fortifying-the-close-to-disclose-process

Fortifying the Financial Close-to-Disclose Process

AUTHOR

Mary Driscoll Senior Research Fellow APQC

October 2012

Research conducted by

Research sponsored by

K03956 ©2012 APQC ALL RIGHTS RESERVED www.apqc.org

Situation Analysis A growing number of CFOs and finance directors are now turning their attention to the close-to-

disclose process, which involves all activities needed to close an organization’s accounting

books, perform all necessary intercompany accounting and reconciliation steps, finalize

consolidated financial statements and, finally, release earnings and publish official statements

with regulators ranging from the Securities and Exchange Commission in the U.S. (SEC) to

operators of securities markets in Europe and Asia. At many firms, this bastion of financial

management (FM) has functioned in much the same way for decades. But change is underway.

In the wake of the global financial crisis, pressure is mounting from internal and external

stakeholders—especially investors, auditors, and securities regulators—for rock-solid assurances

that accounting books and systems are of the highest integrity. That means no errors, faster

reporting, process transparency, and agility in dealing with a torrent of new disclosure

requirements.

“Global markets are demanding greater detail on companies in shorter time scales,” said Pat

Cleverly, Director of Research Policy, and Strategy at Tomorrow’s Company, a London-based

research and agenda-setting firm. Her remarks came in a webinar following the publication of a

landmark report on corporate reporting.1

“What is making a crucial process even more pressurized is the raft of new disclosure

requirements coming out of the Financial Accounting Standards Board (FASB),” says George

Wilson, vice president of The SEC Institute, a Miami-based conferences and training company

that specializes in SEC reporting. There is heightened regulator interest in areas such as revenue

recognition, operating leases, fair value, pensions, and derivatives, according to Wilson. And

surely the pressure for more—and more meaningful—disclosures is felt on a global scale. The

Chartered Institute of Management Accountants (CIMA), the world’s largest professional body

of management accountants with members in 176 countries, reported in 2011 that over 90

percent of its members said disclosures are becoming more complex.

Nick Topazio, a technical specialist at CIMA in London who focuses on external reporting, adds

that the situation is exacerbated by the need for external reporting to be better aligned with

internal reporting. The goal is bigger than satisfying the traditional needs of financial statement

readers; the idea is to position companies to excel at integrated reporting. Integrated reporting

refers to the integrated representation of a company’s performance in terms of both financial

and non-financial results.2 It provides greater context for performance data, clarifies how

sustainability fits into operations or a business, and helps embed sustainability into company

decision making.

CFOs and finance directors are also grumbling about new disclosure requirements they feel are

vague. One example involves the presence (or not) of so-called conflict minerals that are

1 Tomorrow’s Corporate Reporting: A Critical System at Risk. Chartered Institute of Management Accountants (CIMA), PwC, and Tomorrow’s Company, 2011. 2 “Integrated Reporting.” Wikipedia, August 2012: http://en.wikipedia.org/wiki/Integrated_reporting.

http://en.wikipedia.org/wiki/Integrated_reporting


leveraged by perpetrators of violence in central Africa. The SEC wants organizations to reveal, in

their own judgment, whether certain minerals exist in the products they manufacture or exist in

components or raw materials procured across global supply chains. The rule is an outgrowth of

the Dodd-Frank financial-system reform effort in the United States.3 One exasperated senior

finance executive told APQC, “Conflict resources? OK, whatever that means! It’s difficult to

implement disclosure requirements such as this.”

CFOs Seeking Change The close-to-disclose process is not clearly visible to uninvolved managers, but it is an acute

priority for CEOs, CFOs, and board-level audit committee members, all of whom bear public

responsibility and potential personal legal liability in the event of process failure.

