Is this Fast Close benchmark missing the point?

10th July 2014

EPM International a federation of enterprise performance management consultancies has released the 2014 “Close Cycle Rankings” for 2014. It is an annual survey which chronicles the progress of 1000 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, which is based on publicly available data, illustrates some ups and downs in terms of performance, with some companies able to accelerate their reporting timescales and others slowing down. But is the obsession with the speed of statutory reporting the most relevant benchmark, asks Gary Simon, FSN’s managing editor and author of the best-selling book, “Fast Close to the MAX”.

 

 

 

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?

To be strictly accurate it is two benchmarks, namely; the elapsed days taken to report the year end results and, separately, the elapsed days to complete the year end audit sign off.  So it is a very simple and convenient measure of reporting, yet it says very little about the efficiency and productivity of the process which is surely more important.

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. And while the speed of the statutory close is viewed by some market commentators, fund managers and shareholders as a proxy for a well managed Group, the fact that one company may have deployed twice as much resource as another company is completely overlooked.

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 still appear to be disadvantaged by the ‘hang-over’ of Sarbanes Oxley compliance. In broad terms, Companies quoted on the NYSE have fallen significantly behind their peers when it comes to the final audit sign-off.  According to the 2014 report, only 9 percent of US Q4/Year End results announcements in the NYSE TOP 100 in 2014 being audited compared with 56 percent in 2004 (before the mandatory introduction of  Sarbanes Oxley). “This is very different to most other global markets” says the report.  It appears that CFOs would rather delay the results by a few days than risk having to restate their financial results.

The compliance burden is also weighing heavily on US companies’ speed of reporting. Fore example, the report adds that the number of days to close and report of the 20 largest companies in the world, dominated by US corporates, has slumped by an average 23 percent over 10 years, as increased regulation and the volume of data disclosure has taken its toll on the fastest.

However, the rankings 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?  The EPM International Report sheds some light on this.  It says, “In our broader EPM benchmark research, for example, if you are fast at external reporting, you are typically fast at internal reporting”.

Indeed, in this day and age many companies use similar software and processes to produce their statutory reports and their internal management accounts – so one would expect this correlation.

Regretfully, very few organisations appear to monitor the efficiency of these processes or have a rigorous programme of process improvement in place.  If companies are to make enduring process improvements then they need to look at efficiency or productivity measures around the group reporting process. 

PwC in its report, “Putting your business on the front foot”, Finance effectiveness benchmark study 2012 highlight the importance of differentiating reporting velocity from reporting efficiency. It says that leading finance teams operate at around 40% lower cost (percentage of revenue) than typical functions.  They add that a faster period-end close allows more time to analyse key financial information and its implications. 

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 in ever more volatile and uncertain markets is a global trend towards continuous performance reporting. 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 effectiveness collapses like a pack of cards.

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