FSN White Paper
“SAS responds to the challenge of the Fast Close”
19th March 2007
The “Fast Close” is the process governing the ability to rapidly collect and consolidate financial and non-financial information from a variety of data sources and reporting entities across the world through to the final presentation of management and statutory results for the parent company. |
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INTRODUCTION
The ability to ‘close the books' quickly and generate the group consolidated results has always been a high priority for public companies around the world. The timely announcement of results to the stock exchange is seen as a metaphor for a finance function that is in control and a company that is well managed. In a post-Enron era of heightened corporate governance these matters are afforded even more prominence by analysts, fund managers and market watchers. External benchmarks that rank companies according to the speed with which they publish their Annual Reports and Accounts are keenly watched as companies eager to demonstrate their accounting prowess vie for position.
But the dynamics of the ‘Fast Close', defined as the interval between a ‘period close' (when subsidiaries close their books) and the final announcement of audited results is changing. Historically, US companies have performed much more speedily than their European or Asian counterparts and whilst this is still the case, the gap between them is closing 1 .
One factor that is considered to be influential in the deteriorating reporting timescales of US companies is thought to be Sarbanes-Oxley. In particular, the requirements to satisfy themselves that financial controls have been operating effectively throughout the period. It seems that CFOs have become more cautious and are willing to delay the Fast Close process in order to satisfy themselves that the business has rigorously followed its compliance processes. They are also chastened by the knowledge that material weaknesses that slip through the net expose both the company and CFOs to unwelcome reputational risk.
The dilemma that CFOs on both sides of the Atlantic face is that the burden of compliance is growing, yet at the same time the regulators are imposing even more demanding reporting timescales. The EU Transparency Directive, for example, which took effect on 20 th January 2007, requires listed companies in EU Member States to publish their half-yearly results within two months of the period end and to produce at least two “interim management statements”, i.e. quarterly reports.
There are similar pressures in the United States . A new, shorter quarterly filing deadline looms for large companies with a public float of at least $700 million. The Securities and Exchange Commission's Form 10-K deadline for "large accelerated filers" with a fiscal year end on or after December 15, 2006, will be reduced to 60 days from the current filing deadline of 75 days.
Although more aggressive statutory reporting deadlines are clearly a major driver for a faster close there are other more subtle regulatory changes that impinge on a company's ability to comply. Most notable amongst these is the explosion in narrative reporting requirements courtesy of the EU Accounts Modernisation Directive (now embodied in the Companies Act 2006) which requires companies to report on areas of disclosure such as the environment, employees and community issues. The need to report both financial and non-financial KPIs, together with far more detailed information about risks, trends and factors affecting performance imposes an immense burden on companies that now have to manage a much broader set of requirements, spanning more functional areas of the business and additional data sources.
Furthermore, the introduction of IFRS (International Financial Reporting Standards) has added to the complexity of information that has to be consolidated during the Fast Close process, for example, segmental reporting which requires companies to render much more multi-dimensional data from their operational systems.
Despite the broadening of reporting disclosures, its increasing complexity and the accelerated timescales to publish results, there are still those that say not enough is being done to meet the interests of the investing public. A report 2 by the CEOs of the global accounting firms published in November 2006 compared the relative ease with which individuals could get information from the Internet with the difficulty of obtaining timely financial data from companies.
However, it would be a mistake to confine the thinking around the Fast Close to an external or statutory perspective. Whilst it is clearly important to provide accurate and timely information to external stakeholders there is even more value in delivering information to internal stakeholders charged with delivering on operational and strategic objectives.
The Fast Close process is primarily concerned with the collection of monthly and year-to-date actual results, yet it also serves as the comparison for budgets as well as supporting the process for performance projections. Hence the Fast Close process is fundamentally important to the whole of a performance management regime. Furthermore, an efficient Fast Close process liberates time from the reporting supply chain that can be channelled towards the analysis and interpretation of results rather than data management.
So this white paper considers the common impediments to a Fast Close process, the principle steps needed to correct them and illustrates how SAS Financial Management, coupled with other SAS solutions respond to these challenges.
Common impediments to a Fast Close
There are almost an infinite number of factors which can delay the Fast Close. Some are policy issues or accounting issues that affect the ease with which data can be gathered, others are physical or organisational challenges pertaining to the shape of a group's operations. Some are purely technology issues.
