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An Executive’s guide to improving the performance of the group financial reporting process
Contents
Why is the Fast Close such a challenge?
How can one accelerate the Fast Close process?
Banishing bad data - making the process more accurate and dependable
Building an effective control environment (early warning system)
Using the best technology for the job
Managing the transition to IFRS
Aligning the finance organisation
XBRL and the move to real time reporting
The ability to close the books and report quickly after the year end has become something of a management obsession for the last two decades. The importance of the process stems from a perception that a company which generates its results in a timely fashion is well controlled and managed. There is an implied assumption that it is a tightly run ship with high standards of corporate governance. Capital markets appreciate businesses that can confidently roll out their results and there is evidence that investors and fund managers attach a premium to businesses that can demonstrate superior levels of corporate governance.
Although the Fast Close process is associated most closely with statutory disclosures and filings, it has implications beyond the realms of strict financial reporting. The complexities of the networked economy and the broadening of disclosure requirements into novel areas of non-financial reporting, such as environmental reporting, means that companies have to manage relationships with a wide collection of informal and formal users of financial statements.
Special interest groups, lobbyists, industry regulators, suppliers, customers and trade unions are just some of the growing list of stakeholders that have an interest in the publication of many companies’ results. This democratisation of information is now becoming a major driving force in statutory reporting encouraged by global accounting standards, digital media and the inexorable drive towards electronic filing.
But to look at the Fast Close solely through the lens of financial or regulatory reporting is potentially misguided. The Fast Close is the repository of actual performance and therefore the cornerstone of enterprise performance management in which companies compare their aspirations with their achievements. In a world of increasing volatility, where commodity prices, interest rates, exchange rates and patterns of consumer behaviour can move wildly, there is mounting pressure to monitor, analyse and report on performance in ever decreasing timescales. But the whole cycle of performance management can only proceed at the pace of the slowest link in the chain; i.e. the production of monthly management results. Dramatic improvements in technology over the years have allowed statutory and management reporting to coalesce so that most of the processes are now shared. As a result, the Fast Close has assumed even greater importance since improvements in the statutory process almost certainly benefit the wider aim of improving enterprise performance management.
Why is the Fast Close such a challenge?
Despite significant advances in the power of hardware, the bandwidth of communications technology and sophistication of software solutions, the Fast Close process remains seemingly in a constant state of ‘catch-up’ with the demands placed upon it. Several aspects of this complex process can create difficulty, namely;
The need to respond effectively to regulatory and internally generated demands for accelerated reporting timescales against the backcloth of increasing complexity.
The ability to absorb new reporting requirements such as IFRS and deal effectively with the volume and diversity of data that has to be marshalled completely and accurately through the reporting supply chain.
The challenge of being able to transition to the demands of a new era of ‘interactive data’ (XBRL) and digital reporting.
Although these are substantial issues in their own right, the Fast Close process has to contend with a number of further characteristics that make enduring improvements more difficult to achieve. The ability to operate a single joined up process across different time zones, cultures, languages and accounting standards gives rise to significant organisational, process and technology considerations.
How can one accelerate the Fast Close process?
The inexorable drive to quarterly reporting across the world, coupled with increasingly tighter timescales imposed by regulators, has put severe pressure on companies to accelerate the Fast Close process. But there is no single measure above all others that adequately describes the process. The most important facet of any improvement initiative is to take a holistic approach, i.e. to consider the whole reporting supply chain (RSC), from period close in reporting entities through to the production of the final ‘glossy’ accounts, as a single continuous process. A comprehensive approach helps to ensure acceleration by linking consecutive process improvement across the entire Reporting Supply Chain, rather than a piecemeal approach to selected parts of the process. But process improvement cannot be managed in a vacuum, it has to be accompanied by internally generated benchmarks with which to gauge progress.
External benchmarks which rank companies according to their time to market with, say, audited results allow companies to gauge their performance relative to their closest contemporaries, by industry, size and geography. These benchmarks provide a broad indication of reporting velocity and can helpfully establish whether there is a case for improvement. But such broadly based measures which focus exclusively on elapsed time to serve up the results rather than the man-effort involved in delivering the financial statements form only part of the picture.
Genuine process improvement requires a combination of velocity and productivity measures Therefore a key objective of any performance improvement project around the Fast Close should be to develop internal benchmarks that can serve as a lasting record of achievement and go on to form the basis of continuous improvement.
