reconciliation automation whilst maintaining the desired level of control and increasing process transparency across their shared service centres. By doing so, the organisation achieved an immediate return on investment (ROI) with the solution through a 10 percent savings in the first year alone!

Specialist reconciliation software

The deep functionality of specialist reconciliation software, remedies many of the limitations of the spreadsheet-based approach, but these applications, which are usually configured as ‘point solutions’ outside of the regular R2R process, have limited impact and usefulness. The inability to share in the workflows of the R2R process and its status reporting prevents reconciliation software making a full contribution to the productivity and efficiency of the financial reporting process.

This is well supported by research which shows that despite the use of specialist software, spreadsheets (72 percent) and e-mails (68 percent) are used predominantly by finance teams to track and manage daily progress during the R2R process, and 86 percent of organisations use one or both of these methods. In addition, 52 percent use the telephone, while 54 percent schedule face-to-face meetings.  40 percent attempt to control the process using simple, manual task lists – hardly a sound basis for tight financial governance1.

“When the world’s leading search engine provider implemented a solution for Balance Sheet Reconciliation, they immediately had visibility and complete transparency into their global reconciliations and close activities. This resulted in increased quality control with efficient, automated reconciliation and certification processes, enabling the company to reduce its period-end close from 10 to 5 days.”

 

 

HOW CERTIFICATION OVERCOMES THE HISTORIC LIMITATIONS

Putting the rhythm back into the reconciliation process

Cadency’s Certification capabilities transform balance sheet reconciliations from a standalone spreadsheet-bound activity that habitually causes delays in reporting, into a streamlined process that improves control, reduces financial risk, enhances productivity and assists management to accelerate the R2R process.

It achieves this through a dynamic, risk-based approach to the identification of high risk accounts, sophisticated automation of reconciliation activities, knowledge sharing and collaboration – all within the context of a single overall environment (“Cadency”) for financial governance.

A risk-based approach

Naturally, not all general ledger accounts need reconciling on a regular basis, and clearly any regular programme of review should ideally be risk-based in order to optimise the use of scarce accounting resources. But certain accounts are more prone to error and can give rise to material accounting adjustments if left un-reviewed for any length of time. The problem is not just confined to general ledger accounts with high transaction volumes such as bank accounts and other forms of control account. Inter-company accounts and depreciation accounts can be just as risky, particularly when magnified on a divisional, regional or group-wide basis.

reconciliations 2.jpg

Fig 1. Cadency’s Certification capabilities encourages a risk-based approach to the prioritisation of reconciliations

Certification enables management to take a risk-based approach to the review of balance sheet accounts. This can be achieved by manually allocating accounts to user-definable risk categories (e.g. High, Medium, Low) or by taking advantage of automated facilities –dynamic risk management – that identifies the risk profile of accounts  according to criteria (business rules) established in the system.  For example, an account with no movements in the period or with a balances that falls within a predefined credit or debit threshold may be considered low risk, whereas a particular class of account, say a control account, or one where there is a unexpected swing in the period from debit to credit may be considered high risk.

The dynamic and automatic surveillance of all accounts ensures that the risk profile is constantly reviewed and that resources are committed to the highest area of risk – which can differ from period to period.

Automation

The ability to sort rapidly the ‘wheat from the chaff’ is a critical aspect of reducing the burden of balance sheet reconciliations. For example, low risk accounts identified as above can be ignored; accounts where the balance in the general ledger agrees with the underlying sub-ledger can be passed as reconciled, and account balances that fall within acceptable ranges can be left for another time.

Of course automation also extends to bringing in sub ledger and general ledger data from source systems in the first instance as well as rolling forward open (unreconciled items) items from one period to the next. But automation also means that unreconciled items can be aged to give a qualitative feel of risk and users can be prompted to review accounts according to pre-set intervals – regardless of risk profile.

The reconciliations themselves can be partially automated so that items that meet matching criteria can be eliminated automatically to reveal the transactions that are less straightforward to reconcile.  Also, where reconciling items give rise to accounting adjustments, the journal entries can be raised and posted automatically, if desired, to underlying ERP systems. Every aspect of automation helps to eliminate error, reduce risk and improve productivity.