Policy issues and accounting issues
The Fast Close process commences with the ‘period close' in subsidiaries and clearly the whole consolidation process can only proceed at the speed of the slowest entity. Therefore it is important that the period close is well defined and managed so that there is a well oiled and standardised policy for reviewing debtors, reconciling cash books, calculating depreciation, reconciling creditors, making accruals, checking inventory, processing journals and so on, in every reporting unit.
However, there are also less obvious factors that impinge on data quality gathered at this early stage. Inconsistent accounting policies, incomplete data dictionaries and missing ownership details of subsidiaries can all give rise to problems and are time consuming to fix at a later stage.
There are other accounting issues that affect the ease with which data is captured and reported from business units. For example, legal entities which straddle management reporting entities can introduce difficulties in alternating between management and statutory reporting views of the business. Similarly, combining the results of management entities that reside in different operating divisions to form a statutory entity can often present data quality and processing challenges.
Physical and organisational issues
Heterogeneous groups, i.e. conglomerates with highly differentiated business entities spanning different types of trading operation are at a distinct disadvantage compared to homogeneous groups such as hotel groups with similar trading entities. The former is often burdened with different charts of account in each business unit that have to be mapped into the group chart of accounts used for consolidation of results, whereas the latter can take a much more standardised approach. Where groups have separate management and statutory processes this simply serves to accentuate the problems of mapping and control.
The geographical spread of operations can also be a feature which strongly influences the speed of a consolidation. Fully distributed systems with regional sub-consolidations can introduce fractured processing and delays and make maintenance more cumbersome as reporting changes have to be rolled out separately to each affected business unit.
Acquisitive groups face the additional challenge of absorbing new companies with disparate systems and different charts of accounts. Assimilating these changes often has to be accomplished in rapid timescales and with precious few resources to roll out a group system, modify group structures, reconfigure data capture and train the newly acquired management.
Collecting group information from different jurisdictions around the world can also impose difficulties as statutory information designed to meet local GAAP requirements may need to be re-modelled to bring it into line with the group standard.
Technology issues
The lack of communication and workflow technology that supports a more collaborative approach throughout the process can seriously impede the Fast Close as the contributors to the process resort to email exchanges, meetings and telephone calls. But of course all of these traditional forms of support are less effective in a multinational group whose operations span several time zones.
Data Access can also represent formidable challenges to an effective Fast Close. In most groups, data is held widely in different ERP systems and databases and with an increasing emphasis on non-financial reporting most groups are faced with the task of marshalling information from an increasing variety of feeder systems and legacy technical platforms.
Finally, in the absence of suitable enabling technology the ‘Last Mile'of processing, i.e. from the final consolidated results to the production of the Board report or publication of the Annual Report and Accounts, introduces serious delays as data is manually transcribed from spreadsheet to spreadsheet or from spreadsheet to Microsoft ® Word and PowerPoint ® . Not only do these broken process steps introduce delays but they also invite errors, threatening to undo many of the safeguards that can be introduced earlier in the reporting supply chain.
ACCELERATING THE FAST CLOSE PROCESS
The key to accelerating the Fast Close boils down to five principle steps that combine process elements and the way that people are aligned with the technology and applications employed. The five key steps are to; |
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Banish ‘bad' data from the reporting supply chain |
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Build an effective early warning system of controls |
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Use the best technology for the job |
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Align the finance organisation with the process |
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Secure the ‘Last Mile' |
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Banish ‘bad' data from the reporting supply chain
Complete mastery of data quality 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 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 a group reporting system that need to be managed; Balance level data , for example, the entry 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 and other source systems into a common format required by the group reporting pack.
Build an effective early warning system of controls
A tightly managed controls environment is crucial to delivering the fastest possible close 3 . 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.
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. 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.
Similarly, most consolidation systems deliver appropriate capability around, validation of data entry, translation of local currency results into group currency and other reporting currencies, consolidation logic, inter-company elimination, journaling and reporting. Futhermore, the latest generation of products, such as SAS ® Financial Management 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.
But 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. Data validation, well designed data entry, the ability to track and comment on progress are just some of the elements of that ensure a well controlled and streamlined process.
