FSN: European companies reporting faster and closing the gap on US counterparts despite IFRS.

European companies reporting faster and closing the gap on US counterparts despite IFRS.

11th September 2006
British and European Companies have continued to accelerate their annual financial reporting to UK and European stock exchanges over the last three years according to initial research by BPM International (BPMI), a European network of BPM consultancies represented by Paragon Consulting in the UK . Over 50% of the FTSE100 companies have significantly reduced their reporting timetables, which have fallen by an average of 4 elapsed days. 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. Gary Simon, FSN's managing editor reviews the detail behind the headline results.

“The close cycle time is regarded as a key benchmark by many Chief Financial Officers (CFO's), Finance Directors and analysts”, says David Jones , Chairman of BPMI and Director at Paragon Consulting, the UK member of BPMI, which compared the close cycles of 527 companies in seven countries over the last three years. “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.”

Over 50% of the FTSE100 companies have significantly reduced their reporting timetables, which have fallen by an average of 4 elapsed days. The three fastest audited results, says BPMI, were Imperial Tobacco (32 elapsed days), AstraZeneca (33) and British Sky Broadcasting (34).

The same trend is evident in other European countries, which has allowed UK and Europe to close the gap on their US counterparts for the speed of auditing year end results. Yet the gap remains significant: US companies sign off their audits at an average 9 elapsed days earlier.

Although more than 50% of FTSE companies have significantly reduced timescales by an average of 4 days, FSN's review of the data suggests that this is a modest gain compared to the time liberated from the audit timescale, which for 60% of Europe 's largest companies was an average saving of 12 days. Talking to FSN, David Jones, chairman of BPMI, considers that the figures do not necessarily mean that large companies have ‘squeezed' their auditors or that they are contributing more than their fair share to the overall reduction in timescales.

He said, “The averages hide some pretty wild fluctuations, audit timetables have lengthened and shortened by 50% or more in the FTSE100 in the last three years for a few companies. Whether auditors are “giving more back” is an interesting question. We do detect a move to more organizations seeking to get an audit sign off by the time they announce their results (e.g. AstraZeneca, who announce 2/2/06 and have an audit sign off of the same date and aligned the two when they accelerated their close a few years ago) and as Companies across Europe reduce the close this drives auditors to follow suit. In the FTSE about 65% of organizations now align audit sign off to within a couple of days of result announcement. In fast close projects I have been involved with, however, this does not necessarily mean increased pain for the auditor, rather a re-assessment of the audit approach, with hard close audits perhaps being carried out more frequently or earlier during the year. So the re-engineering of the audit approach moves hand in hand with the re-engineering of the close process itself.“

Whilst BPMI's research measured an improvement in timescales for the UK and Europe over a three year period, this covered the mandatory introduction of reporting under IFRS (International Financial Reporting Standards). FSN asked Jones whether there is the possibility that the overall improvement during this period masked a deterioration of performance in 2005? Jones responded, “For the FTSE100 I can tell you that the average time to announce preliminary results for the last three reporting seasons were 53, 53 and 54 elapsed days, so there was no really big hit in 2006 with the move to IFRS but there was a very marginal hit. On the audit side, the average was 60, 63 and 60 elapsed days with the deterioration in the 04/05 reporting season driven by a couple of companies with specific issues.”

He added, “An interesting observation for the UK is for those FTSE100 members whose audits have extended by 15% or more in the last three years, nearly 50% of them are in the financial services sector while only 20% need to comply with SoX, this seems to be significant evidence of the IFRS impact on financial services companies (e,g. IAS 39). Several of these companies have also gone against the trend and have moved from alignment with the audit sign off date to moving to a sign off after the preliminary announcement. This contrasts with those companies in the FTSE100 who have shortened their audit by 15% or more in the last three years, 80% of whom need to comply with SoX and 30% of which have moved to a position of preliminary result announcement and audit date alignment.“

Looking more broadly at Europe , according to BPMI, over 65% of the Top European Companies have reduced their preliminary announcement reporting timetables by an average 9 elapsed days, while audit sign off dates have fallen for 60% of companies by an average of 12 days. Endesa, Dexia, Philips, Autostrade, KPN, Deutsche Post and BASF all achieved reductions of at least 30% in preliminary announcement timetables over the last three years.