Knowledge management

Certification encourages the consistent application of best practice by exposing the methodology and rationale behind every reconciliation and guiding users through each step of the reconciliation.  Easy to follow user configurable templates are supported by documents and guidance which enable reconciliations and knowledge to be shared across the finance team.  Prior period reconciliations and commentary are available on demand, along with any supporting documentation, allowing mangers to move reconciliation work between finance professionals as required to smooth peaks and troughs in workload and to enhance finance function productivity.

Collaboration

Workflow allows completed reconciliations to be circularised for review and approval, as well as for the escalation of exceptions and unresolved issues. As a result, more experienced resources can be deployed as required and difficulties can be addressed before they adversely impact on overall R2R timescales. 

Quality assurance

If required, personnel can be required to sign off on their specific reconciliations once they are complete. As an additional precaution, programmes filters allow reconciled accounts to be selected for review by supervisory staff and internal auditors.  Additional tasks can be set for any reconciliation, for example, to satisfy regulatory compliance or audit requirements and the progress of these can be tracked and managed through automated workflows and alerts.

 

HOW CERTIFICATION CONTRIBUTES TO SOLVING THE CHALLENGE OF FINANCIAL GOVERNANCE

All parts of the orchestra working together

Unlike historic approaches, the Certification functions within Cadency are deeply embedded within the R2R process and forms an indispensable part of Trintech’s overall solution for financial governance. Positioned within this unique solution, it supports visibility and transparency of reconciliations and enables management to better manage risk and compliance. In addition, through the high quality of reconciliations and accompanying documentation it provides assurance of compliance to all stakeholders in the reporting process.

Process visibility

The uniform design of Cadency allows the entire spectrum of financial governance (Certification, Compliance and Completion) to be viewed from a single console-based vantage point.  This means that at any point in the R2R cycle, management can not only view the status of the process, for example, the tasks, issues and reconciliations outstanding and the percent complete, but also view the financial materiality of the balances affected by delays and issues. 

A strong feature of Cadency’s console design is that it tracks the organisational hierarchy, so that individuals at every level of the enterprise have shared visibility of financial governance issues through the same user interface. This means that at any point in the R2R cycle management can view the status of tasks, issues and reconciliations within Certification. 

reconciliations 3.jpg

Fig 2. Cadency provides a window on the status of the reconciliations in the R2R process

For example, authorised individuals can see percentages of reconciliations started, completed or overdue, allowing individuals and their managers to take remedial action to bring reconciliations back on course. Comprehensive statistics of, for example, the number of accounts reconciled or reviewed on time can be derived at management's option, for a segment of the general ledger or for a single company, division or geographical segment.

The enhanced visibility rendered in a single seamless environment, not only gives real-time visibility of bottlenecks in the process, but also allows management to immediately take action, such as reallocating personnel from one part of the R2R process to another and reassign tasks from one individual to another to maximise user productivity.

Better management of risk and compliance

By encouraging a risk-driven approach to balance sheet reconciliations, Certification ensures that resources are channelled towards reconciliations that pose a higher degree of financial risk while at the same time contributing to the overall management of risk within the R2R process.  The ability to force the sign-off of completed reconciliations (following review and approval), ensures a culture of shared responsibility for risk management and provides a higher degree of comfort to auditors and audit committees that the organisation is compliant.

Quality assurance

The ability to prescribe the precise steps in the reconciliation and to enforce rigorous standards of documentation, independent checks and quality assurance provides comfort to stakeholders that the work has been carried out thoroughly and that a high degree of reliance can be placed on the integrity of completed reconciliations.  The comfort gained at this early stage through the use of Certification adds more broadly to confidence in the numbers and financial governance as a whole.

 

SUMMARY

Balance sheet reconciliations form an essential, yet under-invested part of the periodic close process, giving rise to the risk of accounting error and misstatements.  Difficulties with reconciliations are frequently blamed for delays and missed deadlines.

The majority of companies use a vast battery of spreadsheets to tackle reconciliations but many find the sheer scale of the undertaking and the administrative burden that goes along with it, overwhelming.  Lack of process support and a clearly directed risk-based strategy for tackling the problem leaves many companies with un-reconciled accounts exposing them to uncomfortable levels of financial risk.

