The Financial Close Optimizing Performance and Driving Financial Excellence

SAP White Paper Enterprise Performance Management THE FINANCIAL CLOSE OPTIMIZING PERFORMANCE AND DRIVING FINANCIAL EXCELLENCE

CONTENT 4 Executive Summary 12 The Role of Technology 12 Quick Wins and Long-Term 5 The Essential Ingredients of Performance Optimization Financial Excellence 12 Peer-to-Peer Intercompany Reconciliation 6 Drivers for a Fast, High-Quality 12 Integration with Source Systems Financial Close 12 Consolidation Applications 6 Internal and External Stakeholders 14 Ad Hoc Analysis and Reporting 6 The Dynamic Regulatory 14 Automated Internal Control Landscape Processes 7 The Benefits of a Fast Close 14 Close Process Monitoring and 7 Faster Access to Financial Scheduling Information 7 More Time for Value-Added 15 Significant Gains Are Within Analysis Reach 7 Improved Control Systems and 15 A Four-Stage Action Plan Quality 7 Greater Time and Cost Savings 18 SAP Solutions for Enterprise During the Close Process Performance Management 8 Better Investor Relations 18 For More Information 9 How Fast Is Fast? 18 Acknowledgements 10 Barriers to a Fast, High-Quality Financial Close 10 Identifying and Understanding the Barriers 10 Data Quality and Collection Errors 10 Intercompany Reconciliation 10 Poor Performance from Reporting Applications 11 Lack of Automation 11 Weak Audit Trails

EXECUTIVE SUMMARY THE IMPORTANCE OF CLOSING BOOKS QUICKLY AND WITH QUALITY The term “financial close” describes In this white paper, we discuss how a corporation’s ability to complete its corporate finance centers can over- accounting cycles and produce financial come the barriers to a fast, high-quality statements for internal management close. By converging previously dispa- and external legal reporting. The rate disciplines of business intelligence; requirement to close books quickly governance, risk, and compliance; and and with quality is emerging again as enterprise performance management, an important project for today’s global companies can get trusted data into the finance function. hands of key stakeholders in a timely manner. This paper identifies solutions In the late 1990s, companies became to help organizations improve and sus- more efficient at closing their books tain their close times and address the and reporting financial information, but challenges associated with automating compliance regulations such as the and testing internal controls. Sarbanes-Oxley Act placed additional reporting rules on organizations. The result is often a time-consuming, labor- intensive effort to ensure the quality of financial data. Companies are once again focused on improving reporting times and ensuring effective internal controls to govern the accuracy of these processes. Why is it important for corporations to close their books quickly and with quality? Closing fast enables quicker access to financial information, which gives management the foundation for timely and better-informed planning and decision making. The fast close requires a quality close, where processes are monitored to ensure a foundation of trusted information for decision making. Closing fast also helps companies maintain a healthy image in the market, while companies that don’t close fast can often suffer in the eyes of share- holders, investors, regulatory agencies, and trade exchanges. 4 SAP White Paper – The Financial Close

THE ESSENTIAL INGREDIENTS OF FINANCIAL EXCELLENCE RESOURCES, PEOPLE, AND TECHNOLOGY Financial excellence is achieved when Numerous global companies success- The drive for fast close, partly sparked resources, people, and technology are fully engaged in well-publicized at- by the e-business revolution and the combined to optimize and streamline tempts to improve not only the speed promise of the “click-of-the-mouse” processes, decrease operating costs, but also the accuracy and reliability of virtual close, has not delivered its full manage business performance, and their reporting processes – often invest- potential. People attempting to imple- avoid certain risks. A streamlined, effi- ing what has amounted over time to ment a financial close project often cient, and high-quality financial close is hundreds of millions of dollars globally. underestimated the need for a struc- a key ingredient of financial excellence, tured approach to industrialize the although it should not be a new con- Now the requirement to complete the close with a formal methodology. Addi- cept to corporate accountants. Since financial close quickly and with quality tionally, the impact of the Sarbanes- 1998, companies have focused on is emerging once again as a process Oxley Act of 2002 (SOX) was hugely underestimated, to such an extent that it challenged the dominance of the “At Roche we cut our monthly reporting cycle from 20 to 5 work United States at the top of the fast- close league, allowing companies in days, and now our top management has the ability to make faster Europe to narrow the advantage the business decisions, which they really appreciate.” United States had traditionally held. Susanne Erkens-Reck, Head of Corporate Finance Informatics, F. Hoffmann-La Roche Ltd. In the following sections, we examine the drivers, barriers, and solutions to the financial close and set out to deliver improving the speed and quality of the improvement project that needs the full practical and sustainable advice for close process for both statutory and attention of corporate accounting staff the global corporate center looking to management reporting. They have worldwide. A collection of disturbing improve close times and establish a come to recognize the importance of research from both sides of the Atlantic framework for improved internal the close and its role as one of the confirms that close times at the some control. most essential ingredients of a suc- of the world’s largest companies, far cessful global enterprise. from getting shorter, are, in many cases, getting longer. SAP White Paper – The Financial Close 5

