Financial Consolidation Management

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For the last 20 years, organisations have invested into transformation of the entire financial consolidation process from ERP accounting systems to financial consolidation software in order to improve the way of tackling the challenge of Financial Close & Balance Sheet Consolidation with modern software solutions. Despite these
investments, more than 90 per cent of organisations still rely on spreadsheets to gather information from disparate financial systems and perform variance analysis on financial statements, compiling information from multiple sources. The requirement for transparency in financial statements is non-negotiable, and this starts with the financial close and reporting process. Financial consolidation software solutions have certainly
improved the process, driving organisations towards a more consistent chart of accounts, and supporting the period end processes, such as allocations and inter-company eliminations. However, when looking at the actual activities that finance employees perform each month, it is clear that there are still significant gaps. This article provides a realistic view of the use of technology to improve the financial close and reporting process
and achieve increased quality, accountability, auditability, efficiency and ultimately, regulatory compliance.

Sanjay Mehta, CEO, MAIA Intelligence Pvt. Ltd. authored this article for The Chartered Accountant (CA) Journal, March 2011.

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Financial Consolidation Management

  1. 1. MANAGEMENTFinancial Consolidation Management 1410For the last 20 years, organisations have invested into transformation of the entire financial consolidationprocess from ERP accounting systems to financial consolidation software in order to improve the way of tacklingthe challenge of Financial Close & Balance Sheet Consolidation with modern software solutions. Despite theseinvestments, more than 90 per cent of organisations still rely on spreadsheets to gather information fromdisparate financial systems and perform variance analysis on financial statements, compiling informationfrom multiple sources. The requirement for transparency in financial statements is non-negotiable, and thisstarts with the financial close and reporting process. Financial consolidation software solutions have certainlyimproved the process, driving organisations towards a more consistent chart of accounts, and supportingthe period end processes, such as allocations and inter-company eliminations. However, when looking at theactual activities that finance employees perform each month, it is clear that there are still significant gaps. Thisarticle provides a realistic view of the use of technology to improve the financial close and reporting processand achieve increased quality, accountability, auditability, efficiency and ultimately, regulatory compliance. Support for the Financial ideally in the fewest number of days Close possible in order to release results on The financial closing process a timely basis. represents a key corporate gover- Despite the importance of the nance process and the ultimate set of financial close as a key corporate controls over financial results. While governance process, the resources, transactions represent the results or “toolbox,” that finance typically of operations, it is up to finance to uses to execute this process is less execute control reviews and analysis than strategic, and focused on filling processes to validate transactional technology gaps, with the norm being: information, identify potential errors • Multiple general ledgers and or misstatements, and put the seal disparate transactional systems of approval on financial results. For with inconsistent data structures many organisations, the number of that must be mapped to a information interfaces, period end consistent reporting format; journal entries, validation and analysis • A lack of visibility to the status and Sanjay Mehta activities, and consolidation of results execution of the closing process,(The author is a CEO, MAIA Intelligence equates to several hundred sequential and the related tasks and evidencePrivate Limited. He can be reached atsanjaymehta@maia_intelligence.com) steps performed to close the books, gathering performed by finance,106 THE CHARTERED ACCOUNTANT mARCH 2011
  2. 2. 1411 MANAGEMENT To date the obsession considered as well. Leading finance users, consistently with Fast Close The water-fall process presented highlight the following areas where velocity has been below outlines the key phases of automating the financial close drivesnarrowly focused on the the financial close process at a high value and a corresponding return onconsolidation system itself — level. During each phase, and as a investment (ROI).usually located in group finance prerequisite to moving to the next • Process improvements – fast at the centre or corporate phase, analytic activities are performed close, real-time reporting, shorterheadquarters. Naturally, it is to validate the results. These manual, planning and re-forecastinghighly desirable that modern spreadsheet-based processes are cycles.consolidation software is able ‘internal control’ reports that provide • Efficiency – less manual effort to compute the group results the analysis of information required for required for reporting andquickly. Over the years successive assurance during the financial close. analysis.improvements in hardware This process of validating information • Reliance – more accurate and capability together with database with manually compiled analytics is timely information available toand software techniques time consuming, resource intensive, more users.help in faster collation and error prone and presents critical control • Audit efficiency – reduced resource representation of data. implications for financial reporting, requirements and cost of annual