In this white paper Gary Simon, FSN's managing editor, works with Tagetik to provide a new perspective in group financial reporting which seeks to explain what sort of technology support is required to reconnect pre- and post-consolidation phases so that the Last Mile is not seen as a separate activity or afterthought but as a part of a continuum from financial close to reporting; in which numbers and narrative are inextricably linked.
CONTENTS
INTRODUCTION
THE ‘TRADITIONAL’ FINANCIAL CLOSE
Definitions
The rise of documents as part of the Last Mile
ISSUES WITH TRADITIONAL DISCLOSURE PROCESSES
Personal productivity tools
First generation Disclosure Management Tools
ERP-based Corporate Performance Management (CPM) suites
Pure document management
NEXT GENERATION DISCLOSURE MANAGEMENT
Rounding
XBRL disclosures
Workflow and task management
Finance domain knowledge is required
SUMMARY
INTRODUCTION
Few management processes have received as much attention as the financial close process in recent years. The coalescence of global financial reporting standards, the ever increasing demands of the capital markets and the insatiable appetite of ordinary investors, regulators and other stakeholders for more transparency has created a ‘perfect storm’ in which large corporations are constantly challenged to provide timely, accurate and compliant information.
Increasing process automation has been a feature of the finance function for more than two decades yet despite its heavy investment in ERP systems, Business Intelligence, performance management and a variety of other sophisticated tools few organisations can demonstrate a seamless and auditable process from financial data capture through to electronic filing.
In earlier times the focus of activity was primarily on the speed of reporting because the capital markets placed a premium on companies that could report their earnings ahead of the competition. Indeed, faster and more functionally rich methods of data capture and consolidation have played a major role in improving the collection and reporting of financial transactions. But with ever broadening disclosure requirements, reporting formats and accounting complexity the emphasis in corporate reporting has now shifted from guiding transactions (numbers) through the process to marshalling documents (narrative).
The so called, ‘Last Mile’ of finance is the historical term used to describe the narrative phase of the reporting cycle in which a variety of documents are assembled into one or more reports and filings for internal consumption or external stakeholders. But with the passage of time it has become clear that such absolute focus on Last Mile activities in isolation is misguided and counterproductive. What we have learnt is that if the finance function is to benefit from a step-change in reporting efficiency then the activities of the Last Mile have to stretch back to the earlier phases of the reporting supply chain so that numbers and narrative are brought tightly into alignment from the start of the process in one complete, accurate and secure environment.
So in this white paper we provide a new perspective in group financial reporting which seeks to explain what sort of technology support is required to reconnect pre- and post-consolidation phases so that the Last Mile is not seen as a separate activity or afterthought but as a part of a continuum from financial close to reporting; in which numbers and narrative are inextricably linked.
THE ‘TRADITIONAL’ FINANCIAL CLOSE
Definitions
There is little consensus about the definition of the ‘Last Mile’ or even industry-wide agreement on the definition of the financial close process. For the purposes of this white paper the ‘Last Mile’ is taken to mean the processes, tasks and activities which stretch from the period close (sub ledgers) in reporting entities through to the electronic filing of results, for example, in XBRL with regulators, i.e. everything that follows on from the close of the underlying records in ERP systems.
Fig 1.0 Traditional ‘Last Mile’ solutions re-enforce the boundaries between the pre- and post consolidation phase of the reporting cycle
The early ‘pre-consolidation phase’ of the process is largely concerned with the collection of balances (usually year-to-date actual results), the validation of the numbers and their arithmetic consolidation according to tightly defined accounting rules. In the past two decades considerable effort has been expended in refining this process – arguably with some degrees of success. But the post-consolidation phase has been a different matter, with organisations taking a haphazard approach to solving the intricacies of document production.