DRIVERS FOR A FAST, HIGH-QUALITY FINANCIAL CLOSE STAKEHOLDERS AND REGULATORY FRAMEWORK The drivers for a fast close essentially ments of which remain uncertain to that bring material events to the atten- sit between two dynamics: the various this day and in which the only certain tion of management more quickly than stakeholder groups in the enterprise thing is the prospect of yet more before. and the regulatory framework that change. applies to the market in which the busi- To add to this are the rules associated ness operates. Current legislation in the form of Inter- with 10K/10Q filing deadlines. These national Financial Reporting Standards were accelerated in September 2005 Internal and External Stakeholders (IFRS), EU Accounts Modernisation following an amendment to the SEC Directive, and the Sarbanes-Oxley Act Act of 1934. Public companies with a Stakeholders represent the various has added complexity to the regulatory public float of over US$700 million are touch points in an organization where a environment. The United States has now subject to a 60-day deadline for fast-close project can have impact. borne the brunt of the regulatory bur- form 10K and a 40-day deadline for They are both internal and external and den where SOX creates an additional 10Q. Similar deadlines exist in Europe. On the other hand, we have a drive for “The ability to prepare trusted financial statements in a timely greater accuracy. Section 302 of SOX manner is not only a reflection on the strength of a company’s requires the formal management certifi- cation of the accuracy of financial state- financial reporting and control systems but also ensures finance ments; this covers both omissions and professionals can communicate the right information to key misleading or untrue statements. As a result, those required to put their name stakeholders at the right time.” to these statements now want to take Ashley Dolling, Director of Accounting, Rexam PLC. steps to ensure their accuracy, with the net effect of increasing the time it takes to produce financial statements. include executive management, depart- financial reporting hurdle for all those In addition, Section 404 of SOX has mental and business unit accounting companies that are required to meet been one of the factors that many teams, and business analysts on one the demands of the Securities and believe is leading to an increase in the hand, and auditors, investors, and mar- Exchange Commission (SEC). time companies are taking to close and ket analysts on the other. obtain audit sign-off. Section 404 On one hand, there is a drive for faster requires each annual report of a public The Dynamic Regulatory reporting. For example, Section 409 of company to include a report by man- Landscape SOX requires public companies to dis- agement on the company’s internal close any material event that results in control over financial reporting. It also The second dynamic is the one with the a change to the financial condition or requires the company’s auditor to greatest impact on close cycles in operations of the issuer. Under the attest to and report on management’s recent years. Since the well-publicized rules, the issuer has four days from the assessment of the effectiveness of the corporate scandals of 2001 and 2002, trigger of the material event to report company’s internal control over finan- businesses have faced an ever- on the event. This requires financial and cial reporting – again leading to further changing regulatory landscape, ele- operational systems and processes delays in the reporting processes. 6 SAP White Paper – The Financial Close

