Fixing the Financial Close Process

Financial executives work to rehabilitate the dysfunctional close-to-disclose process by highlighting efficiency, standardization and streamlining.

While most financial organizations have found ways to navigate the convoluted financial close-to-disclose process, it still remains a time-consuming, headache-inducing processbut one that has to be done. However, companies can make the process easier by streamlining efforts, working on the human element and investing in automation software.

For decades, financial departments have attempted to revise the the close-to-report cycle, which requires public companies to follow frequently stiff Securities and Exchange Commission requirements at both quarter end and year end. Business executives are hoping to change the job from an elaborate set of processes to a timely, efficient streamlined one. In fact, in a survey from APQC, which gathered responses from 145 senior finance executives from the U.S., Europe and Asia, 75 percent of organizations reported that close-to-disclose process is one of the top two targets for financial improvement over the next 18 months.

The feeling among financial executives falls in line with the old adage, ‘If it ain’t broke, don’t fix it,’ says Mary Driscoll, APQC’s senior research director for financial management. And yet, instead of spending time forecasting, benchmarking and understanding the drivers of the report’s analytics, finance executives are spending most of their time trying to see that the grunt work gets done.

“It’s been a process that we’ve done the same way for many, many years,” Driscoll adds. Finance department staffs are “soldiers on the front lines. They work through the weekends about five times per year.” It gets done, but it’s not easy or always perfect, she adds.

Challenges run the gamut: human error, timing, regulations, automation, intense manual labor, too many spreadsheets, complex multinational businesses, etc. “Harnessing and improving on the close has proven to be incredibly challenging,” explains Gabe Zubizarreta, CEO of Silicon Valley Accountants. “Most companies do it successfully, but it’s a constant strain where you could introduce errors and you’re dodging bullets.”

Indeed, companies are feeling a “tremendous amount of regulatory pressure” in the wake of the Dodd-Frank and Sarbanes-Oxley laws to have a more transparent financial system, explains Kyle Cheney, a partner in Deloitte’s finance transformation team.

Imperfections in the Process
With new pressures, companies are more prone to errors, which often lead to restatements and exacerbate weakness in internal controls, explains Cheney. Yet, there are ways to streamline the process. To start, Driscoll says, finance executives should map out the close process, replacing superfluous steps that duplicate tasks. For example, companies repeat similar steps when they perform one analysis for the monthly close, a slightly different one for the quarterly close, one for auditors and one for SEC reporting. But efficiency begets cost savings, she adds.


An ideal close would take around 10 days — anything beyond 20 days is competitively worrisome. In fact, companies that complete the process in fewer than 10 days will spend 50 percent less than their slower-to-close competitors, Driscoll asserts, citing APQC data. To shorten that window, the CFO should lead the charge in creating a more standardized and automated system, she adds.

However, complex transactions and issues eventually slow down the process, says Steve Kuchen, a member of IMA’s Small Business Committee, former CFO of PacificHealth Laboratories and consultant to small public and private companies. Kuchen deals with XBRL reports, which require several extra days to review as well as allowing for extra time for the statements to be put in XBRL format.

“It can become worrisome” to review the language, adding two to four days to the process.  What’s more, XBRL is not going anywhere, making the accounting process more complex. Kuchen recommends starting with a checklist that includes listing all necessary procedures and journal entries that need to be completed to properly close the books and prepare financial statements. A timeline can record when each task is completed and by whom,  ensuring the books are closed on time.

CFO Top Performers

CFOs can play a prominent role in the process, leading the charge in understanding how to improve the close, says ZubizarretaFirst, executives re-evaluating the process should know how many people are involved in the process, who does what in the cycle, what can be moved to the pre-close cycle, where the bottlenecks are, etc. A CFO, for instance, may want to take some pressure off the close by reviewing recurring items such as fixed-asset depreciation before the month ends, Driscoll says.

Once those are answered, executives can break down the information to help streamline the process and eliminate kinks in the system. They should start by identifying the causes of the holdups in the process, determining if it’s a whole department or one person slowing things down. CFOs can then suggest adjustments to the process to eliminate the financial process congestion. 

Because processes are being centralized and standardized to align with technological advances, companies now have one dashboard that can be accessed from most places in the world. Executives can see the status of work anywhere, and can make people accountable for bottlenecks. This pushes people to work harder so their name doesn’t appear in red, Cheney says.

Hastening the process comes down to more than standardization, however. Because corporations have become more complicated in past decades through acquisitions, more complex subsidiary structures and so on, executives need to be aware of local reporting requirements and differing rules to apply for different corporate structures.  Indeed, incorporating a larger number of legal entities makes it harder to aggregate the reporting.

Current regulatory buildups abroad parallel the tough — and getting tougher — regulatory environment in the United States. For example, SEC regulations, Financial Accounting Standards Board strictures and Sarbanes-Oxley complicate matters even further with penalties and enforcement beyond the rules governing specific industries.

Trouble arrives when companies let their process strategies fall by the wayside and they err in their financial reports.  Share prices may take a hit because “markets don’t like to be duped by anomalies that can’t be explained,” says Darren Heffernan, CFO of software-solution company TrinTech.

Shareholder suits may follow if the mistakes are material to the company and it’s forced to restate financials. Further, finance departments will be burdened by having to re-do the reports, and the company may incur added cost and complexity if it has to  hire a third party to audit those numbers again. Finally, a restatement can be career-ending event for the CFO or controller. “Who would want to employ a CFO who made a material mistake and had to refile their account?” he asks.

When problems run rampant, talent-management and human errors could crop up. If the finance staff is burned out from late nights and intense workloads, they are more prone to human error. “They’re not just spreadsheet jockeys,” Driscoll says.

Because the close heavily involves human capital, companies need to evaluate skill sets and figure out where gaps are. Executives can shift less risky activity to lower-level staff, freeing up top talent to focus less on reporting historical outcomes and more on high-value activities, including forecasting and being involved in strategic decisions, Cheney says. 

To be visible and transparent during the financial close, companies should invest in technology that can help automate the close-to-disclose process, including specific close-automation solutions such as Blackline, Chesapeake, Redwood and TrinTech software, he says. Such applications can assist in scheduling, managing close activities, reconciling financial accounts, processing inter-company activity and preparing and publishing external financial statements.

Although automation can relieve some of the human factor, it can be an albatross in its own way. The more things are automated, the harder it can be to update the system, and the more a real person may have to update it by hand.

“The technology alone is not a silver bullet,” Cheney says. “These initiatives require a balanced focus on people, process and governance in order to truly realize each application’s full value.”

 

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