The rise of documents as part of the Last Mile
The transition from ‘numbers’ to ‘narrative’ is a difficult one for the group finance function whose main reporting tool is Microsoft Excel. Over time the burden of documents has grown as international organisations have been compelled to absorb multi-GAAP requirements, interim reporting and a whole raft of novel disclosure requirements governing sustainability, environmental and employee reporting together with other forms of corporate social responsibility reporting. The rising importance of documents in the financial close process presents several challenges for the group finance function, as follows;
- maintaining consistency between the same or similar information reported in reports for different stakeholders
- efficiently re-purposing the same report for different digital media or information delivery channels, for example, web, social media and traditional print
- managing the assembly of complex documents across multiple preparers of financial statements from different functional areas, such as, group finance, internal audit, external audit, investor relations, PR, printers and design houses
- developing a technical platform capable of providing process support (workflow, version control, task and issue management) in a fluid and dynamic environment
- maintaining cast iron control over disclosures so that internal and external reports and filings are completely accurate and dependable.
Perhaps the biggest challenge is how to maintain the integrity and audit trail of the ‘numbers’ and ‘narrative’ reported in documents all the way back to ‘raw’ data captured from ERP systems.
The issue of reporting has become so profound that several global initiatives have been introduced to simplify accounting harmonisation, improve co-operation between standard setters around the globe and to strip out unnecessary detail included in statutory reporting. The “Integrated Reporting” initiative is the latest attempt to codify and reduce the reporting burden on organisations.
But such initiatives take years of consultation to come to fruition and so in the meantime hard pressed finance functions find themselves overwhelmed by documents with very little in the way of software tools and process support. Add to this the recent introduction of mandatory filings in XBRL and the true scale and burden of the task becomes apparent. So how do finance functions cope?
ISSUES WITH TRADITIONAL DISCLOSURE PROCESSES
For the most part, finance functions are experiencing four main issues; namely,
- the inability to maintain a seamless and traceable transition from the pre-consolidation phase into the post consolidation or document phase.
- the inability to manage tasks and resources as a continuum from financial close in subsidiaries and other reporting entities through to final disclosures.
- lack of visibility and metrics (KPI’s) concerning the status and ongoing performance during the financial reporting process
- the inability to collaborate across (and outside) the finance function as a foundation for process improvement
At the heart of these problems is an over-dependency on manual processes and a variety of personal productivity tools and specialised point solutions that are unsuited to an environment which requires collaboration, communications and control spanning the whole of the reporting cycle. So what are the limitations of historic approaches?
Personal productivity tools
Microsoft Office productivity tools such as Microsoft Excel and Word are the mainstay of the Board pack used for internal management reporting. Direct integration between Word, Excel, PowerPoint and group consolidation systems provides a simple means of generating operational reports for internal consumption but are of limited value for external reports to the markets and other stakeholders.
The lack of process support, version control, task and issue management renders a spreadsheet or Microsoft Word-bound approach vulnerable to errors and delays and requires huge manual intervention to exert control and transform numbers into ‘polished’ documents suitable for external consumption.
First Generation Disclosure Management Tools
Disclosure Management products are designed to tackle the issue of collaborative document preparation by providing a secure, ‘black box’ environment in which participants with different roles and responsibilities can collaborate in the assembly of complex document types and filings while continuing to work independently.
So, for example, several members of the finance team can work simultaneously on different parts of the Annual Reports and Accounts, using different tools, but the output can be merged to form a single document or a number of independent documents and disclosures in different formats.
Typically, Disclosure Management products draw their data from an underlying consolidation system allowing the ‘numbers’ to be combined with the ‘narrative’ during the closing stages of document production. In addition, the presence of task management and tracking of financial close activities integrated to workflow and email engines encourages greater productivity. So at first sight, such an approach seems to overcome the principal limitations of approaches based on manual processes and personal productivity tools. But on closer inspection the ‘pure’ Disclosure Management approach fails to address many of the fundamental concerns of the financial reporting process.