Improved Control Systems and Quality A financial-close initiative should estab- 10% Redeploy staff and resources toward more lish a number of best practices for value-added activities financial reporting, including automation, workflow management, and data- 13% Able to meet regulators’ deadlines entry validation. One of the keys to a fast close is “right-first-time” reporting, Do not see any value in cycle-time reduction 62% which not only increases quality earlier 8% in reporting processes, but the addi- Able to work fewer hours, late nights, and weekends tional time spent on analyzing the data 7% leads to better quality reporting that Reduce costs delivers greater value. Because the fast close is about streamlining and industri- alizing the close process, internal control systems are inherently improved, Figure 1: Benefits of Reduction in Financial Cycle Time1 which, in turn, improves the audit sign- off process. The Benefits of a Fast Close More Time for Value-Added Analysis Greater Time and Cost Savings During By streamlining close processes and the Close Process Good corporate governance is insepa- reducing the number of staff days The cost impact of a fast close is sub- rable from the benefits of a fast and required, you free significant time for stantial. A streamlined close process efficient close. These benefits have accounting staff. This can be used to offers time savings in terms of manual multiple touch points both internally and add more depth and value to the writ- intervention, error reconciliation, vari- externally to the organization. Some of ten reports produced at the end of the ance analysis, and data processing the well-researched benefits – and sub- quarter and year but also allows more and collection across a variety of close sequently the most common contribut- time for ad hoc financial analysis during processes. These time savings can ing elements – of a fast-close project the monthly cycle, improving the quality then be quantified into numbers of staff business case are discussed in the fol- of decision making. days, which, in turn, can result in lowing sections. reduced headcount, fewer temporary According to a survey conducted by staff working on low-value activities, Faster Access to Financial Information Business Objects in partnership with and reduced recruitment costs. By reducing the close time, businesses BPM Magazine,2 62% of respondents benefit from much faster access to overwhelmingly saw this as the single information relating to the performance biggest benefit for cycle-time reduction of their business. As part of an inte- (see Figure 1). It’s also important not to grated and coherent performance overlook how the fast close creates a management process, this allows man- more manageable work-life balance for agement to focus attention quickly on staff in the accounting department. problem areas and make faster busi- Quite often, the length of a close cycle ness decisions to improve future is only the tip of the iceberg when it performance. comes to the effort involved, and it’s not uncommon for staff to work significantly longer hours during the close. 1. Source: Fast-close survey conducted by Business Objects and BPM Magazine, May 2006. 2. Ibid. SAP White Paper – The Financial Close 7

These savings, however, are not limited greater comfort. Additional transparen- to possible financial rewards. When cy enables greater access to capital for applied to value-added activities, freed those reporting earlier. It means the time increases revenues and lowers reporting of material events can be per- costs. Particularly relevant is the appli- formed in a more timely manner, which cation to Section 404 of SOX, where can have a positive impact on stock fast-close initiatives not only aid com- value. Additional analysis, including the pliance but also assist in driving down use of narrative and commentary, also the high costs associated with Section has a big impact on how a company is 404 compliance by establishing sus- perceived. tainable and repeatable processes to reduce audit fees. Better Investor Relations The ability to publish statutory results ahead of shorter regulatory deadlines is, in itself, only part of the benefit for companies that close fast. Publishing faster than industry peers and more closely monitoring business perfor- “The concept of ‘sustainable value’ is now built upon the long-term viability of a company’s strategy. By establishing a framework for enhanced business reporting, companies can now gain greater insight into performance and dramatically improve investor and analyst confidence.” Professor Robert G. Eccles, Harvard Business School mance are associated directly with the management capability of a company and, in turn, the company’s image. It not only implies a level of expertise but also allows for speedier communi- cation – and at a greater level of detail to investors and analysts, giving them 8 SAP White Paper – The Financial Close

How Fast Is Fast? veyed adding an average of over 2 to understand where you sit compared weeks (19 days) to the time it takes to to your peers, either by geography or The battle for who reports the fastest get audit sign-off over the last 5 years.5 industry, and how this relates to the is somewhat one-sided as U.S. corpo- relative complexity of your performance rations have consistently reported The trend toward a “slow close” in the management and financial reporting almost twice as quickly as their European United States started several years ago process. Determining this benchmark counterparts, with the average time to and can, in part, be attributed to the should be the first stage of any close report year-end or fourth-quarter introduction of the Sarbanes-Oxley Act project, as it helps you establish a results in the United States standing at of 2002, with a big spike in close and “SMART” (specific, measurable, 29 days in the 2007/2008 reporting audit sign-off periods immediately after achievable, relevant, and time-bound) year, compared with 50 days in implementation of the rules. That objective on which you build a project Europe.3 said, even though more companies plan to shorten your reporting time. increased the length of close and audit The simplest and most publicly accessi- sign-off than those that reduced it over ble way to establish a fast-close bench- the five-year period, there is now some mark is to look at the published legal evidence that close periods are return- year-end reporting periods, including ing to previous levels. the time to announce results and the time to obtain audit sign-off. The latest Interestingly, however, the gulf that research from the BPM International exists on legal fourth-quarter or year- network (BPMi) does precisely this for end reporting between Europe and the the 2007/2008 reporting period. United States does not exist when it According to BPMi’s Global Close comes to internal management report- Cycle Rankings 2008, over the past 5 ing. A study by BPM International years, 60% of the largest European shows that while the United States is companies have reduced their results marginally ahead of Europe and that the announcement timetables by an aver- gap between the best and the worst age of 10 days; and 46%, their audit performers is still large, the general timetables by an average of 14 days.4 pattern is very similar. These results are summarized in the following table.6 A slightly different picture can be observed in the United States. Here Upper Quartile Middle Quartiles Lower Quartile Best Worst BPMi’s research indicates that 52 of Europe <8 9–15 >16 2 55 the 100 largest U.S. corporations actu- United States <7 8–14 >15 1 22 ally added an average five days to their fourth-quarter and year-end results announcement timetable over the past There is no 100% right or wrong five years. Audit cycles have also answer as to how fast a company lengthened significantly in the United should close. To determine how quickly States, with 71% of companies sur- you should close and report, you need 3. Global Close Cycle Rankings 2008 (BPM International, July 2008). 4. Ibid. 5. Ibid. 6. Consolidation, Reporting and Planning Functions in European Multinational Enterprises 2006 (BPM International, February 2007). SAP White Paper – The Financial Close 9

