Fast Close is back under the microscope after recent research revealed that reporting timescales are increasingly under threat from the ever increasing burden of regulation and compliance. The Enron saga, for example, may have completed its slow passage through the US courts but its legacy remains in the shape of the Sarbanes Oxley legislation which weighs heavily on every group finance function affected. Elsewhere the impact of accounting regulation such as IFRS (International Financial Reporting Standards) has created accounting challenges, complexity and uncertainty that have led to even more pressure around the statutory close process.
The research by BPM International, a European network of BPM consultancies represented by Paragon Consulting in the UK revealed that British and European Companies have continued to accelerate their annual financial reporting to UK and European stock exchanges over the last three years but the position for US companies appears to have worsened in the face of Sarbanes-Oxley compliance. Also, the reporting timeline in the financial services sector in the UK appears to have been hit by the impact of IFRS.
According to David Jones, Chairman of BPMI and Director at Paragon Consulting, the UK member of BPMI, the research compared the close cycles of 527 companies in seven countries over the last three years. He told FSN, "The speed of close is symptomatic of the state of underlying finance processes and systems and therefore of the management processes and systems in general." As a result, a number of software vendors have rushed out instant fixes to the problem.
But the fast close is not amenable to a 'quick fix' and technology alone is certainly not the answer to repairing and enhancing a process as convoluted and involved as the monthly, quarterly and year end reporting cycle. Improving reporting timescales depends on changing a number of aspects of the process in tandem to get the desired overall effect.
One element of the jigsaw is the 'controls environment', the rather dry aspect of a group consolidation that ensures complete and accurate processing. The argument goes that if the controls environment is sound then the number of errors falls and the consolidation process works smoothly, quickly and efficiently.
Recognising the supreme importance of the control environment, Cognos the CPM vendor, has teamed up with Deloitte, the global accounting firm, to jointly develop a 'Blueprint' for controlling the group consolidation process. The so called, CCR (Close, Consolidate, Report) blueprint provides a roadmap, tools, and templates to implement a successful controls-focused consolidation system. It's a framework for identifying gaps, strengths, and opportunities to shorten the close cycle.
Ray Pineda, Enterprise Applications – Performance Management Leader, Deloitte told FSN "Applying the Blueprints best-practices and control activities to streamline this process shortens the close cycle and reduces the risk of material misstatements in financial reporting for customers.
"The joint work on the Blueprint represents leading practices compiled from related engagements with hundreds of clients. It works because it combines two things: best practices and technology, to address both business process improvement and the tools that support it," Pineda adds.
First, Deloitte assesses the current state of a company's CCR process and lays out a roadmap to identify gaps and opportunities. Next, it delivers a set of processes and activities to optimise efficiency and effectiveness in the close cycle. Then, each step in the CCR process is mapped to control activities that achieve over 30 regulatory control objectives based on the COSO framework. Finally, Deloitte delivers proprietary configuration templates that support critical controls. Underlying the process is Cognos 8 controller, a Web-based consolidation system that has the sort of application controls that the Blueprint envisages.
As a simple example, the Audit Log tracks any changes made in the system. So if a company structure is updated, it shows what existed before the change and what changes were made. An online sign-off form also speeds the management approval process, and provides evidence for auditors that the change was authorised.
According to Nat D'Ercole, a Deloitte Director, reflecting on the controls environment has other benefits. He told FSN, "Having better procedures in place forces organisations to think about other matters such as, a common chart of accounts and the way in which information is booked."
However, using appropriate technology is just as important as the controls environment. A mature consolidation product with inbuilt application and process controls is a definite advantage whereas for example, using spreadsheets for a consolidation probably leads to more problems than it solves. "In a spreadsheet everything is linked to a cell and it is easy to introduce errors," says D'Ercole.
Laura Ashley, the ladies fashion and home furnishings business is one company that that has benefited from a robust controls environment and consolidation process. It operates from 255 outlets in Europe as well as marketing through DIY retail giants, the internet and mail order. Naturally, the accuracy and validity of the underlying data is essential for the company's confidence in the information generated – something which Paul Mainwaring, Laura Ashley's, Group Financial Controller acknowledges, "We upload the data from the general ledger; we are very happy with how this performs and are confident in the integrity of the data," he says.
Data integrity and controls was also high on the list of priorities for Robin Petley, Group Financial analyst with Associated British Foods, one of Europe 's largest food groups, when choosing Cognos Controller. "We needed a solution to address the flexibility and fit of a home grown system, with the security and control of an established software product, plus integrated pre-built financial rules to guarantee the integrity of the financial data," he says.
Laura Ashley's Mainwaring also gets far greater visibility of the fiscal structure across the whole group using Controller. "We get a clear dividing line between the fiscal and the management picture. We can be looking at the fiscal picture one minute, and then run a different report to give the internal view the next," he says.
The improved visibility of the fiscal structure across the group, together with the management reporting functionality all within a single environment, has delivered Laura Ashley the dual benefits of faster smoother closing and reporting, and more effective decision making.
For Robin Petley, at Associated British Foods (ABF) the decision to use Controller to consolidate at the centre rather than at the subsidiary level has also produced clear benefits. ABF says, this gives the decision makers within the group greater visibility of the full financial picture and, coupled with Controller's pre-built financial rules, ABF has confidence in the integrity of the financial data. Previously a considerable amount of time was spent reconciling management accounts with statutory accounts at the year end. The consistent data set provided by Controller removes this overhead and the accounting team use that time more effectively, making decisions rather than checking figures.
In practice, it seems that there is no single solution to fast close problems, but looking after the controls environment, adopting best practice such as the CCR Blueprint and choosing the right tools for the job goes a long way to producing a smooth and efficient close process.