So having established a holistic approach and appropriate benchmarks what can be done to make the process more slick and efficient? There are five key steps to accelerating the Fast Close, namely;
banishing bad data
building an effective control environment (early warning system)
using the best technology for the job
aligning the finance organisation
securing the so called, ‘Last Mile’
Banishing bad data - making the process more accurate and dependable
Historically, the Fast Close has been seen as a distinct process governed by data capture and consolidation systems superimposed on operational and ERP systems residing in reporting entities. However, the advent of software vendors with the capability to supply ERP engines and performance management suites from the same stable has allowed previously distinct processes to coalesce.
Modern software solutions which incorporate collaborative web based technologies are blurring the line between transaction systems and information systems allowing management to have complete visibility of the reporting supply chain and exert strong control at every stage of the process from general ledgers in subsidiaries through to consolidated results at the centre.
Complete mastery of data quality throughout the reporting supply chain is absolutely pivotal to delivering straight through processing and a faster close process. Erroneous data saps management time and diverts scarce resources from the task in hand. Although seemingly a simple objective, securing the quality of data across an entire organisation presents significant challenges. The scale of a consolidation, its geographic reach and the variable quality of people and systems around the world all conspire to make it a difficult task. Yet with some simple measures in place and the appropriate application of web-based collaborative technology, managing data quality can be turned from an error prone task into a dependable and repeatable process.
There are several distinct elements to data quality in the reporting supply chain that need to be managed; Balance level data , for example, the capture of monthly or year-to-date actuals, budgets, forecasts, statistics other non-financial information and prior year comparatives; Metadata, i.e. structural information such as, cost centres, account codes, reporting entities and company codes and Mappings , i.e. the translation of data from operational, ERP and other source systems into a common format required by the group reporting pack.
Building an effective control environment (early warning system)
A tightly managed controls environment is crucial to delivering the fastest possible close. Unexpected errors can take hours or even days to trace and resolve, particularly where they straddle business entities in different time zones.
Yet the implementation of suitable controls can be extremely challenging because of assorted methods of data entry, a variety of underlying ERP systems, widely differing charts of accounts and a mixed approach to mapping tables and technology. However, despite the difficulties, automation is almost always a good idea. Whilst manual controls can be effective most of the time, they are only as good as the last time they were applied and therefore do not form the ideal basis for a repeatable and dependable controls environment. By contrast, an automated control (provided it has been correctly established) can be relied upon consistently to be effective every time it is required.
Streamlining process steps by standardising on automated methods of data capture from ERP systems, eliminating spreadsheet templates and adopting a single technology standard for data mapping helps to minimise the risk of error by concentrating controls, i.e. reducing the number and variety of controls that have to be implemented. But in a process as convoluted, high risk and far reaching as the reporting supply chain it is important that the emphasis of the controls environment is on preventative controls, i.e. controls that warn the user in advance that something is wrong and prevent the execution of an event, rather than controls that merely detect and report an error after it has arisen.
Web based environments which provide all finance users with visibility of the reporting supply chain, for example, mapping tables, close tasks, their state of completion and controls are proving decisive in detecting problems at the earliest opportunity and resolving them close to the point of origin. Trapping errors where they arise prevents them being propagated along the reporting supply chain and accelerates the process.
But the controls environment should not be taken for granted. It needs to be constantly reviewed and tested. Significant opportunities for improvement have been brought about by the increasing integration of GRC (Governance, Risk and Compliance) systems with the end-to-end reporting supply chain so that controls documentation and testing can now be deeply embedded within the group reporting framework. The result is that it is possible to confirm that application controls have been working satisfactorily before finalising and publishing financial statements. By implementing measures such as these it is feasible to have a more efficient Fast Close process without sacrificing data quality and accuracy.
Use the best technology for the job
Consolidation software is maturing and many of the physical constraints that existed until the turn of the millennium have evaporated. Furthermore, collaborative technologies that unify and streamline processing across reporting and transaction (ERP) systems provide a sound backbone for an effective process.
Web based processing, improvements in communications infrastructure, database performance, data storage and sheer processing power have removed many of the common technology related obstacles to a Fast Close. The ability to implement a faster close is much less about the inherent functionality of a consolidation system and much more about user definable choices around the deployment of specific functionality, taking advantage of the native capability of the application to accelerate the process. Furthermore, the latest generation of products, provide considerable customisation around multiple hierarchies and multidimensional design which allow for wide ranging combinations of statutory, management and regulatory reporting from a single application. This kind of functionality comes into its own when managing the transition to IFRS.
Managing the transition to IFRS
With increasing US commitment to convergence with IFRS it is becoming the de facto standard for global reporting whilst at the same time moving down the value chain to smaller companies. However, transitioning from local GAAP to IFRS presents a number of distinct challenges. First and foremost are the accounting consequences such as the impact on the balance sheet, earnings, bank covenants, pensions and cash flow. The different basis of measurement between one set of accounting standards and another drives the need to communicate, to a variety of stakeholders, why results reported under local GAAP might look materially different from IFRS.