BARRIERS TO A FAST, HIGH-QUALITY FINANCIAL CLOSE DEVELOPING A STRATEGY FOR YOUR BUSINESS Identifying and Understanding corporate centers of today’s global and includes supporting text and the Barriers enterprises – are presented in Figure 2 commentary. Once data collection is below, with a number of the most sig- accomplished, the real process of con- While compliance-related issues have nificant explained in more detail. solidation in accordance with multiple resulted in the increase of close cycles accounting standards can begin. in the United States, especially around Data Quality and Collection Errors the audit sign-off associated with inter- The inability of many companies to Intercompany Reconciliation nal controls, compliance itself is not a achieve a “right-first-time” financial The intercompany process all too often direct barrier to a world-class financial close process is a critical hindrance to sits on the critical path for the close close process. The issues are with the faster reporting cycles. It’s linked to cycle, causing significant delays while processes, people, and technology bar- manual data entry, late delivery from operating units resolve unmatched riers to a financial close. These barriers reporting units, a lack of validation and intercompany transactions and balanc- can be found at both the head-office controls, poor integration with source es. Time spent at both the head office and reporting-unit level and affect multi- systems, and a lack of integration and local operations contributes to a ple teams and processes. By identify- across multiple close processes. Data significant number of staff days that are ing and understanding these barriers, needs to be collected from different needlessly wasted on this essential but you are then able to outline a strategy charts of accounts and multiple sourc- cumbersome process. According to through which you can remove them es, including ledger systems, HR sys- research conducted by Business systematically from your close process. tems, and spreadsheets, and once Objects and BPM Magazine in 2006, Some of the most frequently cited bar- collected, normalized into a common 77% of respondents thought that riers – based on our experience of sup- chart of accounts. Often the data col- improved intercompany reconciliation porting fast-close initiatives in the lected is both financial and nonfinancial would speed the close process.7 Poor Performance from Reporting Internal politics Late delivery from Lack of buy-in from Staff experience Applications between HQ and with systems and The consolidation process is, by its reporting units divisions subsidiaries close processes nature, iterative and involves many Distribution of systems and Multiple GAAP or charts rounds of consolidation, review, and maintenance of metadata of accounts adjustment before the process is final- Data transmission problems Intercompany reconciliation ized. The performance of consolidation and reporting applications is critical as organizations look to enhance the close Lack of automation Weak audit trails process and save time in every area. Lack of integration with source systems Poor processing speeds and lack of Delays understanding variances and manual data input scalability and availability of applica- Reconciliation of management and tions during peak close periods can be Integration with plan and budget data statutory reporting serious impediments to a world-class Data collection errors and high financial close. Performance of consolidation applications volumes of late adjustments Added pressure of adopting new regulations such as Sarbanes-Oxley Resource-intensive manual internal control activities Process Barrier Technology Barrier People Barrier Regulatory Framework Figure 2: Frequently Cited Barriers to a Fast Close 7. Source: Fast-close survey conducted by Business Objects and BPM Magazine, May 2006. 10 SAP White Paper – The Financial Close

