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• Fast Closing: The Managerial Issues

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Implementing the International Accounting Standards (IAS) and fast close requirements (last month plus x days) are tasks that most companies have to provide.
IAS compliance and the fast close pose extra challenges in today’s global reporting environment. This will be much easier for companies that have already established integrated financials architecture in their own country and defined group standards for accounting and controlling - in line with the reporting requirements of the parent company. With companies having to comply with IAS accounting standards as of 2005 and keep up with the trend toward faster closing, ever greater demands are being placed on both group reporting and IT systems.

“The need is for transparent financial information faster than ever before”.

This is primarily due to the demands coming from USA, which ultimately under the IAS international reporting complexities, i.e. the movement towards IFRS (2005) or convergence, will affect all countries.

In the USA, its Securities and Exchange Commission (SEC) requires accelerated reporting deadlines (35 days to file 10-Q, 60 days to file 10-K) and its Sarbanes-Oxley Act has a formal certification requirement – thus executives are demanding more time to analyse financial results prior to certifying (Sec 302 “sub-certification” process requires more timely and accurate reporting). There is also a need for clear accountability at business unit / regional level (e.g. Sec 404 drives need for improved documentation and control and Sec 409 Material changes must be disclosed within 48 hours). This requires significant input from the management accountant. There is also a need for increased stakeholder scrutiny of financial data as recent corporate failures have challenged the business climate. The demand is for a “no surprises” in the financial reporting environment.

As a result to meet SEC’s Accelerated Reporting Requirements, it is reported that 59 percent of companies will use their existing reporting systems more effectively; 29 percent will upgrade their reporting systems; and 8 percent will make significant investments in new information technology. Executives have also cited potential benefits to achieve from improvements to their closing and reporting process as follows:

• More time for analysis and review of reported information 67%

• Increased quality of financial information 55%

• A more timely and accurate decision-making process 48%

• Better information from existing systems 35%

• Process alignment and improvement 24%

• Improved credibility in the market and within the organisation 18%

• Improved staff awareness and satisfaction 14%

• Improved shareholder confidence 6%

Fast Close contains procedures to :

• Optimize and accelerate the closing process

• Streamline financial operations

• Increase timeliness of information

• Get better data quality and more transparent information

There are many issues that arise. Overall, these are as follows :

• Integration Issues: for example, the harmonisation of system landscapes; standardisation of operational systems; central sources of information and analysis and the standardisation reporting tools.

• Standardisation Issues: these pertain to the Processes; Chart of Accounts; Reports and Key Performance Indicators.
  Automation Issues (Work Flow)

• Collaboration Issues such as Web-Access and Portals

• Auditability Issues such as Document principle and Drilldown

Some of the more specific managerial issues are discussed below :

Centralised vs. Decentralised system

The first task is to decide on the type of architecture. Should the company opt for a single, centralised system or multiple local systems? Will subsidiaries be modelled in their own separate countries (decentralised) or in separate company codes within a region (centralised)? Merely by integrating companies in a centralised system, groups can perform reporting across all companies and countries, although the heavy maintenance overhead involved is a disadvantage. Modelling several company codes centrally may necessitate a more complex authorisation concept, but this will not only simplify and standardise reporting, allocating costs between countries and company codes will also be much easier.

Defining Group Standards

IAS and the fast close can only be efficiently implemented if the group of companies defines valid, group-wide standards - such as a common chart of accounts. The company should also address how to map local accounting regulations alongside the IAS group standard. For requirements of this nature, specialists can, for instance, create a blueprint for multi-GAAP accounting (that is, parallel rendering of accounts) to ensure that processes are properly mapped in the system.

Superior Project Management

When planning this kind of rollout project, the accounting team may find that each subsidiary brings its own particular problems to the project and expects to see them solved. The teams should not expect to be able to fulfil all local requirements immediately. It’s important to distinguish between what is truly necessary and what is merely desired. Ultimately, the aim is to achieve the project goals from a group perspective. To accomplish this, the company needs a highly qualified rollout team and a targeted change management strategy based on a consistently implemented procedure methodology. The project management overhead involved should not be underestimated.

The current traditional month-end and annual “closing” has the following characteristics :

• The close process is comprised of multiple sub-consolidations

• Each management level has its own accounting organisation that completes all aspects of the close

• Financial applications are autonomous and customised

• Roles and responsibilities overlap among accounting layers

• Heavy reliance on “top-side” corrections with push-down entries

• Stand-alone reporting packages prepared, reviewed, and submitted upwards

• Significant effort to reconcile data transfer and coordinate any chart of account or application changes

Conversely the Best-in-Class Characteristics of “Fast Close” companies would be as follows :

• Operating units submit into single application for consolidation

• Accounting layers are coordinated among tasks that govern, monitor, validate, and execute

• Financial applications support management information needs while efficiently compiling data between levels

• Top-side entries are used sparingly and not to correct source data

• Data is immediately available for analysis and review by the appropriate group

• Centralized oversight over changes to chart of accounts and application maintenance

All accountants should consider obtaining further in-depth training in this area. To ensure the month-end closing process is effective and efficiently managed to achieve faster closes get an understanding of how to use a structured process. Find out which tasks one must do, and in what order, to improve the quality of the company’s financial data before the month’s end. Discover which closing activities (such as depreciation runs and audit reports) can be spread throughout the month to reduce the time to close. Learn why one should monitor and review the processes on a periodic basis. Find out why harmonizing a company’s structures by using single controlling and operating concerns will lower the cost of maintenance and is a prerequisite for a fast close. Learn why one shouldn’t close one’s books before one can confirm that the ledgers are reconciled, and report those results to obtain managerial approval. See what tools are available for structuring these closing transactions, speeding approvals, and linking processes seamlessly.

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