Systems play a crucial role in managing multiple GAAP reporting during the transition. There are five important areas of consideration;
The potential need to collect additional information to satisfy new disclosures
The possible need to adjust general ledger and other transaction systems
The requirement to isolate IFRS adjustments in the accounts
The need to re-state prior year comparatives on the new basis
The requirement to reconcile and report between one basis of measurement, (US-GAAP in this instance) and IFRS.
These principle factors determine directly the scope of systems and process changes. The European experience of implementing IFRS provides some useful lessons for other parts of the world. In some cases, management underestimated the potential impact of the change and the scale of resources necessary to support a smooth transition. With insufficient time and resources, early implementations sometimes focussed on superficial adjustments at the group level rather than permanently embedding changes in underlying sub-ledgers, transaction systems and data capture processes. As a result some organisations were forced to re-visit their implementations in subsequent years to make the close cycle more robust and dependable.
There are no hard and fast rules concerning the ‘right’ approach to implementation since the impact of IFRS depends on, for example, the accounting policies adopted by different companies and the industry in which they operate. For example, capital intensive organisations may be compelled to make changes to fixed asset or general ledgers to accommodate the requirement under IAS 16 to depreciate separately components that are significant in relation to the cost of the whole asset. Similarly, for product oriented companies that hold inventory, the move away from LIFO costing permitted under US GAAP to FIFO or weighted average costing permitted under IAS2 could involve significant reworking of underlying inventory, sales and purchase order processing systems. Moreover, segment reporting and analysis required by IAS 14 could give rise to revised data requirements in subsidiaries and at group.
The most important aspect of managing the transition to IFRS is to keep a careful record of the accounting adjustments. Theoretically this can be achieved through (i) setting up specific entities in the reporting hierarchy to hold the adjustments; (ii) altering the chart of accounts for specific IFRS adjustment accounts, or (iii) a combination of these approaches. In practice it has been found easier to alter the chart of accounts structure and rely on advanced reporting functionality to ‘pull out’ the adjustments, present multi-GAAP accounts and generate reports showing the reconciliation between local GAAP and IFRS.
Systems flexibility remains a key requirement particularly in those geographies such as Canada and possibly North America currently embarking on their IFRS transition. IFRS is not cast in stone. Changes to standards during the conversion process have to be absorbed ‘on the hoof’, adding to the communications challenge. In Europe the IFRS environment was held stable during the implementation period to allow European companies to acclimatise to the new regime – latecomers to IFRS are unlikely to enjoy the same privileges.
Aligning the finance organisation
For many organisations the group reporting process is a mechanical and unthinking process in which data is conveyed in electronic packages from reporting units to group finance at the centre. In fact group reporting terminology, such as “reporting pack” and “submission” underlines the sense of detachment, lack of connectivity and end user engagement. Indeed, group reporting is often viewed by reporting units as an imposition, a constant stream of changing information requests and deadlines from group and something they are compelled to do with very little operational benefit to them.
In common with many other business processes, the typical group finance organisation relies on a hotchpotch of informal communication methods when things start to go wrong. Unreconciled items, misclassifications, posting errors and queries over inter-company balances are often resolved by lengthy telephone calls and email exchanges which can create substantial delay, yet a broad range of collaborative technologies, such as workflow, is available to reconnect users to the process and give them end-to-end visibility of the reporting supply chain that they need. Not only does this technology support the alignment of the finance organisation with the Fast Close, but it can also drastically improve throughput and speed as well as the end “user experience”. Technologies such as finance portals and Instant Messenger also assist the creation of a broader network of communications, helping to resolve issues that would otherwise create delay.
XBRL and the move to real time reporting
One area of of the close process in which technology is on the verge of making a very significant impact is the introduction of XBRL (eXtensible Business Reporting Language). The SEC’s decision in December 2008 to mandate the use of XBRL for statutory filings of listed companies in the United States has elevated the status of ‘interactive data’ from a side show into the mainstream of group financial reporting.
Stock exchanges, revenue collection authorities and company regulators in China, Japan, the Netherlands, Spain, and the UK are among those that have been working - for some years - towards the mandatory use of XBRL but the initiative needed the endorsement of U.S. regulators to put it firmly on the map and establish XBRL as the platform of choice for digital reporting. US public companies that file using US GAAP, and have a $5bn plus turnover, must provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15 2009, and other filers will follow over the next two years – with the help of software suppliers.
