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Sarbanes Oxley : Finance : Internal Controls
A Faster Close
By
Robert Kugel
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Robert Kugel
CFA, VP & Research Director
Ventana Research
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Ventana Research has just completed a study of how companies handle financial reporting and consolidation. Nearly two-thirds of the respondents from corporations with more than 1,000 employees or $100 million in annual revenues (the size of organization on which the study focused) stated they want to accelerate their monthly close. More than half wanted to speed up the quarterly close.
A fast, clean close is desirable because usually it reflects a well-designed process efficiently executed. A faster close gets financial information out to managers sooner, and for US public companies it makes it easier to deal with the Securities and Exchange Commission?s (SEC) shorter filing deadlines. The study participants also think shortening the close is an important objective. Ventana Research advises companies to examine each element of the people-process-system to find opportunities to shave the time it takes to effect the close. In our judgment, having the right software becomes the most important factor in achieving an optimal closing period.
Assessment
It was fashionable several years ago to talk about an instantaneous ?virtual? close. Whether or not this is a desirable objective, our study found only 32% complete their monthly close in four business days or less, while 28% required seven or more business days. For the quarterly close, the responses were 23% and 49%, respectively. Most people thought their company could finish closing sooner: 61% wanted to accelerate the monthly close and 54% wanted to speed up the quarterly close by at least 1-2 days. Participants expressed their view that accelerating the quarterly close is a priority: 29% rated it ?very important? and 46% said it was ?important.?
Four factors affect how quickly companies are able to close their books: (1) organizational structure, (2) process design, (3) software/IT systems and (4) execution. For any given level of sales, companies with a simple business model in a single location will have an easier time of it than those that operate multiple lines of business in multiple accounting jurisdictions and have a complex ownership structure.
Even so, a well-designed process can promote efficiency. Companies can choose to streamline or complicate it. If they are intent on a faster close they can simplify allocations, legal entity structures, harmonize charts of accounts and so on.
Software played a vital role in speeding up the closing process throughout the 1980s and 1990s. ERP systems made it easier to collect the accounting information all in one place, and consolidation software automated what had been a tedious and error prone manual process. However, many companies still have room to simplify and harmonize their IT systems by reducing the number of separate accounting systems, making better use of their consolidation application (or using a better one) and reducing manual entries and spreadsheet use. Software and process are interdependent. IT systems that are not well matched to process or a process that fails to leverage the IT system?s capabilities cause unnecessary delays. Moreover, staffing, training and management all affect how well any process is executed.
View
A faster close, even if it amounts to a oneday improvement or so, is likely to be an undertaking that adds value since eliminating the factors that elongate the process unnecessarily usually cuts costs. Harmonization of systems, automation of manual processes, elimination of spreadsheet use, and so on, reduce complexity and the sources of error/correction cycles. Ventana Research advises CFOs and controllers to find ways to shorten their closing cycle and to focus on their software and IT systems. When they are neglected, they often become barriers to change. Enhancing and optimizing the software environment often becomes an enabler of change.
Ventana Research is the preeminent research and advisory services firm helping our clients maximize stakeholder value with Performance Management throughout their organizations. Putting research in a business and IT context we provide insight and education on the best practices, methodologies and technologies that enable our clients to leverage assets to understand, optimize, and align strategies and processes to meet their goals and objectives.
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