Lack of Automation Weak Audit Trails The close process comprises multiple Not only an issue during the close pro- elements, many of which can be auto- cess where central finance may seek to mated to speed the close process, investigate and verify figures, the lack reduce errors, and increase staff avail- of strong audit trails also has an impact ability. Examples of key processes that on the postclose audit sign-off. A can be automated include intercompany detailed and automated audit trail from matching and elimination, consolidation source to disclosure can be a key tool, of entries, currency conversion, owner- especially when a close process fea- ship and control calculations for minori- tures lots of late data changes and ty interests, equity elimination, cash journal entries. More than 40% of flow, and GAAP conversions. Lack of respondents to the Business Objects automation and guided workflow also and BPM Magazine survey8 felt that adds to the issues associated with staff improved audit trails were very important that may be unfamiliar with business in reducing close times (see Figure 3). processes and reporting systems. Audit trails on changes to data Integration of actuals, plans, and forecasts Integration to source systems Automated controls, business rules, and calculations Performance of business process management applications Automation of intercompany reconciliation Automation of consolidation reports generation Automation of report distribution, access to the Web 0 20 40 60 80 100 Unimportant Little Importance Somewhat Important Important Very Important Figure 3: Importance of Factors Affecting the Fast Close9 8. Ibid. 9. Ibid. SAP White Paper – The Financial Close 11

THE ROLE OF TECHNOLOGY LEVERAGING SOFTWARE FOR THE FINANCIAL CLOSE Quick Wins and Long-Term Peer-to-Peer Intercompany Integration with Source Systems Performance Optimization Reconciliation In organizations where it’s not possible Identified as a barrier to the close, to have a single-instance ERP or GL The use of technology is key to facilitat- intercompany reconciliation often sits application, the integration of consolida- ing wider people- and process-oriented directly on the critical path and takes tion and enterprise performance man- change as part of your financial close far too long to complete, involving the agement applications with underlying project. Technology can be used to head office in a complex communica- subsidiary systems is even more cru- achieve both quick and big wins, and tion process that ideally should be cial. Establishing direct links to these understanding your options is a critical resolved among local operating units. systems – which can be automated as part of project planning for the financial By enabling Web-based peer-to-peer much as possible – not only speeds the close. It’s vital to align your use of tech- intercompany reconciliation, you can process of loading data but it helps nology with your organization’s resourc- remove the process from the critical avoid costly mistakes and subsequent es and needs, focusing on what can be path. In addition, when operating com- wasted time resulting from manual data achieved in a defined time frame. For panies can reconcile balances earlier in entry, corrections, or errors associated example, the combination of imple- the reporting period, it becomes possi- with batch loading of comma-separated menting a standard chart of accounts in ble to dramatically reduce the number value files. a new single instance of an enterprise of staff days the process takes, resource planning (ERP) or general led- decrease the number of errors, and Establishing a mapping between vari- ger (GL) application may be far too easily enforce corporate policies. ous systems, while preferred, is also time-consuming and expensive for even prone to error, as reporting structures the largest and most technology-rich While the majority of consolidation and definitions of accounts vary among companies. However, the benefits of applications feature an intercompany business units and change over time. making improvements to an existing component, these are often applied Leading financial information manage- consolidation application or implement- after the close and fail to improve the ment applications support mapping per- ing a new functional and high- quality of the process or remove it from formed by business users, validation of performance consolidation engine to the critical path and, as a result, drive destination data, and the ability to drill collect and consolidate results are still multiple iterations of the consolidation back to source data to mitigate risk. achievable within the time frame of a while adjustments are made. Applica- financial close project. tions are now available as stand-alone Consolidation Applications solutions or as part of integrated suites Consolidation applications play a key We have identified several focal points to facilitate online peer-to-peer inter- role in the corporate center close pro- to help speed your closing cycles. company reconciliation. They can often cess. Although implementing a new These can be achieved through be installed alongside existing consoli- application is not an undertaking to be improvements to current applications dation applications and, due to the cen- taken lightly the benefits for the organi- as quick wins, or by defining what you tralized nature of their deployment, can zation in terms of improved speed, qual- may need from future investments in be implemented very quickly and at rel- ity, and workflow offered can be signifi- performance optimization applications. atively low cost, resulting in dramatic cant. A new application provides a basis reductions in the close time and gener- for implementing numerous quick wins ating significant ROI. as well as driving wider financial trans- formation where appropriate. 12 SAP White Paper – The Financial Close