So what does XBRL mean in practice? What should companies be thinking about to prepare for XBRL implementation?
In broad terms, XBRL is a ‘mark up' language that allows electronic tagging of financial data so that a third party user of the data, knows exactly how it has been prepared and what it is supposed to mean. For example, “Revenue” defined according to IFRS, for a particular company, period and currency. Once individual elements of the data are tagged in this way they become amenable to data query, analysis and reporting so that external readers of financial statements, such as fund managers and individual investors can use query tools to select and compare data from different companies.
Regulators around the world, such as the SEC have seized upon XBRL as a way of reducing their administrative burden. By getting companies to codify their statutory filings such as the 10-Q the regulators can streamline their data entry and reduce their processing costs. But the move towards ‘interactive data’, as XBRL is sometimes called, will also benefit the Fast Close process by automating many tasks for the first time. But what should companies do to prepare for the change?
Well for large filers in the US the work begins right now with other enterprises following suit over the next two years. Like many new initiatives, planning is the key to success. The name eXtensible Business Reporting Language, is quite a mouthful and gives some clue to the difficulty that some users will face acclimatizing themselves to the language and its idiosyncrasies. It will take a while for users to familiarize themselves with the vocabulary of the XBRL world, such as “taxonomies”, “extensions” and “instance documents”. Laid bare, in all of its glory, XBRL nomenclature and syntax can look quite foreboding.
Furthermore, the tools available for generating and using XBRL are still developing in this rapidly changing area. For example, tools are necessary to map (convert) ordinary US GAAP or IFRS account lines into XBRL in a manner that is consistent with the relevant standards. The output needs to be validated to ensure that the syntax is complete and finally end user tools are needed to read XBRL financial statements. Added to which, XBRL skills are in short supply. This all adds up to a need for careful selection of XBRL tools and significant investment in education in order to embed the necessary level of competence in the finance function.
For the foreseeable future the emphasis of XBRL initiatives will be on external reporting and disclosure but the standardization that XBRL potentially offers will bring opportunities to drive significant change in business processes. In a sense, the implementation of XBRL is mirroring the early days of Sarbanes Oxley, i.e. with an overwhelming focus on statutory compliance rather than the broader possibilities and process benefits. Ultimately, like Sarbanes Oxley, companies will discover that a change inspired by regulation could have significant downstream benefits in streamlining processes around regular management reporting and standardizing data throughout the organisation.
The dynamic and varied nature of internal reporting means that companies could benefit significantly from XBRL, as could transaction reporting, the management of all corporate documents and their content, and it could also bring reductions in publishing costs.
However, for this broader vision to be achieved it will also need to be accompanied by harmonisation of reporting standards, for example, US GAAP and IFRS. Whilst these are converging there is still much progress to be made before improvements can be realized fully.
In the short term companies could be stretched as investors start to use XBRL data in the public domain to challenge company statements and projections. But by a similar token, the public availability of competitor data in XBRL format could bring interesting opportunities for analysis, benchmarking and insight.
After a period of stability the Fast Close process is on the move again. Broadening disclosure requirements, regulatory pressure to reduce reporting timescales and gains made in IFRS convergence coupled with advances in XBRL are keeping group finance departments on their toes. As a result the Fast Close process is constantly under review and hence there is now a pressing need for companies to develop internal performance benchmarks to derive the maximum benefit from any process change.
Streamlining the Reporting Supply Chain remains a challenge. Accelerating the process relies on mastery of data management, embedding an effective control environment, using relevant collaborative technology and giving the finance function end-to-end visibility of the process. Great strides have been made in many of these areas, for example, in linking the period close in subsidiaries with the close process at group. It is now the post-consolidation phase, often referred to as the ‘Last Mile’ of finance which now provides the most fertile opportunity for a step change in process efficiency.
Fortunately, new technologies such as workflow and document management are beginning to make an impact, providing greater opportunities for collaboration, speed and control of accounts production. Although relatively new, XBRL holds out the prospect of even more streamlined filing of statutory returns and the possibility of improved internal processes.
It is also potentially game-changing, heralding a new era of real time reporting in which investors and other stakeholders have unfettered access to digital data on demand. If it happens, this will present fresh challenges for the Fast Close process and spawn the next generation of solutions.
About FSN
FSN Publishing Limited is an independent research, news and publishing organisation catering for the needs of the finance function. The report is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University, a Chartered Accountant and a Fellow of the British Computer Society with more than 23 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. His book, “Fast Close to the MAX” was published in 2008.
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.
© FSN Publishing Limited. All rights reserved 2009.
