In recent years, advancements in technology, group finance skills and processes have enabled the world's largest companies to improve the time it takes to publish and announce their audited results. But recent research shows that cracks are beginning to appear in the reporting supply chain and the fast-close is in jeopardy. It appears that continuous improvement can no longer be taken for granted as companies wrestling with compliance, are increasingly forced to sacrifice timeliness in favour of reporting accuracy. However, FSN finds that with appropriate systems and processes in place, there is no need for a trade off between reporting accuracy and the speed of close.
The elapsed time taken to close the ledgers and report the year's results to the financial markets, the so called 'speed of close', is a key benchmark by which group finance departments measure their prowess, particularly against competitors in the same market segment. More importantly, the speed of close is widely regarded as a proxy for management competence. It is thought that a rapid close reflects a management team that has well honed reporting processes, is in touch with the numbers and has the confidence to announce its results quickly to the market. As a result, this key benchmark has assumed enormous importance and for example, earlier this year, research commissioned by Cartesis, a provider of performance management applications, showed that "Closing and periodic reporting of actuals" is once again top of the finance agenda, cited by 35 percent of companies as being the area requiring the greatest need for improvement in cycle time.
Companies also recognise the additional benefits that a fast close can deliver, such as cost savings, improved control systems, improved data quality, more time for value added activities and a better work–life balance for accounting staff.
It is a trend acknowledged by David Jones, Chairman of BPM International, a specialist implementer of performance management and reporting systems. In BPM International's recently released "Close Cycle Rankings" research report 2006, Jones notes that the power of the close cycle metric has encouraged many organisations to launch "fast close", "close acceleration" or virtual close" initiatives over the last 10 years, which have resulted in significant improvements in financial processes and systems as well as accelerated reporting timetables. Indeed, according to their latest research, British and European Companies have continued to accelerate their annual financial reporting to UK and European stock exchanges over the last three years with over 50% of the FTSE100 companies recording an improvement of 4 elapsed days. But the same survey suggests that US companies are buckling under the weight of Sarbanes-Oxley with 40% of US Top 100 companies delaying their announcement date by an average of 7 days and the time taken for US audit sign-off increasing by an average of 21 days over the last three years for 80% of America 's largest companies.
Despite the burden of Sarbanes Oxley , US companies continue to outshine their European entities on the key benchmark of the fast close. Nevertheless, improvements in Europe mean that the gap between the best performers in both continents is beginning to close. If the most efficient US companies are to sustain their competitive advantage in what are increasingly global capital markets then they can no longer afford to lose time to fulfilling compliance obligations.
Experience in Europe suggests that companies are coping far better with the regulatory burden given the improvement in reporting timescales reported by BPM International's report, being recorded after taking the implementation of IFRS (International Financial Reporting Standards) into account. As an example, Recticel, a €1.39 billion turnover (2005) chemical company has reduced its reporting timescales despite IFRS. Firmin Jonckheere, Head of Management Reporting, says, "Full reporting used to take fifteen days in theory. Twenty days was more realistic, plus 3 or 4 days for consolidation, which meant that we considered ourselves lucky if we delivered management reporting on the 25 th day."
Recticel reports that by using the Cartesis Finance application for statutory and management reporting, the time involved has been reduced from 20 to 15 days and consolidated results are available on the 17 th calendar day after close. Which is just as well as Recticel contemplates the prospect of having to report under more stringent Euronext reporting standards which may require it to publish results in two months rather than the present three months deadline.
According to James Fisher, a Cartesis Director, BPM solutions have played a key part in enabling European companies to absorb the complexities of IFRS and accelerating reporting timescales. He points to the experience of Nissan Motor Company Limited, (Nissan) a Cartesis customer that has reduced its monthly close and consolidation timescales from around 33 days to 10 whilst taking multidimensional reporting and multi-GAAP reporting in its stride!
Nissan wanted a solution that would support a new matrix management structure so that data could be analysed by region or function, or by product, customer, supplier and business partner. IFRS rules meant that Nissan had to report in J-GAAP (Japanese GAAP), as well as IFRS and US GAAP.
Time is of the essence in the reporting cycle and delays in computing a full consolidation can be especially frustrating. Fisher says "Exemplary consolidation speeed without compromising the audit trail is crucial when operating within the small window of time available to group finance at month end." He adds, "when combined with the ability of our system to consolidate legal and management reporting structures simultaneously, this makes a significant difference to overall consolidation timescales when it really counts."
But shaving time off the reporting cycle is not just about having the appropriate technology to hand after the period end. Fisher points to improvements in the process that can be realised by the simple expedient of say, implementing an efficient process for agreeing inter-company balances. He told FSN, "There's no reason to leave inter-company balances to the last minute. By providing the right tools and processes to reporting entities, they can be encouraged to agree inter-company balances for themselves during the month. By correcting errors where they arise rather than 'dumping' the problem on group finance at month end, the inter-company process can be taken off the critical path, reducing errors post close and offering substantial overall time savings."
In the final analysis, it is what can be done with the time liberated with a fast close that justifies the importance that the capital markets place on the fast close benchmark. For example, Recticel's Jonckheere says that value added tasks like reporting capital employed and cash flow have replaced the time Recticel used to spend on the consolidation before implementing Cartesis.
Similarly, Alain Pierre Raynaud, Global Controller of Group Finance and member of the Nissan Group Executive Committee says, "With Cartesis (Finance) we have been able to move from a limited bi-annual financial close of 33 days to a ten day monthly full close process. The outcome is a significant improvement in the quality of data which in turn has increased our confidence and understanding of Nissan's performance."
All of this experience illustrates that a fast close is a 'means to an end' rather than an 'end' in itself, but because an efficient close speaks volumes about the quality of management and can deliver tangible benefits in a relatively short period of time, this is one metric that companies ignore at their peril. Fast close is definitely back in fashion!