Align the finance organisation with the process
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. Infact 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, such as email, fax and telephone calls to prop up the reporting process 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.
Unfortunately, commonplace productivity tools such as Microsoft ® Outlook ® sit outside of the formal reporting process, placing the finance function at a disadvantage. In effect the finance organisation occupies two distinct and unconnected worlds, operating parallel processes. On the one hand financial information (structured data) is communicated through the group reporting application, but the informal communications (unstructured data), which is just as insightful and important, is outside of scope. Structured and unstructured data which should be naturally combined are compelled to follow different processing paths.
Yet a broader range of collaborative technologies is available to establish the link between formal and informal processes, structured and unstructured data. Not only is this technology capable of reconnecting users with the process and aligning the finance organisation with the Fast Close, but it can also improve the end “user experience”, enhancing their productivity, promote the benefits they gain from the process and help to harness their ‘buy-in' and commitment.
Secure the ‘Last Mile'
It is interesting to note how often group reporting stumbles at the last hurdle – document production. Despite the considerable effort expended on managing data quality, improving collaboration and honing the Fast Close process many of the hard won time savings are frittered away because the Fast Close is brought to a premature conclusion.
High quality document production sits uneasily with group reporting applications. The scope for error as structured and unstructured information is transcribed from reporting system to PowerPoint ® or Word or from the group system to a file format acceptable to external printers is significant.
A further strain is the need to maintain version control over documents as well as strict security and confidentiality over the information they contain; a position that is exacerbated by fractured systems, a convoluted process and the increasing number of people involved in the final stages of document production.
WHY ERP MAY NOT BE THE SOLUTION
ERP systems have been widely deployed in a large number of multinational companies and through standardisation or processes have often been successful in driving down the cost of transaction processing. In particular, homogeneous businesses which are strongly vertically aligned are usually well placed to take advantage of common processes and a group-wide ERP system.
Although a common transaction platform simplifies the process of data capture it does not necessarily follow that an ERP system is more effective for group consolidation and reporting. Whilst such an arrangement provides notable efficiencies around the process of data capture, for example, because of the use of common charts of accounts, validated transactions and shared database environments, there is often a trade off between systems optimised for transaction processing and those designed principally for reporting. In practice, the consolidation capability, performance and functionality available from ERP vendors have not generally proved to be the equal of best of breed consolidation solutions and as a result, many organisations elect to deploy specialised consolidation tools on top of their ERP systems.
It should also be born in mind that many information requirements are no longer satisfied directly through general ledger systems so that a group consolidation is no longer as reliant on the chart of accounts structure as it used to be. Furthermore, efforts to standardise on a group-wide chart of accounts are often quickly frustrated by acquisitions and mergers.
For the majority of multinationals that use a variety of ERP systems, charts of accounts and a mixed portfolio of methods for data capture an ERP system does not confer any particular processing advantage in the context of a Fast Close.
HOW SAS RESPONDS TO THE CHALLENGES OF THE FAST CLOSE
Many of the underlying causes of an unacceptable Fast Close process are connected with the fragmentation of data, systems and processes. In a complex, heterogeneous business, data (both structured and unstructured commentary) has to be collected swiftly and accurately from multiple data sources scattered across the world and marshalled into a streamlined and controlled process right up to the delivery of the final consolidation. At the same time, the process has to visible across the enterprise and support organisational alignment through effective communication and collaboration. However, the difficulty for most organisations is that they have sought to rely on a mixture of technologies and applications acquired from different vendors, supplemented by spreadsheets and a variety of manual steps.
SAS on the other hand is unique in the financial reporting software market because of its high degree of self-sufficiency. Over the years, it has developed all of the key technologies and applications required to support the Fast Close process. This ensures that data and metadata is consistent throughout the process. Furthermore, deep integration between the constituent parts of the process allows information to travel uninterrupted through the reporting supply chain. It is this cohesion that ensures data quality and the minimum of delays.
SAS responds strongly to the demands of each of the five principle steps needed to accelerate the Fast Close process. For example, ETL (Extract, Transform, Load) tools help to banish ‘bad data' from the Fast Close. Extracting, transforming and loading information from multiple information sources is handled by the SAS ® Data Integration Server which is a component of the SAS ® Enterprise Intelligence Platform. This wizard driven product allows the data fields of the source and target systems to be defined and for business rules to be developed which determine how information is to be ‘mapped' between them.