White-collar crimes in the late-1990s prompted passage of the Sarbanes-Oxley law in 2002, and

that led to stronger internal controls. Similarly, the current increase in regulatory scrutiny is

motivating CFOs to review their close-to-disclose processes. In the first quarter of 2012, APQC

conducted a survey on trends in FM process improvement. Responses were gathered from 145

senior finance executives from large United States and European organizations, with a small

percentage coming from Asia. One surprising finding: nearly 75 percent of organizations

reported that the close-to-disclose process ranked among their top-two targets for FM

improvement over the next 18 months (Figure 1).

Most Popular Targets for Financial Process Improvement

Percentage Process

78% Plan, budget, forecast/analyze, re-plan

72% Close/consolidate/report

70% General accounting (any sub-process)

50% Accounts payable transaction management (any sub-process)

46% Working capital management

Figure 1

3 Jessica Holzer. “Wal-Mart, Target Avoid Mining Rule: Big U.S. Retailers Are Expected to Escape Dodd-Frank 'Conflict Mineral'

Disclosure Requirement.” The Wall Street Journal, August 2012: http://professional.wsj.com/article/SB10000872396390444082904577605630361858586.html.

http://professional.wsj.com/article/SB10000872396390444082904577605630361858586.html


The senior finance executives and subject matter experts interviewed for this report sounded a

common theme: many large organizations, particularly those that have seen robust global

expansion over the last decade, could stand to improve in one or all of the following four areas:

1. Take less time to gather and process financial data. Finance executives often complain that

they have to spend too much time assembling, reconciling, and consolidating data, and

there’s precious little time left at the end of the process for critical review. They desperately

want more time to think through what the financial results say about underlying

performance drivers. They want to prepare meaningful analyses for senior executives, board

members, and external stakeholders. They want more time to fine-tune their approaches to

investor-relations issues, get ready for the “earnings call,” etc. But an over-hang of data

wrap-up work at the 11th hour gets in the way of process effectiveness. For many, delays in

the so-called upstream processes come home to roost.

For many, a big source of this problem has to do with the ungainly need to (a) take

transaction data that had previously been pulled into the the general ledger by automated

systems and (b) pour that data into manual processes for the final steps of close-to-disclose.

What’s more, many large companies are burdened by the number of entities that have to be

consolidated and the number of secondary systems that have to be tapped (e.g., treasury,

tax, fixed assets, and non-FM databases such as those used in sales and marketing). An

interesting perspective on this (Figures 2 and Figure 3) comes from Leinani Malig, president

of Kauleo Consulting, and Trevor Gillespie, audit partner at Mohler, Nixon & Williams.4

4 APQC. “The Financial Close - Why Is It Still Such a Challenge?: June 2012 FM Community Call.” APQC Knowledge Base, June 2012.

http://www.apqc.org/knowledge-base/documents/financial-close-why-it-still-such-challenge-june-2012-fm-community-call-0


Use of Multiple Systems Increases Complexity

Figure 2


Multiple Entities Drive Complexity

Figure 3

2. Use automation to boost process effectiveness. One example comes from Kyle Cheney, a

partner with Deloitte & Touche LLP. “An optimized reconciliation management system can

introduce significant efficiencies while simultaneously mitigating risk of financial errors. I

have been working with several of my clients to automate the reconciliation of a large

portion of their balance sheet accounts, and the results are significant. They are saving time

resulting from functionality that supports integrating balances from the general ledger and

sub-systems, improving workflow approvals and document management. We are seeing up

to 25 percent process-cost reduction coupled with increased confidence in the reported

balances, which is a very compelling value proposition.” An interesting dimension to this:

software solutions in this space have matured, and some have very compelling functionality

around key process areas such as variance analysis, journal entry processing, and close

scheduling. Given that global expansion has added to the close-to-disclose burden, more

CFOs and finance directors of multinational organizations will no doubt want to automate

more process steps.