The following points are important that is just as true for the close pro- that centralize data and metadata man- when considering the role of a consoli- cess as for any other activity. By pub- agement, automate business rules, and dation application in a fast, high-quality lishing statistics on the best and worst interface with source systems are a financial close process. performers in the close process and by start. Leading applications, however, coaching and training in the areas that take automation to the next level by Data Entry and Validation are identified as weak, you make the introducing financial intelligence, which Integration with source systems to process a managed one, increase further speeds the close cycle by using improve the way data enters the sys- discipline, and carry out significant built-in rules logic to automate consoli- tem is only half the battle. Data coming improvements to the close time. dation entries. Because such applica- into performance management applications also understand the life cycle and tions also needs to be checked and High Performance challenges of finance departments, filtered intelligently based on the As the adoption of Web-based consoli- they can handle multiple reporting reporting framework and rules defined dation applications has increased over channels with different charts of by the central finance team. GAAP pre- the past five years, so has the impor- accounts and different account flows or sentation, required breakdown of data, tance of their performance in the analysis dimensions over time. They and start and end dates are examples closing cycle. Not only are some can also manage the retention of past of automatic checkpoints. applications limited to single-process reporting frameworks so finance pro- consolidations, but the time it takes to fessionals can safely adapt to ever- By leveraging functionality in consolida- perform a consolidation, multiplied by changing financial needs without having tion applications, it’s possible to ensure the required iterations and views in a to copy and paste, rebuild, or destroy data quality at every level of a corpo- close cycle, can add to the problem. their previous reporting scenarios. rate reporting cycle and guarantee that Instead of supporting high perfor- incoming data not only respects the mance, they become a major bottle- Ease of Use timing and expected format but also neck. The performance of some Lack of buy-in from divisions into the “makes sense” and is consistent, com- applications is also greatly reduced processes at the corporate center is plete, commented appropriately, and when full audit features are turned on, often caused by requiring divisions to goes through the right auditable forcing companies to sacrifice speed follow resource-intensive manual pro- approval process. This leads to greater against auditability. By leveraging con- cesses or use applications that are quality and a right-first-time approach solidation applications that allow and unfamiliar, nonintuitive, or nonsupport- to the closing cycle, which reduces the perform simultaneous consolidation ive of local reporting requirements. need for late adjustments and addition- processing yet don’t require compro- Leading consolidation applications al data submissions and speeds the mises on the audit trail, you can experi- overcome these challenges through review and variance analysis process ence significantly faster consolidation extensive use of familiar tools such as by ensuring narrative is provided where times and run fewer iterations. Microsoft Office combined with required. straightforward business process flows Process Automation that guide users through the key stag- Consolidation applications enable you Because the industrialization of the es of the business process, ensuring to monitor and record the performance close process is key to a successful they are followed consistently through- of the various contributors to the close financial close, the ability to automate out the enterprise. process. It’s long been said that what as many processes as possible is gets measured, gets managed – and extremely advantageous. Applications SAP White Paper – The Financial Close 13

“Once CPAs achieve greater ef- users on a near real-time basis, with of the most effective safeguards ficiency in the way they produce information updates occurring automat- against fraud and a prerequisite for reg- ically from the underlying consolidation ulations like Sarbanes-Oxley. It is also business information, they can applications. With immediate availability one of the most difficult controls to more quickly analyze and confi- of information during the financial close deploy and sustain, given the thou- process, business users can leverage sands of users, roles, and processes dently expose the more relevant the ad hoc analysis and reporting tools that require access and authorization information to managers, stake- available to them to perform more in- evaluation, testing, and remediation. process analysis, thereby increasing Leading GRC management applications holders, and others for better- insight and further contributing to offer a comprehensive set of access informed decision making.” reducing the time needed for the finan- controls that identify and control cial close. access and authorization risks in cross- Mike Willis, CPA, Founding Chairman of XBRL enterprise systems to prevent fraud International and Partner, Pricewaterhouse- Automated Internal Control Processes and reduce the cost of continuous Coopers As global regulatory mandates multiply compliance and control. and grow more stringent, manual Ad Hoc Analysis and Reporting approaches to control activities are Close Process Monitoring and Enterprise stakeholders require more becoming untenable. By embedding Scheduling analysis based on complex models and automated controls into your financial Process automation and workflows in shorter time periods. The ideal close process, you can move away within the consolidation application help application for your company should from resource-intensive manual control reduce the amount of time spent on support data entry and validation, activities to address critical business lower-value activities. However, as automate business processes, provide risks. A rationalized set of automated organizations become more complex advanced search functionality, be flexi- controls ensures that your organization and as compliance regulations add to ble enough to enable business users can meet compliance mandates in the the number of steps required in a close to perform ad hoc query and analysis, most timely and cost-effective fashion process, the need to control and man- and perform at a speed to meet your while optimizing operational efficiency. age all of these steps across the entire needs. A single application may not be Leading financial management applica- close and applications involved able to meet all your ad hoc analysis tions for governance, compliance, and becomes more important and even and reporting needs in real time. So it’s risk (GRC) provide a risk-based more challenging. You can gain signifi- important that whatever application you approach to establishing a control envi- cant benefits from creating a complete choose can integrate with a business ronment and identifying the most effec- overview of the status of a closing intelligence platform that can provide tive and efficient controls for business cycle, its critical path, and the execu- the additional functions you require. processes and cross-enterprise IT sys- tion of the processes and steps. It tems. They reduce the cost of compli- helps you establish a closing calendar, A business intelligence platform can ance by streamlining and automating track hundreds of tasks, dependencies, provide advanced search functionality control processes, including automated milestones, and approvals across entire that enables users to identify key met- controls with “lights-out” control test- company, and enforce deadlines. The rics and trends hidden in hundreds of ing, to accelerate time to compliance. additional automation and greater col- internal and external resources, such laboration improve coordination and as structured databases, unstructured An additional critical piece of the com- increase staff productivity for enhanced company and text content, and the pliance process relates to the proper compliance and greater transparency. Web. A business intelligence platform segregation of duties and access con- can help you deliver information to trol over key information assets – one 14 SAP White Paper – The Financial Close