Specialised reconciliation software has provided a partial remedy, allowing businesses to standardise on an approach to reconciliations and to document what they have done.  But these solutions tend to work in a ‘vacuum’ and completely detached from the broader R2R process.  As a result companies that have deployed these solutions continue to suffer from a lack of process visibility and control.

At its core, Cadency, with its Certification capabilities, is a very advanced reconciliation product, combining the latest thinking in risk-based management of reconciliations, with advanced levels of automation, knowledge management, collaboration and quality assurance.  

But more significantly, Cadency represents a new breed of solution which fuses specialist reconciliation functionality with the management of the overall R2R process so that the progress and impact of reconciliations, issues, tasks and controls is visible to the CFO and the finance function within the context of the disclosure management, governance, controls and compliance.  This elevates reconciliations from a mere side-show and positions it clearly as a central theme of a comprehensive approach (Cadency) to financial governance.

The ability to streamline and manage the entire R2R process from the very beginning in a single financial governance environment, maximises process visibility, minimises the chances that risks are overlooked - giving the CFO peace of mind and confidence in the integrity of any reports and disclosures.

 

Bibliography

Note1  Oracle /Accenture study: The Challenges of Corporate Financial Reporting, May 2012.

Note2  Gartner: Top 10 Findings from Gartner’s Financial Executives International CFO Technology Study, 16 May 2012.

 

About Cadency

“Cadency,” is the first of a new class of financial governance applications - a paradigm shift in Record-to-Report solutions – designed from the outset to enable comprehensive stewardship of the process, regardless of the underlying ERP/CPM suite. 

There are three broad elements to the Cadency solution, namely; “Certification,” “Compliance,” and “Completion.”

Certification

This covers task and issues monitoring – the ability to set tasks, for example the reconciliation of high-risk balance sheet accounts (providing policy, instructions, explanations and supporting documentation), allocate them to responsible individuals, and certify whether the tasks are complete or whether there are issues arising that need to be resolved.

Compliance

This covers controls monitoring – the ability at any point during the process for management to assess risk, set relevant controls and monitor whether the control has been applied effectively, as well as if the organisation is compliant or whether follow-up action or escalation is required.

Completion

This is the complete management of narrative – the ability to synchronize commentary with numbers, author multiple document types for multiple stakeholders, and manage content in a variety of published formats such as XBRL and e-filings.  

reconciliations 4.jpg

Fig 3. Diagram of the Cadency Conceptual Model

For further information please see the “Cadency” white paper which can be downloaded from http://go.trintech.com/restoring-the-rhythm-of-finance-to-the-record-to-report-process.


About Trintech

Trintech is the leading provider of solutions for the Record-to-Report process. Nearly 700 clients across 100 countries – including half of the Fortune 50 and the FTSE 100 – rely on our solutions to optimize resources, reduce costs, manage risk and monitor activities across the entire finance organization worldwide. Trintech’s Cadency™ platform automates the entire R2R cycle – including account reconciliation, close management, compliance, and financial reporting including XBRL tagging and regulatory filings. Trintech’s offices are located in the United States, United Kingdom, Netherlands, France, Ireland and Hong Kong, with partners in South Africa, Latin America and across the Asia Pacific region. www.trintech.com

About FSN

FSN Publishing Limited is an independent research, news and publishing organization catering for the needs of the finance function. This white paper is written by Gary Simon, Group Publisher of FSN (Financial Systems News) and Managing Editor of FSN Newswire. He is a graduate of London University, a Fellow of the Institute of Chartered Accountants in England and Wales and a Fellow of the British Computer Society with more than 27 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.

Gary.simon@fsn.co,.uk

www.fsn.co.uk

Disclaimer of Warranty/Limit of Liability

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. The publisher and author make no representations or warranties with respect to the accuracy or completeness of the contents of this white paper and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose.  No warranty may be created or extended by sales representatives, or written sales materials.  The advice and strategies contained herein may not be suitable for your situation.  You should consult with a professional where appropriate. FSN Publishing Limited and the author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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