The problem with First Generation Disclosure Management solutions is that their scope is pegged to the post consolidation phase of the financial reporting process, i.e. the working assumption is that the process starts with the final consolidation rather than period close in subsidiaries.
Fig 2.0 First Generation Disclosure Management solutions are pegged to the closing stages of the reporting cycle
In practice this means that there is still a gap between pre- and post-consolidation phases and much of the benefit of Disclosure Management is ‘lost’ since visibility and control is limited to the final steps of the process and there is a lack of integrity between the ‘numbers’ generated in the pre-consolidation phase and the relevant ‘narrative’ added in the post-consolidation phase.
Fig 3.0 First Generation Disclosure Management limits the backwards traceability of numbers held in documents
Fundamentally, it is not possible to drill back through the financial process to trace numbers from, say, a footnote in the accounts to the underlying raw financial data. Such a limitation might be expected in standalone Disclosure Management systems that are packaged separately from consolidation systems but surprisingly similar drawbacks affect some of the ERP-based Corporate Performance Management (CPM) suites.
ERP-based Corporate Performance Management (CPM) suites
Theoretically, the large ERP-based suites of performance management software should be at an advantage. They have the broadest range of functionality (although not necessarily the best-of-breed in all circumstances) and can boast the ability to integrate with their ‘captive’ ERP systems. But all is not as it appears. The applications which make up these large suites have in many cases been added individually over a period of time through acquisition and assembled into a master suite. In theory this should provide seamless integration, consistent use of metadata and ensure that documents and numbers travel together unimpeded along the reporting supply chain. But in practice the different design and origins of each part of the suite (although by now greatly re-engineered) may limit the effectiveness of integration and the ability to trace numbers bi-directionally through the reporting process from final document or filing back to ‘raw’ financial data.
Pure document management
The overwhelming complexity of group financial reporting has spawned a new category of solution in the Last Mile. This is a pure document management approach in which key documents and associated workflows are managed completely separately from the underlying consolidation systems and populated manually with relevant numbers. Such an approach brings the benefit of simplicity, better visibility of documents and version control but keeping narrative and numbers in separate process streams does very little, if anything, to improve the integrity and dependability of financial reporting.
NEXT GENERATION DOCUMENT MANAGEMENT
The key issue in financial reporting is to allow ‘numbers’ and ‘narrative’ to travel together along the entire length of the financial reporting process. However, it is clear that this cannot be achieved readily by modular application suites sourced from different product stables, nor can it be bolted on via a standalone or specialised application.
The only satisfactory way to achieve this is through a unified architecture which is designed from the outset to store numbers and narrative together. In this approach documents can be referenced to numbers at any stage of the process from the capture of raw data from ERP systems through various stages of adjustment (currency, audit, inter-GAAP) to their final destination in the accounts or notes to the accounts.
Fig 4.0 Next Generation Disclosure Management brings ‘numbers’ and ‘narrative’ together across the entire reporting process following data capture from ERP or consolidation systems.
Rounding
Rounding errors – a numerically small but irritating problem – can be eliminated since the underlying numbers are consistently applied throughout the reporting cycle rather than added or adjusted in documents at the conclusion of the process. Late adjustments are driven back into the process so that underlying data is corrected rather than permitting superficial changes on the face of documents. This means that when the system is ‘rolled-over’ from one year to the next, the starting position faithfully represents the closing position of the previous period.
XBRL disclosures
Of course XBRL is just another representation of numbers. By storing XBRL tags with the numbers and narrative and making these accessible to documents in the same way as ‘normal’ numbers, next generation disclosure management systems are able to maintain the same high level of integrity in XBRL reporting and other reporting requirements from the same set of data.
This will become increasingly important over the coming years as more detailed XBRL tagging requirements will drive tagging back ‘inside the enterprise’ (rather than outsourcing the tagging process) and XBRL tags are captured earlier in the process.