SIGNIFICANT GAINS ARE WITHIN REACH YOUR FINANCIAL CLOSE ACTION PLAN Understanding the drivers for a close, doesn’t necessarily have to result in a In the first stage, for example, you cre- the barriers you face, and the technolo- major change program and – provided ate a vision, review your technology gy options open to you is important – you structure your approach, deliver and processes, and identify “quick but that’s only part of the solution. A the appropriate and sponsored resourc- wins” and “big wins.” Some of the financial close project, like any other es, and manage the project – it’s possible questions you have to answer are, corporate initiative, requires a struc- to make significant gains relatively easily. “What’s the target?” and “What’s the tured approach with a methodology worth to us to meet the target?” From that’s supported by people, process, A Four-Stage Action Plan here you map your existing financial and technology; is manageable; and close process, including key dates and has clear but realistic objectives. A To a large extent, the principles are no durations, to identify your critical path full financial close project can, and in different from any other large change and the challenges. For example, you most cases must, extend beyond cor- management and implementation proj- could look at the time it takes to submit porate-centric processes and functions ect. As shown in Figure 4, you can take packages from reporting units, the time (although the focus of this paper, as a an incremental approach to developing to complete the consolidation process, whole, is on those driven by the head an action plan. and the time to announce the final office). That being said, the project Stage 1 Stage 2 Stage 3 Stage 4 Vision, benchmark, Implement quick wins Implement big wins Conduct postimplementation and review review Create close Corporate close Close processing, monitoring, and scheduling Perform“as-is” scorecard to coach • Enterprise performance review Establish framework best and worst management performers • Consolidation applications for continuous improvement Conduct peer-to-peer Define vision intercompany and benefits • Business intelligence Extend financial ex- reconciliation • Ad hoc analysis and reporting process cellence to planning, • Financial information budgeting, and management forecasting Leverage data Obtain executive integration tools, vali- • Governance, risk, and sponsorship dations, and controls for compliance right-first-time close • Automated internal control processes • Access controls Local close/enterprise resource planning SAP® and non-SAP software environments Milestone 1 Milestone 2 Change management Milestone 3 Completed project plan Immediate timetable reduction Vision achieved Figure 4: Example of a Financial Close Action Plan SAP White Paper – The Financial Close 15

