Financial Accountability: the technology's ready ... Are you? (Corporate Reporting).
Most financial executives are pressured to deliver financial information on a timely basis. Yet, they are tied to period-end financial closing and reporting processes that take weeks to complete and don't deliver the right details required by decision-makers. A recent survey by Cap Gemini/Ernst & Young found that 63 percent of the CFOs surveyed indicated that their financial systems are inadequate for the new reporting requirements.
And now, there are new financial reporting pressures on the horizon. In August, the Securities and Exchange Commission passed new disclosure rules aimed at giving investors a better picture of publicly traded companies, and sooner. Among the rules are requirements to accelerate the filing of l0-Q quarterly financial statements from the current 45 days to 35 days from a quarter's end and 10-K annual reports from the current 90 days to within 75 days of fiscal year end, with the changes phasing in over a three-year period.
Also in August, CEOs and CFOs of the largest publicly traded companies in the U.S. began signing off and attesting to the accuracy and integrity of their financial statements, with strict penalties now in place for fraudulent financial statements.
Challenges in Financial Consolidation and Reporting
Because most companies don't have a single, standard general ledger system, the consolidation system must be able to collect data from multiple sources across an organization and create a common view, or chart of accounts, for corporate reporting.
Once the data is collected, the financial consolidation process can finally begin -- while complying with a plethora of accounting rules defined separately by regulatory bodies: the Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB) and other local bodies. The rules cover factors that include currency translation, elimination of inter-company transactions, accruals, minority ownership calculations and goodwill accounting related to M&As.
Reporting is further complicated by the need to deliver different information to multiple internal and external audiences in various formats. These can include:
* Summary balance sheets, income statements and cash flows for external audiences (SEC, Internal Revenue Service, Federal Deposit Insurance Corp., creditors, local authorities)
* Results by business segment for external use (FAS 131)
* Results by product or brand for internal and external use
* Divisional profit-and-loss statements for internal use
* Actual vs. budget variance reports for internal use
* Trend reports and rolling forecasts for internal use
Also adding to the complexity are demands from the investment community for more transparency into corporate results. 'That has driven the SEC to now require even more detailed and timely disclosures of insider trading, acquisitions and other activities.
How Companies Perform Financial Reporting
During a recent Webcast on this topic, Hyperion conducted an informal poll of finance and IT managers and found that more than half of the companies are still using spreadsheets and multiple general ledger systems for consolidation and reporting, and almost half reported financial closing and reporting cycles of 11 business days or longer. In addition, roughly 38 percent of the respondents reported that line management is dissatisfied with the timeliness and quality of financial results they receive on a regular basis.
This feedback was consistent with the results of a 2001 joint market research study by Hyperion and Hackett Best Practices. It found that the average company's financial closing cycle was six days, with another 5.4 days for reporting; the top-performing companies in the study reported financial closing and reporting cycles of five business days or fewer.
Speeding the Process: The Virtual Close
While very few companies have achieved the "virtual close," those that have, have undergone major changes in their financial processes, management culture and financial systems to achieve the goal. Necessary management and cultural changes include: reduction in the number of legal entities to consolidate, clearly defined key performance indicators (KPIs), focus on top-level results and elimination of interim closes.
Financial systems changes include: adopting a single, fully integrated financial application system; developing a completely automated consolidation system; using an automated inter-company accounting system; leveraging a Web portal for delivery of standard reports; and linking the Web portal to an OLAP database that allows users to conduct ad hoc queries and analyses.
A more common scenario is that companies -- while not able to perform a textbook virtual close -- have significantly decreased their closing cycles. For example, Zebra Technologies, a leading provider of on-demand printing solutions, was able to reduce its closing and reporting time to five business days by shifting from several distributed reporting systems to an integrated Web-based application.
Financial Consolidation and Reporting Best Practices
A variety of best practices and tools are available to improve the closing and reporting cycle and ensure the integrity of financial results. Many companies are reviewing and updating internal controls for all financial processes and ensuring that a strong audit trail is in place. Many are realizing that spreadsheets are too easily manipulated and do not provide this strong audit trail.
Similarly, companies are making an effort to shorten their closing and reporting cycles, but also seeking to collect more detailed information on performance at the division, department and line-of-business level. Having the visibility into the results that shortened closing cycles provides directly improves decision-making and provides a better understanding of the underlying details behind consolidated results.
Supporting this trend is the move to implement a standard chart of accounts across the organization. This enables companies to speed the collection and consolidation of results and to ensure more consistency in performance metrics.
Here are some key trends in financial systems and how companies are taking advantage of some of the new features these products offer:
* Shift to a centralized repository -- a single version of the truth to allow access to underlying details -- vs. spreadsheets and distributed applications, which shield financial executives from the details.
* Implementation of multidimensional financial consolidation and reporting systems that connect directly with BRP systems to collect the financial results and the operational detail for more internal transparency.
* Web-based flash reporting on KPIs (sales, gross margins, major expense lines, etc.) throughout the reporting period via the financial consolidation system, or a performance scorecarding system to take action sooner on variations from plan.
* Self-service finance -- Web-based internal reporting of financial results vs. the distribution of paper-based reports and books. This includes the use of personalized financial "portals" that provide a single point of entry to pertinent internal and external information and systems.
* Integrated business performance management systems that support collaborative decision-making and link financial reporting with planning, scorecarding and business modeling systems for continuous performance measurement and profitability improvement.
Beyond these existing capabilities, in the near future, financial reporting systems will begin supporting electronic delivery of financial results to external stakeholders and regulatory bodies via an emerging standard, XBRL (eXtensible Business Reporting Language). This standard will provide more timely and useful information, and make it easier to prepare and deliver financial results to various external audiences.
So, is there hope in the face of changing regulations? There is, and the virtual dose may be one solution. However, by adopting many of the best practices associated with the virtual close, and by taking advantage of the new Web-based financial reporting and business performance management solutions, reporting cycle time can be greatly reduced, and financial executives can deliver more timely information to decision-makers and free up finance staff to spend less time on processing and more time on providing value-added analysis.
Spending more time on value-added analysis, in turn, can improve the quality of the financial results, highlight business opportunities and provide competitive advantage. Perhaps most importantly, executives can finally bring financial accountability to all levels of their organization.
John L. Kopcke is chief technology officer for Hyperion Solutions Corp., responsible for the overarching product and technology strategy. He can be reached at 408.220.8018.
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|Author:||Kopcke, John L.|
|Date:||Oct 1, 2002|
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