3. Identify the root causes of accounting and reporting errors and reduce the risk of

restatements. The specter of having to fix errors and restate financials that have been filed

with regulators has grown more alarming. “The cost of improper accounting and reporting


has risen,” notes Jim Robertson, currently an independent consultant with 20+ years’

experience as a senior corporate finance executive. “In the past, the SEC would generally

request a restatement of the current quarter and some prior quarters. But now, my sense is

that restatements are being requested further back, often over years. And the sheer

amount of work for a restatement is just so overwhelming today, given the growing

reporting and disclosure requirements. CFOs and controllers are now more than ever

intensely focused on getting the numbers right the first time. Small companies are at a

singular disadvantage here because they tend to lack enabling consolidation systems and

process rigor. But even some companies that have implemented an enterprise-wide ERP, or

rely on a consolidation tool, continue to rely on Excel-based manual processes which remain

sources of error. These are some of the issues that keep CFOs and controllers up at night,”

says Robertson.

Kyle Cheney concurs: “you need to take a hard look at specific process areas that have

historically been labor-intensive and difficult to control. For example, intercompany

accounting is often the most time-consuming aspect of the close for multinational

companies. There is tremendous difficulty in reconciling, settling and clearing out

intercompany transactions that cross borders, which often results in challenges in reporting

gain/loss on multi-currency translation and excessive tax liabilities. Improving and

automating intercompany accounting can certainly reduce financial reporting risk and tax

liability while increasing process efficiency. This is an area that leading companies are

looking at now.”

CFOs and finance directors also want more transparency around the linkage between data

coming out of core financial systems and data landing in the financial statements. According

to Cheney, “you want to be sure there’s no breakdown as you’re pulling information from

various sources. We see a growing use of technology to insert an automated auditing

capability right into the reporting and disclosure process. That gives you assurance that, for

example, a number that shows up in the disclosures is the same number that shows up on

the face of the financials, and ties to the source data.”

4. Strengthen alignment between the data used for regulatory reporting and the data used

for planning and resource allocation by internal P&L owners. The point is to improve the

quality of information used by internal decision makers. A best practice in this regard is to

embrace what’s called driver-based planning—and that requires that financial data and

operational metrics are aligned in the context of performance reporting. Information

quality, broken down in this sense, has equal parts of accuracy, freshness, consistency, and

accessibility. APQC research indicates that more senior executives working today at large,

complex organizations are asking for financial data governance models that ensure

performance is accurately measured and tracked consistently across the enterprise. Such an

ideal would tend to rule out a heavy reliance on manual data entry and spreadsheets during

the close-to-disclose process.


The Relative Cost and Speed of Close-to-Disclose When it comes to assembling the business case for investing in close-to-disclose improvement,

CFOs and finance directors are looking very closely at the return-on-investment arithmetic. And

well they should. According to data from APQC’s Open Standards Benchmarking in general

accounting and reporting, there is a direct correlation between (a) the total cost to perform

financial reporting per $1,000 in revenue and (b) the speed with which an organization

completes the close-to-disclose cycle.5

First, consider the cost of producing and filing SEC Form 10-Q.6 The fastest companies—those

that prepare and file their quarterly statements in 10 or fewer days—reside in the top quartile

and spend relatively less money to perform financial reporting per $1,000 in revenue (Figure 4).7

Obviously, the slowest organizations—those that take more than 25 days to complete the

quartertly cycle and comprise the bottom quartile—are at a disadvantage.

Total Cost to Perform Quarterly Financial Reporting per $1,000 Revenue

Figure 4

5 APQC defines perform financial reporting as the process of compiling financial data, developing corporate or business unit financial reports for management and board review, preparing consolidated financial statements for public release, and filing official documents with regulators as required by law. 6 A 10-Q is a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission. Its annual counterpart is SEC Form 10-K. 7 The top quartile is the performance level above which 25% of all responses occur. The bottom quartile is the performance level above which 75% of all responses occur. The median is the middle value in a set of values that are arranged in ascending or descending order.

$0.10 $0.22

$0.33 $0.42

$0.67

$1.06

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

The Fastest: Quarterly Cycle TimeN = 49

The Slowest: Quarterly Cycle TimeN = 42

Top Quartile Median Bottom Quartile

http://www.apqc.org/general-accounting-and-reporting

http://www.apqc.org/general-accounting-and-reporting


As shown in Figure 5 on the next page, a similar difference exists between organizations that are

the fastest when it comes to completeing the annual close-to-disclose cycle (15 or fewer days)

and the slowest (37 or more days).