Examples of big wins include: The term “financial close” describes a corporation’s ability to • Establishing a standard chart of accounts across the entire enter- complete its accounting cycles and produce financial state- prise. Although this can bring many ments for internal management and external legal reporting. benefits, including timetable reduction, it can affect every GL in every The requirement to close books quickly and with quality is subsidiary – and it’s a major emerging again as an important project for today’s global undertaking. • Implementing new consolidation soft- finance function. ware where existing applications were unable to deliver suitable quick wins or provide a sustainable infra- structure for the fast close in your consolidated figures. Senior sponsor- Examples of quick wins include: organization ship on project objectives and the • Reviewing intercompany reconcilia- • Harmonizing packs and processes resources required to achieve them are tion processes to take them off the across reporting cycles. Standardiz- key to success. critical reporting path ing on the same data flow each • Developing mechanisms within your month helps to avoid discrepancies The second stage is the implementa- consolidation applications for the vali- and reduces timetables because the tion of your quick wins. These serve to dation of data at the source, including increased volumes this standardiza- produce almost immediate timetable the submission of supporting tion typically produces forces subsid- reductions, demonstrate that time sav- commentary iaries into automating processes and ings are achievable, and put people into • Resolving data transmission bottle- standardizing their own systems. The a positive and determined frame of necks and data submission policies end result is often better data quality mind for delivering the bigger wins. The during the close process and shorter timetables. key here is to understand that not all of • Establishing the close process as a • Establishing a new reporting frame- the barriers to a close require huge managed one by using the workflow work for all stakeholders involved in amounts of effort – in some cases, you functionality of your consolidation the financial close process to provide can easily make very significant gains, tools to publish tables of the best and a broader range of possibilities and provided your consolidation solutions worst performers and then imple- greater depth of analysis are robust and flexible enough. The menting coaching processes to • Where manual data entry processes trick is to evaluate the options open to improve performance exist, replacing them with direct inte- you and prioritize them according to the gration between source ERP or GL amount of time and effort needed to Assuming that the quick wins by them- applications and enterprise perfor- implement and the size of the impact selves cannot lead you to achieve all mance management applications on your close cycle. Those with the your targets or that you’re unable to • Establishing a control environment least required effort but maximum implement them given your current sys- identifying the most effective and effi- impact are the most attractive and tems, you then move on to third stage, cient controls for financial close pro- should be your quick wins. the big wins. These require greater cesses and then streamlining and resources and more time but often lead automating them to minimize the to big reductions in the close process. compliance burden 16 SAP White Paper – The Financial Close

• Developing a framework to monitor and control the entire close process from local close activities in an ERP application through to final statement production in consolidation applications A key consideration – and the final stage in the action plan – is continuous process improvement. Once you have identified a fast financial close as a pri- ority, each time you review a process or supporting technologies for enterprise performance management, you do so in such a way that continues to support and challenge the close process. Finally, it is important to note that the benefits don’t have to stop at the financial close. Much of the learning can be applied to other key processes. You can apply the same type of methodology – challenging the way you do things, taking a holistic approach, and leveraging technology – to other processes, such as planning, budgeting, and forecasting. In fact, 72% of respondents to the Business Objects and BPM Maga- zine survey feel that integration of actuals, plans, and forecasts is important or very important in reducing close times (see Figure 3). SAP White Paper – The Financial Close 17

SAP® SOLUTIONS FOR ENTERPRISE PERFORMANCE MANAGEMENT COMPREHENSIVE FUNCTIONALITY TO IMPROVE EFFECTIVENESS AND PERFORMANCE CONTROL SAP® solutions for enterprise perfor- Acknowledgements mance management are a comprehensive set of solutions that help your Business Objects, an SAP company, company capitalize on the value of your would like to thank the BPM Interna- existing data assets. With these solu- tional consulting network tions, your organization becomes more (www.bpminternational.com) for its agile, gaining organizational alignment, permission to include findings from visibility, and greater confidence that Global Close Rankings 2008 and Financial excellence is achieved when resources, people, and technology are combined to optimize and streamline processes, decrease operating costs, manage business performance, and avoid certain risks. A streamlined, efficient, and high-quality financial close is a key ingredient of financial excellence. give you optimal control and competi- Consolidation, Reporting and Planning tive advantage. These solutions can Functions in European Enterprises integrate with SAP Business Suite 2006 in this report. Business Objects applications; SAP solutions for gover- would also like to thank all those who nance, risk, and compliance; and the kindly gave permission to be quoted in business intelligence platform from this paper. SAP and Business Objects. As a result you can maximize business profitability, manage risk and compliance, and optimize corporate systems, people, and processes. For More Information For more information about how solutions from SAP and Business Objects can improve your financial performance, call your SAP representative today or visit us on the Web at www.sap.com/epm. 18 SAP White Paper – The Financial Close

SAP White Paper – The Financial Close 19

50 090 951 (08/08) ©2008 by SAP AG. All rights reserved. SAP, R/3, xApps, xApp, SAP NetWeaver, Duet, PartnerEdge, ByDesign, SAP Business ByDesign, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. Business Objects and the Business Objects logo, BusinessObjects, and Crystal Reports are trademarks or registered trademarks of Business Objects S.A. or its affiliated companies in the United States and other countries. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies (“SAP Group”) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty. www.sap.com /contactsap

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The Financial Close Optimizing Performance and Driving Financial Excellence Document Transcript