Mary Driscoll, Senior Research Fellow from APQC

1. Fortifying the Financial
Close-to-Disclose Process
AUTHOR
Mary Driscoll
Senior Research Fellow
APQC
October 2012
Research conducted by
Research sponsored by

2. Situation Analysis
A growing number of CFOs and finance directors are now turning their attention to the close-todisclose 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.
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3. 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.
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4. 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.
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5. Use of Multiple Systems Increases Complexity
Figure 2
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6. 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
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7. 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.
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8. The Relative Cost and Speed of Close-toDisclose
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
$1.20
$1.06
$1.00
$0.80
$0.67
$0.60
$0.42
$0.40
$0.33
$0.20
$0.00
$0.22
$0.10
The Fastest: Quarterly Cycle Time
N = 49
Top Quartile
Median
The Slowest: Quarterly Cycle Time
N = 42
Bottom Quartile
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.
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9. 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
$1.00
$0.90
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
$0.96
$0.69
$0.41
$0.23
$0.21
$0.09
The Fastest: Annual Cycle Time
N = 51
Top Quartile
Median
The Slowest: Annual Cycle Time
N = 41
Bottom Quartile
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.
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10. Cycle Time in Days between Completion of Quarterly Consolidated Financial
Statements and the Release of Earnings
30
25
25
20
18
15
10
10
5
0
Top Performers
Median
Bottom Performers
N = 209
Figure 6
Cycle Time in Days between Completion of Annual Consolidated Financial
Statements and the Release of Earnings
40
36
35
30
25
25
20
15
15
10
5
0
Top Performers
Median
Bottom Performers
N = 210
Figure 7
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11. 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
9
Van Decker, John E., “CFO Advisory: Last Mile of Finance Overview.” Gartner Group, April 2012.
“The Last Mile of Finance: Strategically Transforming Financial Governance.” Deloitte Development LLC., 2012.
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12. Percentage of Journal Entries Processed Manually
57.0%
60.0%
50.0%
40.0%
30.0%
25.0%
20.0%
10.0%
7.2%
0.0%
Top Performers
Median
Bottom Performers
N = 341
Figure 8
Total Cost to Perform General Accounting per Journal Entry Line Item
$6.00
$5.28
$5.00
$4.00
$3.00
$2.03
$2.00
$1.00
$0.45
$0.00
Top Performers
Median
Bottom Performers
N = 264
Figure 9
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13. 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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