Workflow and task management
As next generation disclosure management solutions are architected as a unified database from the outset, it is a straightforward matter to ensure that workflow and task management permeate the whole of the financial reporting process. This contrasts markedly with specialised point solutions or modular suites in which the workflow or task management is sometimes broken between one processing phase and the next.
The ability to unify numbers and narrative throughout the process against the background of a consistent approach to workflow, review/approval, task and issue management enables users of next generation disclosure management solutions to benefit from better process visibility and productivity gains. For example, bottlenecks can be identified and more disclosure tasks can be executed earlier in the close process. Furthermore, by storing the history of tasks and task duration alongside document production such a system can accumulate relevant metrics and act as the foundation for process improvement.
Fig 5.0 The table below highlights the key differences between the approaches to Disclosure Management
|
Benefit |
ERP –based, modular CPM Suites |
Standalone Disclosure Management |
Next Generation Disclosure Management |
|
Covers the entire corporate reporting process? |
Yes – but modular design and history of acquisitions interrupts the process flow. |
Limited to the later post-consolidation phase of the process. |
Spans the complete length of the process from local close in subsidiaries to digital reporting. |
|
Tracks ‘numbers and ‘narrative’ together? |
Yes – but not usually across the whole process. |
Numbers inserted automatically in documents but at a late stage – post consolidation. |
Underlying database hold the relationships between numbers and narrative through the whole process. |
|
Rounding errors? |
Rounding differences may occur between modules. |
Rounding differences arise between standalone solution and underlying consolidation system. |
Rounding differences resolve because data is drawn from a unified database serving all reporting needs. |
|
Workflow, task and issue management? |
Difficulty in implementing uniformly across all modules limits process visibility and productivity. |
Limited to final stages. |
Complete coverage provides basis for continuous process improvement. |
Finance domain knowledge is required
Over recent years the growing complexity of the financial close has highlighted the pressing need for superior domain knowledge to accompany the implementation of these specialised applications. Smaller, niche vendors, such as those that have developed next generation disclosure management products are often better placed to provide the in-depth expertise. The emphasis on a unified database promotes a wider understanding of the issues and how they affect all stages of the group reporting process as compared to product specialists who may only be able to offer expertise in one or two selected areas.
SUMMARY
The ability to handle documents effectively in the financial close process is becoming critical to the finance function’s effectiveness and productivity as the demand for a whole variety of different reports and disclosures continues to grow.
Early attempts at document management in the financial reporting process, so called ‘Final Mile’ solutions and First Generation Disclosure Management products have only partially satisfied the need. Modular ERP-based performance management suites (built up from acquired software) are not always tightly integrated across the entire financial close process and limit the ability to drill back from disclosures and electronic filings to underlying raw data. More specialised standalone ‘Final Mile’ solutions which are bolted onto other vendors’ consolidation systems at a late stage suffer a similar fate.
On the other hand, next generation Disclosure Management products in which ‘numbers’ and ‘narrative’ (including XBRL Tags) are stored in a single unified database that serves the whole financial reporting process provide consistency in reporting, eliminates rounding differences, and ensure that numbers can be traced from any report back to the original submission of data (with an audit trail of every change in-between). The ability to manage financial close activities, tasks and issues in parallel provides a robust environment in which group finance has control of documents, the numbers they contain and has complete visibility of how they were derived. This capability will be essential for finance organizations as disclosure requirements continue to expand in the coming years.
One of the leaders in the field of combining 'numbers and narrative' is Tagetik whose unified financial reporting solution supports the advanced aims set out in this white paper. You can find out more about Tagetik on their website here.
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About FSN |
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FSN Publishing Limited is an independent research, news and publishing organization catering for the needs of the finance function. This white paper is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University, a Fellow of the Institute of Chartered Accountants in England and Wales and a Fellow of the British Computer Society with more than 27 years experience of implementing management and financial reporting systems. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector. Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. FSN Publishing Limited and the author do not accept responsibility for any kind of loss resulting from the use of information contained in this document. |
