There is a competing demand for improved financial governance and increased transparency and reliability of data. Finance and accounting organizations need to proactively manage the challenges of data quality and prepare for new regulatory requirements to avoid creating a “perfect storm” for their fiinancial close and consolidation processes. How can these challenges be tackled in a concise and predictable manner?
Establishing a Governance Process
Effective finance and accounting organizations address the requirements and challenges of the financial close by implementing a well-defined governance process. The central components of a good governance process include:
- Policies and Procedures: Establishing rules and defining requirements for accounting activities can lead to standardized closing processes and help mitigate the risk of accounting errors. Documented processes support knowledge transfer and cross-training.
- Project Management and Defined Roles and Responsibilities: Defining tasks and dependencies when ambiguities exist between functional areas can help clarify critical path activities and decision points. Managing the financial close like a project can help increase the efficiency of a close process by reducing duplication of efforts.
- Financial Close Calendar: Developing and communicating a close calendar can provide finance with the ability to identify dependent sources of information for key activities. The calendar can also be used to track progress against milestones. Additionally, assigning ownership to individual tasks can help improve status reporting and accountability.
- Financial Close Scorecard: Defining and tracking closing metrics can enable organizations to perform better post-close valuations to more easily identify the obstacles to close and resulting improvement opportunities.
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Measuring Your Financial Close
Along with a well-defined governance process consider implementing metrics for your financial close. Measuring the results of your fiscal close to determine if you’re achieving your goal of timely, accurate, and consistent financial data requires a constant review of your progress. A view into financial close results also requires establishing clear and concise metrics along with defined responsibilities for tracking and reporting results immediately after the process is completed.
- Gross Number of Adjusting Entries: Transaction errors can significantly delay the fiscal closing process. Investigating the gross number of adjusting entries can be used to identify the root cause of a potential process weakness or system issue.
- Review Errors: Focus on the types of errors found during the initial review of the financial statements. This information can be used to identify and correct underlying problems that can be prevented during future closing processes. These errors should be documented and discussed during post-close reviews.
- Completion Times by Functional Area. This metric provides insight into each category of activities that must be completed during the closing process. This series of metrics can also identify bottlenecks within specific functional requiring improvement. Examples are included below.
- Time for subsidiaries to forward their results to corporate headquarters
- Time to close the processing of period-end cash
- Time to finish processing accounts payable
- Time to issue billings to customers
- Time to close payroll and record accrued wages
- Time to count and value ending inventory
- Time to issue related management reports
Conclusion
As regulations and requirements become tighter around responsibility accounting, more and more companies are continually re-evaluating their closing processes to meet up with their statutory requirements. Both single and multiple financial reporting systems require well-defined governance and metrics reporting processes.