with the knowledge of these and ultimately business decisions. and quarterly audits. processes in the heads of just a most financial consolidation systems • Finance ownership – a solution few employees; integrate information at a high level, that is owned by finance and easy• Limited reporting capabilities that automate period-end activities, such as to use, with less reliance on IT. have propagated spreadsheet- eliminations and produce summarised Although there is no agreed based reports that house critical income statements and balance sheets definition of the ‘Fast Close’, it is financial results which are the with limited analysis capabilities. commonly deemed as the number of company’s “corporate records.” Detailed analysis and reporting (both days taken by companies to publish Spreadsheets are further used to variance and management) take place their final audited accounts following support multiple manipulations outside the consolidation system. the year end. It is, however, a broad of the same data over and Analytic reporting – a key capability brush measure that says little about the over to meet various reporting on which finance professionals spend efficiency of the underlying process. For requirements, with weak controls most of their time – is missing. example, two companies that produce as to accuracy, approvals, and tracking of recipients. When taking a deeper look at therisks and opportunities within the closeprocess, dealing with reporting andanalysis issues is where organisationshave the best opportunity to achieveboth greater efficiency and reliability.Optimising the FinancialClose ProcessIn order to optimise the financial close Modernising the Financial their results thirty days after the yearprocess, organisations should match Reporting Environment end are ranked equally, irrespective ofthe key activities that drive the actual When a strategic goal is to modernise whether one of them uses thirty percentclose process with the technologies the financial reporting environment, the more finance resource than the otherthat provide process support as well as best practice is to invest in a solution to meet the deadline.information integration. With increased that will meet financial consolidation Another curiosity is that ascrutiny of the financial close as a key analytic requirements, statutory benchmark focused exclusively on theinternal control process, providing financial reporting, and provide the year end, says nothing about the regularassurance over the internal controls information platform for performance monthly or quarterly reporting cyclesthat govern the close process must be management and decision support. which are the lifeblood of management THE CHARTERED ACCOUNTANT mARCH 2011 107
  3. 3. MANAGEMENT 1412reporting, performance measurement subsidiaries’ systems tightly into the The first priorityand control. Clearly, there is a need for reporting supply chain and require little for an organisationmore holistic approach which not only in the way of formal IT skills are allowing seeking to changedrives faster reporting throughout the finance functions to exert control over processes in order to maintainyear, but also underpins a process of mapping tables, data transfer and compliance is to focus oncontinuous improvement. changes to charts of accounts so that improving the core systems To date the obsession with Fast the process of harvesting data from that directly support financialClose velocity has been narrowly reporting entities becomes depend- reporting and accuracy. Thisfocused on the consolidation system able and accurate. This level of means looking at the processesitself — usually located in group automation accompanied by greater for gathering, consolidating,finance at the centre or corporate control and visibility across the entire and reporting financialheadquarters. Naturally, it is highly organisation greatly accelerates the information results, and findingdesirable that modern consolidation process whilst simultaneously reducing improvements to deliversoftware is able to compute the errors. the information in a moregroup results quickly. Over the years The expectation of the User Group transparent, accurate, secure,successive improvements in hardware is always to have a process as simple and timely manner.capability together with database and as the Approval Process depicted results.software techniques help in faster here, however to have best possible • ERP Systemscollation and representation of data. controls and efficiencies in the process, Enterprise Resource Planning Collecting data from subsidiaries one need to ensure the application (ERP) and general ledger systems has always been fraught with difficulty. provides the ease and control both are excellent for storing data andThe heterogeneous nature of many that are managed and control by the managing the transactions thatglobal businesses, reflected in their Finance team. support the business. Companiesdiverse operational systems and The fact that statutory reporting typically have an array of ERP and charts of account has acted as a these days has partly metamorphosed other financial and non-financialsignificant drag on the Balance Sheet into a marketing exercise and a means application systems, ranging fromConsolidation (BSC) as group finance of delivering a corporate message has state-of-the art solutions to legacygrapple with a multitude of different added to the pressures. and proprietary data systems.systems interfaces. Even the simplest‘mapping’ of data from local ERP to group systems can involve extensivemanual procedures, spreadsheets,and batch transfers of files, introducingthe potential for serious error alongevery step of the way. The scope formistakes is also greatly magnified bythe number of entities involved andfrequent changes in group reportingpacks, brought about by managementdemands and regulatory change.The difficulty is that once erroneous Inefficacy of Current Unfortunately, ERP