Total Cost to Perform Annual Financial Reporting per $1,000 Revenue

Figure 5

Another view of performance in this space is to look simply at relative close-to-disclose cycle

times (Figure 6 and Figure 7). For this view, APQC gathered the performance of just over 200

organizations and sorted them into quartiles.

$0.09 $0.21

$0.23

$0.41

$0.69

$0.96

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

The Fastest: Annual Cycle TimeN = 51

The Slowest: Annual Cycle TimeN = 41

Top Quartile Median Bottom Quartile


Cycle Time in Days between Completion of Quarterly Consolidated Financial Statements and the Release of Earnings

Figure 6

Cycle Time in Days between Completion of Annual Consolidated Financial Statements and the Release of Earnings

Figure 7

10

18

25

0

5

10

15

20

25

30

Top Performers Median Bottom Performers

N = 209

15

25

36

0

5

10

15

20

25

30

35

40


N = 210


The Need for a Holistic Approach Although it’s tempting to fixate on the linkages between speed and cost, it is important to keep

in mind the need to establish a well-designed process and a sound control environment that

provides top-quality financial reporting to both internal users—the C-suite, the executive board,

and business unit managers—and external users of official financial statements.

What’s involved? The Gartner Group suggests that “financial governance solutions [serve] as a

missing link between corporate performance management (CPM) and governance risk, and

compliance (GRC) solutions, particularly in the final stages before disclosure (a.k.a. the last mile

of finance). While ERP-based tools can help guide the financial close process, they typically do

not encompass the post-GL close process, which includes all the financial consolidation activities

needed to create external financial statements and regulatory reporting. Despite the breadth of

functionality in CPM and ERP systems, they don’t go far enough in providing a holistic approach

to the activities that are required to complete the financial close.”8

A concurring opinion from Deloitte says that the risk of error and restatement is best mitigated

by “a holistic approach that understands how people, processes, and systems—both individually

and collectively—may help an organization improve the efficiency, governance, and quality of

their reporting…[that is how] a finance organization can become a key strategic contributor the

company’s success.”9

Meanwhile, APQC’s Open Standards Benchmarking shows the value of automating post-close

financial processes. As shown in Figure 8, the top performers automate more than 93 percent of

their journal entries (7.2 percent are manually processed) while the laggards automate 43

percent of theirs (57.3 percent are manually processed). And as shown in Figure 9, the laggards

consequently spend nearly 12 times more to get the job done (45 cents versus $5.28). John E.

Van Decker, an analyst at Gartner Group has observed: “CFOs who invest in the last mile of

finance stand to reduce the cost of these processes by up to 30 percent, while also reducing the

risk to company reputation and stock price associated with restatements.”

8 Van Decker, John E., “CFO Advisory: Last Mile of Finance Overview.” Gartner Group, April 2012. 9 “The Last Mile of Finance: Strategically Transforming Financial Governance.” Deloitte Development LLC., 2012.


Percentage of Journal Entries Processed Manually

Figure 8

Total Cost to Perform General Accounting per Journal Entry Line Item

Figure 9

7.2%

25.0%

57.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%


N = 341

$0.45

$2.03

$5.28

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00


N = 264


Summary The close-to-disclose process will continue to grow more burdensome as will the pressure on

the reporting staff. While more speed and less cost are indeed compelling targets for repair,

these goals should not be pursued without a step back and a good look at the bigger picture.

Finance must ensure excellence in corporate reporting on all levels. One must keep in mind the

purpose of reporting: to assist in the effective functioning of the market economy by enabling

shareholders, investors, and other stakeholders to assess the overall performance of a business

and to establish its current and future value (CIMA, PwC, and Tomorrow’s Company). This core

mission falls apart if shareholders and other stakeholders cannot rely on the quality of the

information produced.

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