Financial close: times demand more automation.

The rewards of the role of senior finance professional are increasingly difficult to realize. In February 2007, Fortune magazine summed up the position of today's finance chief: "The chief financial officer post--once a finishing school for CEOs--has become the crummiest gig in the corporate suite."

While some may believe this new CFO world is here to stay, the changes to the framework of finance are permanent and constantly evolving.

The office of Finance has been experiencing multiple changes for quite some time. The function is now hidden amid a mass of compliance, disclosures, litigation and controls.

The pace of regulatory changes also continues to increase. These increases are the result of the current economic challenges as well as on-going regulatory initiatives such as the mandate of eXtensible Business Reporting Language (XBRL) as the reporting standard format and the likely move to International Financial Reporting Standards.

The Financial Close

One of the core functions that challenges the finance function today is the financial close. While a majority of the enterprise has automated underlying functions and processes, the financial close remains one of the last bastions of manual work.

The tools are used to assemble data, improve efficiencies, aggregate and consolidate numbers--enterprise resource planning, corporate performance management and others--are sound as the arithmetic is usually right.

However, the close and financial reporting process is still similar to baking a cake by instinct, with no recipe to guide the process and no assurance that fiscally critical steps will not be forgotten.

Walk into any Finance organization during the quarter-end close and you will see a team hard at work assembling the ingredients, mixing them just so, adjusting as necessary to reflect the actual performance, until they are able to generate financial statements that are ready for public disclosure.

The tools used in the close are typically Excel, Word, document management solutions and a fair amount of hard copy. If the team was asked to systematically describe the process, it's evident that it's usually driven from a tattered piece of paper with handwritten notes describing the steps needed to close.

This informal and significantly manual approach was relevant work when companies weren't held to today's levels of precision and transparency and a requirement to maintain that same judgment for all similar situations going forward. In today's challenging environment, this is no longer tenable.

Though Finance has made significant efforts to adapt and enhance data, the process-management layer has been largely ignored. The lack of close integration and standardized process has left the Finance team to repeatedly deal with a number of critical issues every close period, including:

* Too many errors;

* Poor visibility into processes;

* Increased regulatory scrutiny;

* Disjointed close and compliance process; and

* Weak documentation.

It's fair to say that as a result of The Sarbanes-Oxley Act of 2002, IFRS and other regulatory requirements, some close-related issues have been addressed. In fact, in 2007, financial restatements actually decreased in the U.S. for the first time since 2001.

Yet, 1,237 companies still filed restatements in 2007, a number that far exceeds restatements in any year since 2001. With the globalization of IFRS standards, greater restatement risk and an increase in the number of closes, complexity is predictable into the 2010 reporting cycle and beyond.

These issues and their solutions lie in stitching various elements together in the "last mile of finance." In other words, the final critical phase of financial management prior to public disclosure where financial, compliance and operational information are aggregated, tested and converted into a set of financial statements.

Material weaknesses and errors in disclosures occur within the last mile because it remains--in large part--an onerous, time-consuming and intensely manual process. And while Finance has progressed along numerous dimensions, it has yet to step back and consider its entire operation as a single, integrated process of interdependent and interrelated sub-processes similar to other processes within the enterprise.

Every company, public or private, develops, manufactures and delivers a set of products and services. Finance delivers financial statements as a product to its many stakeholders who have a right to expect that a public company uses the same level of diligence in producing these statements as it does in delivering the other products and services that it sells.

Consider the actions of managers at the manufacturing level. In their quest to ascend from zero to Six Sigma, they have been able to reduce costs, improve cycle times, increase customer satisfaction and produce higher-quality products.

Companies have embarked on similar initiatives for procurement, customer service, order processing and even sales management. Finance should be no different and should require finance operations to achieve the similar process improvements that have been successful in other areas of the business.

The Optimal Route

To define the optimal route, it's important to establish goals to improve the overall process.

First and foremost, it's key to improve the process from a cost-efficiency standpoint. Today's challenging economic climate dictates that any change to operations results in improved efficiency, reduced cost and personnel savings.

Next, the overall integrity of the close must be assured to internal stakeholders along with external regulators and shareholders. This assurance is formed by tight linkage between the quantitative results from operations and the qualitative controls required to assure that such results are accurate as process visibility and transparency for all stakeholders.

Finally, all processes must meet all internal and external reporting requirements and deadlines.

The price of admission for any solution evaluated by controllers must adhere to the "3C" principle: control, compliance and communication. Controls represent the key elements of risk mitigation and enforced judgment required of today's accountants. Compliance represents the integrated measurement of success when transactions flow through the control points.

Communication is how the outcome of success measures are observed and delivered to key decision-makers within the process.

Without specifically addressing the 3C principle, most controllers and their myriad of end customers struggle to accept change in the environment that drives their numbers. The optimal end-game process is one that guarantees that the right people perform the correct actions, in the proper sequence and within the required timeframe.

With additional transparency requirements such as the U.S. Securities and Exchange Commission's final rule mandating XBRL and its 21st Century Disclosure Initiative, it is vitally important to establish the "record-to-report" process in this "production" environment.

Technology is available to streamline and enhance the end-to-end financial close and reporting process management regardless of where the process is being performed--within the business units, shared services or outsourced.

Controllers' Challenges

Consider the challenges and solutions from the perspective of the corporate controller--the person most often in the middle of the controlled chaos of the financial close--and how he or she views the process as well as how it's viewed by his or her constituents.

For example: while work teams may report the completion of their task along with compliant results, customers may perceive a close that more often resembles a "fire drill" than a controlled process; and while close metrics are reported, customers may find that results are inconsistently available at standard times.

By applying a standardized process and leveraging automation and business-process management to the financial close and reporting cycle, a "center of excellence" approach is enabled within the close function that drives efficiency while ensuring that all compliance, governance requirements and objectives are met.

Automation can never replace the required skill and experience of Finance professionals on a daily basis, but leveraging automation to enhance transparencies and perform the mundane tasks reduces process overlap and frees up resources to focus on the more challenging elements of the close.

Through this process change, the controller's dilemma is addressed across a variety of dimensions, the most important being the stakeholder perception of a clear, flexible and repeatable close process.

For example, when compliance and performance are visible in real time, results are more readily available and customers are more confident. When individual excellence is consistently demonstrated, there is measured accountability; and when local issues are resolved within a global framework, the issues are visible and the resolution more acceptable.

The End Game

With an integrated close that tightly links financial numbers with the relevant controls, reconciliations and close tasks, Finance can build predictability, flexibility and sustainability into its financial close and reporting operations.

Ultimately, the end-game results in increased productivity, reduced cycle times, lower external fees and fewer material weaknesses and financial restatements.

Regardless of whether organizations are utilizing shared services centers, business process outsourcing or a hybrid of both, today's leading companies have achieved benefits when they have implemented an integrated close process using modern automation technology coupled with process-management best practices.

David Taylor ([e-mail]) is vice president, Strategic Planning and Corporate Business Development for Trintech Group PLC in Dallas. John Schlueter ([e-mail]) is director, Record to Report, for EDS, a Hewlett-Packard company in Plano, Texas.