and general data enters the reporting supply Consolidation Systems ledger systems are not designed tochain, it tends to travel through the meeting the consolidation challenge easily integrate or consolidate dataprocess unchallenged, consuming is difficult because organisations from other sources. To producevaluable time and resources to put use manual, inadequate, or multiple appropriate financial statements,it right. consolidation systems for their a single aggregated view across However, vast improvements in financials. As a result they are unable all transactional systems isthe management of data quality are to structure, control, and automate required. As well, these systemsbeginning to have an impact. A new the process for internal and external do not provide all the necessarygeneration of advanced ETL (Extract, reporting, and are unable to gain consolidation functionality. ToTransform and Load) tools which bind a single, accurate view of financial ensure that the closing process is108 THE CHARTERED ACCOUNTANT mARCH 2011
  4. 4. 1413 MANAGEMENT To do away with needed to calculate and track impor- the current regulatory environment, the inefficacy of tant functions such as inter-company companies need a consolidation Current Consolidation adjustments, business changes, and system that streamlines processes,Systems the use of modern other journal entry changes. ensures accuracy, and helps controlsoftware solutions becomes costs. It is essential that the systeminevitable which would lead Consolidation: The deliver in these areas:to improved financial close First Step in Sustaining • Financial reporting from a single and reporting process and Compliance version of the truth. Reporting mustachievement of increased The first priority for an organisation also support delivery of many stylesquality, accountability, seeking to change processes in order and types of reports – for example,auditability, efficiency to maintain compliance is to focus producing reports across multipleand ultimately, regulatory on improving the core systems that GAAPs – and providing a line of compliance. All above may result directly support financial reporting and sight from management reports toin achieving a better financial accuracy. This means looking at the financial statements.consolidation management processes for gathering, consolidating, • Future-proofing of consolidations. system. and reporting financial information As requirements such as IFRS enter timely and accurate, the system results, and finding improvements the fold, systems need to be able to must handle all the complexities to deliver the information in a more handle the different consolidation of consolidation, such as currency transparent, accurate, secure, and and reporting complexities driven conversion and inter-company timely manner. by common accounting standards eliminations. What’s more, it is The goal is to have a consolidation and reporting. not flexible enough to manage and financial reporting system that • A single, centralised platform for the accounting of business helps businesses effectively manage all processing and calculations. It changes such as mergers and their financials; reduce the risk factors is no longer appropriate to provide acquisitions— in a timely manner. for errors, fraud and manipulation; supplementary processing with• Spreadsheets lower the cost of compliance audits; multiple systems, spreadsheets, Spreadsheet systems are widely and accelerate the closing and and people. used for accounting and financial reporting process. • Adaptable to business change. reporting. But multiple spread- Reliable financial data is the back- The current pace of business sheets make each person or bone of compliance, and a robust con- requires a new degree of agility and department an island of report solidation system provides the foun- nimbleness in finance. Companies information. This can lead to dation for accountability. And this is the need to quickly incorporate the duplicated effort and opens the jumping off point for delivering greater latest information for analysis or to door to inconsistent data repre- transparency and management of identify scenarios for mergers and sentation. Spreadsheets drive un- company performance— the broader, acquisitions. As organisations add acceptable rates of input errors— sustainable objectives going forward. and divest new entities, financial from data entry, re-keying, link- results must reflect these changes failures, and cut-copy-and-paste Compliance Calls for a in a timely manner. activities. Security of spreadsheets Better Solution is inherently problematic, since Using manual and inadequate Conclusion communication of information is consolidation systems creates In conclusion, to do away with the in- via emails or shared drives. As well, inefficiencies, exposes the process efficacy of Current Consolidation Sys- auditing of spreadsheet content is to errors, and increases compliance tems the use of modern software virtually nonexistent, since there costs. Such systems negatively impact solutions becomes inevitable which is no systemic ability to track who the bottom line, as businesses sacri- would lead to improved financial close received what information or who fice performance initiatives to instead and reporting process and achieve- made which changes to the data. direct time and resources toward fixing ment of increased quality, accountabi- As with ERP systems, spreadsheets errors and reworking the numbers. This lity, auditability, efficiency and ultimately,also lack sophisticated consolidation can lead to further inspections, audits, regulatory compliance. All above maycapability. They don’t have the and restating of financial statements, result in achieving a better financialnecessary level of sophistication which drive expenses even higher. In consolidation management system.n THE CHARTERED ACCOUNTANT mARCH 2011 109

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