Is there a governance issue when a company takes a long time to close its books?
We’re not talking about being so late that it must file for an extension. We mean, taking more time than it should if it simply implemented certain changes?
Some experts believe the answer is yes.
According to a recent study by Ventana Research, finance departments are not as effective as they should be in the execution of their accounting cycle and in delivering timely information to improve performance and competitiveness. As a result, they should change their key financial management processes.
How does Ventana know this? For one thing, a majority of companies are not completing their monthly and quarterly close as quickly as they feel they should, according to Robert Kugel, research director, financial performance Management, at Ventana.
Ventana found in a recent survey that 57 percent of companies take five or more days to close their books. Only 32 percent do it in four days or less. This is apparently a problem, given that 73 percent said they believe it should take four days or less.
Pre-404 Systems At Risk
There is a lot at stake for companies to cut the amount of time they take to close their books. Increasing the level of process automation and systems integration would give finance departments more time to focus on other things that could enhance corporate performance, Kugel claims. In addition, companies can save money and reduce the potential of running into compliance problems.
Indeed, Kugel asserts that many of the issues companies must address to execute a fast, clean and efficient close also will improve financial control and transparency. This, in turn, should allow them to reduce the cost of compliance with Sarbanes-Oxley, both from the standpoint of their ongoing internal requirements as well as their external audit fees.
Barton
“Their systems that were OK pre-[Sarbanes-Oxley Section] 404 are now a risk,” asserts Doug Barton, vice president, product marketing, for Cognos, the business software company that commissioned the Ventana study of 208 individuals at companies with more than 1,000 employees or over $100 million in annual revenues. The study focused on two key areas: financial reporting, and closing and consolidation performance.
Nearly half of the participants worked in finance, while nearly a third worked in IT. In general, the study concluded that corporations do a good job delivering basic information on company and business unit performance. “A decade ago, this was not the case,” it added.
Most respondents report that they are getting information on time to make informed business decisions. Ten years ago, however, Ventana points out that it was still common for executives to wait to receive reports on reams of greenbar paper. “The reports did not promote insight since it was difficult for employees to find the information they needed in the clutter,” it adds.
A Striking Finding
Even so, a lot of work remains to be done. At least one-third of companies continue to fall behind in their ability to deliver basic financial information on a timely basis. Corporations still lag in providing executives and managers a broader set of data points enabling them to manage more effectively.
In fact, the survey found that 80 percent of the respondents indicated they were missing some critical information from periodic reports. “That’s a striking finding,” insists Barton. “It means the finance department is underperforming.”
Only 54 percent of the firms sampled provide individuals with adequate information about their own performance. Leading indicators about the company’s health and competitors’ performance are notably absent: only 50 percent get sufficient data about the former and 21 percent the latter.
According to the study, the problem can be traced to one word: spreadsheets.
Kugel at Ventana insists this manual process is a root cause of longer closing cycles. He points out that less than 10 percent of companies have eliminated their reliance on spreadsheets, which frequently supplement the consolidation and reporting process for core activities like calculation of accruals or translation of currencies. “That was an eye-opener,” concedes Barton.
How does he know that spreadsheets are the big culprit? Because half of the companies in his study that limited spreadsheet use were able to close in four days or less, compared to only 27 percent that used them extensively.
In fact, Ventana estimates limiting spreadsheet use enables a 20 percent faster closing time. “If you eliminate manual entries and spread sheets, you cut the time needed to close your books,” says Kugel.
But, if a company is closing its books on time, is it really a big deal that they are still heavily relying on spreadsheets? According to Ventana, the answer is yes. For one thing, the more manual steps a company introduces to the process, the longer it takes to close its books, so the more it must pay in audit fees and compliance costs.
It also increases the risks of human error during the process.
Closing the books earlier also provides a company more time to write and review their MD&A (Management’s Discussion and Analysis). Companies are also able to more quickly get the information out to the field.
Kugel also points out that there are internal control issues. Afterall, these manual processes are additional steps that must be documented, tested and audited under Section 404. This would not be necessary if they were automated.
”It is clear systems that were adequate pre-Section 404 fail to provide finance departments with the ability to address evolving demands for tighter and more efficient controls,” Ventana points out in its study. “These systems often involve too many manual steps and rely on inherently uncontrollable systems such as spreadsheets. Organizations need secure data environments to reduce control risks in the consolidation and reporting process.”
Ventana insists that it is hearing auditors of public companies discouraging use of spreadsheets for creating internal management reports because they believe spreadsheets pose potential control issues.
Indeed, while 44 percent of respondents believe spreadsheets do not pose a compliance issue, 47 percent do. Of the total sample, 32 percent are looking for ways to implement better controls while only 15 percent are looking for a replacement. Another 9 percent report they do not use spreadsheets in their process.
Of course, there is some self-interest on the part of Cognos to promote the study’s findings. After all, the underlying conclusion is to buy Cognos’ systems. “A cynic could say that,” acknowledges Barton. “That’s why we want the data to guide the urgency.”
Indeed, Ventana estimates one-half to two-thirds of U.S. public companies will need to address compliance efficiency issues through process changes. These changes will aim to reduce financial fraud, control risks, eliminate sources of errors and simplify process execution through greater automation. “Software also plays a role,” the report notes. “For some corporations this will require changes in how they use their existing consolidation and reporting software and/or changes to the software itself.”
And don’t forget, next year the SEC will require companies to close their books earlier—60 days for annual reports and 35 days for quarterlies, from 75 days and 40 days.
Ventana adds that “The need to meet Sarbanes-Oxley section 404 requirements has preoccupied finance staffs for the past two years. Now that their initial compliance work is completed, companies will focus on improving compliance efficiency. Compliance costs will be a catalyst for change in companies’ processes as well as in the systems and people supporting the processes.”
No comments yet