Going Back to Basics on Financial Reporting

by Stephen Lee, David Frey, Aaron Lo, Edge Zarrella and Jez Heath, KPMG, 13 April 2010

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topics:
Management

tags:
automation business performance chart of accounts financial reporting

KPMG International’s recent ‘race to close’ survey has found that 75 percent of businesses are looking to reduce the close and consolidation time for their business, with a target of less than six days.

It is intuitive to see that management needs reliable, insightful financial data to make informed business decisions, and that much of that insight comes from financial performance data. A lack of reliable financial data and the resulting impact on competitiveness impairs the performance of the enterprise through both a direct and indirect cost.

However, to start addressing the issues within finance does not necessarily require large capital investments in new finance systems. Management can start to see measurable performance improvements by improving data structures and financial reporting processes with much lower investments required.

Transformation initiatives

Since the market downturn, we are seeing an increase in requests for assistance from companies looking to transform their finance functions. The twin drivers are the cost of finance and the need to support effective decision making.

The objective of these transformation initiatives is to reduce the time it takes to perform the monthly and annual close cycles, to provide more in-depth interpretation, analysis and insight into the number in terms of business performance, and to support decision-making with accurate, fact-based advice. Central to these objectives is a streamlined close-and-reporting process that is more akin to business-as-usual rather than a monthly event that drains valuable finance resources.

At a high level, the monthly close process has three well-defined steps: the general ledger close (collecting the data), consolidation (adding the numbers up), and report creation (analysing and formatting the results). Within each step, we see a recurring set of issues that relate to technology, process and organisation structure of the finance function.

General ledger

The general ledger close consists of collecting the transaction data from the source transaction systems, including accounts payable and accounts receivable, capturing and entering accruals and closing the ledger so no further adjustments can be made. Non-financial data is captured at this stage, including headcount data, order data, shipment data, and inventory and budget data. Typical issues here include a lack of automated interfaces between the source systems, requiring manual data entry that could lead to data errors and onerous checking and correction processes.

The consolidation of the different accounts for the separate divisions, locations and subsidiaries involves establishing a standard view of the data. This is most effectively achieved through a single chart of accounts, performing necessary currency translations, identifying and eliminating intercompany transactions, and performing minority ownership calculations. This is a heavily iterative process requiring large amounts of rework as adjustments to the accounts are processed.

One common issue is overly complex organisation structures. Reducing the number of subsidiaries can have a material impact on reducing the complexity of the process. Another high-impact issue is the lack of a standardised chart of accounts across the organisation. The result is complex data mapping and resulting reconciliations to prove the mapping, all requiring high levels of manual effort and error correction. Many organisations that lack systems to automate the consolidation process use Excel sheets to manually perform consolidation. This practice is considered a significant control weakness and increases the risk of error.

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