In terms of audit sign-off timetables the gap between European and US Companies has already closed dramatically. BPMI research shows that the average time to obtain the year end audit sign-off in the 2006 reporting season was 60 days in the UK , 64 days in Europe and 55 days in the US , a gap of just 5 days with the UK and 9 days with Europe . This contrasts markedly with the position three years ago when the gap was a massive 20 days with the UK and 26 days with Europe . Jones says that Sarbanes-Oxley is draining away a US competitive advantage as the audit consumes much more senior management time as well as increasing audit costs. But how does Jones know for sure that Sarbanes Oxley is responsible for the delays?

He told FSN, ” The close cycle rankings themselves can't provide the absolute evidence that SoX is putting the brake on US close cycles. However, I would say the circumstantial evidence is very strong and this added to the many observations and studies others have done about the increasing cost of audit and the investments being made to comply with SoX and my own conversations with US Controllers I am pretty confident that SoX is the root cause. After all, the SEC has actually been demanding faster filing over the last few years and when you look at the detail, it is often those who were already able to comply with those accelerated timetables who have slowed down the audit sign-off, the announcement or both.

The movement over the last three years has shown a very marginal hit on average Q4 and Year End announcement times in the US Top 100; 27, 28 and 28 elapsed respectively. While the audit sign off dates have shown the very significant hit; the average times being 40, 55 and 56 days. So the big hit came in the first full year of SoX S404 adoption, where our research shows over 75% of US companies had slower audits, with an average increase of 20 elapsed days. I have no doubt that US companies will work on trimming these audit timetables once their new SoX processes have settled down.

Despite the SoX effect, BPMI research shows that the 100 largest US companies still command a significant lead over their European counterparts in terms of their result disclosure with an average of only 28 days. For example, by the time the largest British companies started to report (after 32-33 elapsed days) in January, over 70% of the US Top 100 had already declared their full Year results. Companies who report within 20 elapsed days in the USA include some of its largest including Cisco, Alcoa, Genentech, Dell Computer, Lehmann Brothers, Hewlett-Packard, IBM, J P Morgan Chase, Pfizer, Motorola and General Electric.

The BPMI study does not cover quarter end reporting in the USA , but Jones told FSN that in his view, quarterly reporting is one of the practices that is critical to helping US companies close more quickly and sign off audits more quickly than their European counterparts. “Clearly this is having less of an impact on the audit than it use to but it is still assisting US companies with fast announcements,“ says Jones.

Perhaps more worrying is that despite the overall improvement in reporting timescales in the UK , BPMI's data suggests that several companies have done markedly worse. In fact in absolute terms the bad performers lost many more days than the good performers gained, so that the overall averages for the UK hardly moved.

Jones responded to FSN as follows, “This is a very interesting point! My observations, (based on working in this market and across Europe for some years) that the UK has focused on other priorities over the last few years, in particular the specific issues of implementing SoX and IFRS. The UK financial services sector seems to have been hit particularly hard by IFRS and of course this is a big sector in the UK . This focus has meant the balance of those having to delay their reporting cycle by significant amounts have overshadowed those organizations who have put some effort into accelerating the close over the last three years.”

“In addition, there were a lot of “accelerated close” and “faster reporting” initiatives in the UK in the late 1990's and early part of the 2000's, but these have been less of a focus recently. This led to the position in previous years when the UK average reporting times were some of the best in Europe and the gap with continental colleagues was large. This position is now changing and the gap is closing or in some cases has closed.”

“The effort in implementing IFRS in Continental Europe has been more substantial over the last few years than in the UK as the impact of change has been greater but this has led to many European companies running fast close initiatives as part of their overall IFRS transition, hence the closing of that gap with the UK evidenced in our research.”

“I suspect that as SoX and IFRS processes and systems “bed-in” in UK companies the overall speed of the close cycle will again receive some attention. This won't be driven by any desire just to be “faster than the rest” but by the continuing need to drive finance efficiency. There is no doubt in my mind that a fast close is symptomatic of the overall level of effectiveness and efficiency of any finance function and so organizations will again seek to tune up their finance function post the IFRS transition which will result in better close processes and shorter close cycle times.“

The full BPMI Report is available by clicking this link:
http://www.bpm-international.com/closecycleranking

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