FSN: Is the Fast Close benchmark masking more pressing problems?

Is the Fast Close benchmark masking more pressing problems?

12th November 2007
Last week FSN reported the latest BPM International Close Cycle Rankings for 2007. It is an annual survey which chronicles the progress of more than 500 of the world's largest companies in terms of the speed with which they make their preliminary earnings announcements and release their audited results. As in previous years the survey illustrates some ups and downs in terms of performance, with some companies able to accelerate their reporting timescales and others slowing down. This year's survey highlights the drag on performance caused by Sarbanes Oxley compliance. But if statutory reporting fails to make headway what does this tell us about the health of internal management reporting and performance management more broadly? Gary Simon, FSN's managing editor and author of the book, “Fast Close to the Max ® ” discusses the issues.

The Close Cycle Rankings Report is becoming something of an annual ritual and a very public record of the winners and losers in the effort to dash out annual results. Some companies bathe in the reflected glory of accelerated timescales whereas others are noticeable by their absence from the winners' rostrum. But why does this single benchmark of performance matter?

In some respects the Close Cycle Rankings has more in common with the annual Beaujolais Nouveaux race - it has become a worldwide race and obsession to be the first to serve the new wine of the harvest – regardless of the quality. And so it is with the Close Cycle Rankings – market watchers are more pre-occupied with the speed with which the results are published rather than the effort involved in the process.

Companies across the world are accorded ‘equivalence' if they report on the same day after the year end, regardless of the number of man days or FTE (Full Time Equivalents) engaged in producing the numbers. Unfortunately, the speed of close and reporting is viewed by some market commentators, fund managers and shareholders as a proxy for a well managed Group and tightly run ship. The fact that one company may have engaged twice as much resource as another company seems to escape everyone's attention.

That is not to say that the benchmark does not have value. Clearly companies do not change their resourcing arbitrarily from one year to another and so the league tables provide a broad insight into the relative performance of businesses in different industries and geographical domains. Added to which the trends over a number of years provide some insight into what is happening.

This year's ‘nugget' is that US companies are slowing down – apparently overburdened by Sarbanes Oxley compliance. It seems that CFOs would rather delay the results by a few days than risk having to restate their financial results. Apparently finance professionals who are unfortunate enough to have to adjust their results, or own up to material controls weaknesses, often pay for it with their careers.

More interesting still is that this year's Close Cycle Rankings suggest that the announcement of preliminary results and audited results are becoming increasingly uncoupled. Commenting on the irony of the situation, David Jones, Director of Paragon Consulting, who conducted the research says, “Tightening of compliance legislation was meant to increase confidence in reported numbers, but the impact in the USA has been to dramatically reduce the number of year end results announcements that have the key confidence factor of being audited.”

However, although the rankings are useful they beg the question “Why is so much attention lavished on a once a year event?” Furthermore, if a company is sluggish in producing its annual audited results what does this imply about the quality of its management accounting processes?

In this day and age many companies use similar software and processes to produce their statutory reports and their internal management accounts. Regretfully, very few organisations appear to monitor the efficiency of these processes or have a rigorous programme of process improvement in place.

The ‘velocity' of group reporting is just one simple measure that can be applied – but it's not enough. If companies are to make enduring process improvements then they need to look at efficiency or productivity measures around the group reporting process, such as man-days-per-entity, (Days to complete the Board Pack multiplied by the number of people involved at Group and divided by the number of reporting entities). Similarly, they should consider other quantitative measures around different phases of the reporting cycle, for example, period end in reporting entities, time taken to finalise inter-company adjustments and number of group journals. More enlightened companies have developed all manner of in-house measures which are regularly reviewed by the finance team seeking to make performance improvements and monitor bottlenecks.

It is instructive to note that benchmarking organisations such as the Hackett Group highlight the importance of differentiating reporting velocity form reporting efficiency. They say that Cycle times to close the books (period close) and respond to ad-hoc requests are not significantly different between World-class companies and their peer group but what is different is the amount of investment required to achieve that cycle time. The number of FTE's (Full Time Equivalents) per Billion of Revenue in general accounting and external reporting can differ by as much as 46% percent between the two groups. Similarly, process cost as a percentage of revenue can vary by as much as 47%. It seems that reporting efficiency has a long way to go.

But there is another even more important reason to shift the emphasis of reporting benchmarks away from statutory reporting to management reporting and from pure speed to efficiency measures. What is becoming clear as a global trend is the move towards continuous performance reporting driven by regulation. The Fast Close is rapidly becoming the process on which all performance reporting depends – after all, budgets and performance scorecards are valueless without actuals for comparison. Without a competent Fast Close performance management collapses like a pack of cards.

To buy your copy of Fast Close to the Max, by Gary Simon, click here to enter the FSN bookstore.

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