Using these tools, an automatic process can be established for bringing information say, current ‘year to date' actuals, or ‘monthly actuals' from an underlying ERP system or indeed any other systems, into the consolidation environment . Once the process is set, there is full control to ensure that the data is brought across completely and accurately. However, if the metadata, i.e. the structural data is changed inadvertently, (perhaps a new cost centre or chart of account line is added) then the ETL layer will trap the change and provide audit reports warning that data might be rejected and why. The fact that the metadata is managed from a single point for all SAS solutions makes changes of this nature simple to control and deploy. Once established, the ETL process provides a highly effective, controllable and repeatable method of pulling relevant data quickly into SAS Financial Management, the consolidation system, without manual intervention.
For manual data entry (ideally avoided), a tightly integrated Excel interface allows flexibility over input schedule design and provides full validation and control. When combined with automated ETL tools this provides an effective early warning system. |
| A SAS Financial Management screen illustrates how an administrator can create a new data entry form in Microsoft ® Excel ® drawing directly on information in the consolidation model. |
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In common with most consolidation products, SAS Financial Management provides very competent user definable validation routines that help to trap errors and comprehensive audit trails that allow problems to be traced and resolved without delay.
Unstructured information, such as notes and documents attached at the cell or entity level aid communications and strong capability around journal posting and inter-company elimination help to overcome a notorious bottleneck in the Fast Close process. These are some of the best tools for the job for encouraging a Fast Close.
A particular advantage of SAS is the strength of the SAS ® Portal which provides the backbone of a collaborative environment and supports the alignment of the finance function to the process. The information displayed via a web-based interface allows the user to review consolidated results or drill down to a lower level as required to explore variances. It can also display comments and alerts appended by finance personnel at different stages of the financial consolidation process. In addition the portal can draw more widely on other information sources within the SAS® Financial Intelligence Suite such as document repositories and hyperlinks to provide a powerful collaborative tool which links Fast Close participants across the enterprise and yet be personalised as required for different individuals. |
| Portal technology, in this case a SAS Portal, can be used more interactively for dialogue and collaboration around Fast Close issues, helping to resolve them more efficiently. |
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Finally, SAS supports the ‘Last Mile' , principally through the production of Board reports, dashboards and scorecards as required, leveraging its dynamic Excel add-in which allows information to be drawn directly from the consolidation database. Integration with Microsoft Word and PowerPoint provides further reporting options.
SUMMARY
Internal and external reporting demands are burgeoning in all major economies of the world. Reporting disclosures are now more complex and pervasive and companies are required to report in ever decreasing timescales. However many organisations are hampered in their response to these challenges by fragmented systems and processes as well as limited support for collaboration and communications across the finance department.
Managing data quality, implementing tight controls and providing automated interfaces for the collection of data from reporting entities and a variety of data sources is a prerequisite of developing a robust and dependable process capable of delivering timely and accurate information. These are notable strengths of SAS' technology platform which allied with its competent consolidation application SAS Financial Management, provides a formidable solution to the challenges of both statutory and management reporting. But SAS is also capable of responding to the emerging needs of the finance department for better visibility and collaboration through enhanced communications and handling of unstructured narrative. It also supports the ‘last mile' of processing with Microsoft integration and its own suite of visualisation capability.
But the Fast Close is a ‘means to an end' and not an ‘end' in itself. Faster and more dependable processing relieves the finance function of the drudgery of managing an inefficient process as well as providing a platform for broader performance management based on the actual results furnished by the group consolidation process. As such, the Fast Close process may unwittingly hold the key to not only more accurate and consistent reporting, but also to enhanced business performance.
Research
1 BPM International “Close Cycle Rankings 2006”
2 Global capital markets and the global economy: “A vision from the CEOs of the International Audit Networks”
3 PricewaterhouseCooper's 2001 Survey of European CFOs (PwC, European Survey 2001: Consolidation and Reporting Functions in Multinational Enterprises) |
| About FSN Publishing Limited |
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 latest book, “Fast Close to the Max™” will be available in the Spring 2007.
Gary.simon@fsn.co.uk
www.fsn.co.uk
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.
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